Last week was a good week for mortgage backed securities and consumer borrowing costs.  In total MBS, improved by almost 100 basis points which helped to lower mortgage rates by ¼ percent.  Much of the improvement came on the day after the FOMC statement was released.   It appears that after market participants had a day to digest the statement, fixed income (of which MBS and treasuries are a part) became popular again.  Also helping our cause was 3 very successful Treasury auctions as foreign investors  gobbled up over 65% of the total allocation.  Strong foreign demand for our countries debt helps to keep our borrowing costs low. 

 

In observance of Independence Day, we have a shortened trading week with all markets being closed on Friday.  Today brings us no economic reports to digest, so MBS will be driven by treasuries and money flows once again.   Currently the benchmark 10 year Treasury note is trading at a yield of 3.50 after touching a lower yield of 3.47 earlier this morning.  If treasury yields continue to move lower, MBS prices should go higher which will allow lenders to pass along better rates.   But onto the data for the week.

 

Tuesday

-           Chicago PMI, which is a survey of businesses that gives market participants a gauge into the strength of business activity around the Chicago area.  Readings above 50 indicate a expanding business sector while readings below 50 indicate a contracting sector.  Recent readings of this report have begun to show some signs of life which has helped stirred the pot  of the recession is over crowd.   April’s report came in much better than expected at 40.1 from 31.4 the prior month which sparked a big rally in equities at the expense of fixed income.  Last month’s report did disappoint coming in at 34.9 and economists surveyed are expecting this month’s report to come in higher at 40.0.  MBS usually benefit from a worse than expected report.

-          Consumer Confidence, which is a survey of 5000 consumers across the country on their attitudes on present economic conditions and their view of future conditions.  Since consumer spending drives our economy, this report is very important to market participants as a optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save.  Our economy benefits more with spending, so the stock market likes a higher reading while the MBS market prefers a lower reading.   This report like several others has indicated a shift in consumer attitudes which has helped the stock market rally over the last couple months but unfortunately that rally has led to higher mortgage rates.  Last month’s report indicated a sharp move higher for the 2nd straight month coming in at 54.9 from 40.8 in April.   Economists surveyed are expecting this month’s report to continue to show optimism improving among consumers with a reading of 57.0.  It will be interesting to see if rising gas prices and unemployment has put a damper on confidence.  MBS tend to benefit with a worse than expected reading. 

-          S&P/Case-Shiller home price index which tracks the monthly change in the value of residential real estate in 20 metropolitan regions across our country.  Many economists agree that until home prices stabilize and show signs of improving, it will be extremely difficult for our economy to recover.   Recent reports have continued to show home prices falling but at a slower pace.   There are no expectations released for this report.  Improving home prices would be a positive sign for our economy.  The stock market should rally with any hint of improving or declining  at a slow pace home prices which would probably pull money out of fixed income to spur the rally in stocks.

Wednesday

-          Mortgage Bankers’ Association Index which tracks the increase or decrease in purchase and refinance activity at major lenders.  The recent spike in rates has had a greater impact on the refinance activity but last week’s report showed both  refinance and purchase activity improving.  An increasing trend in purchase applications would be positive for the stock market and negative for MBS.  More home sales would lead to increase buying of furniture, flooring, appliances, etc... which should result in higher corporate profits thus the stock market likes to see an increasing trend.   If you have been contemplating buying a new home, what is keeping you from pulling the trigger?  Do you feel home prices still have to fall further, are you concerned about job security or has the recent rise in mortgage rates put your plans on hold?

-          The Institute for Supply Management’s Manufacturing index (ISM) which is a survey of more than 300 manufacturing firms which gives market participants a read on the strength of the manufacturing sector of our economy.   Just like the Chicago PMI survey, readings above 50 indicate a growing sector while readings below 50 indicate contraction.   This report has also indicated that the worst of the recession is behind us with the last 3 reports all coming in better than  the prior month.  Economists surveyed are expecting further improvement with a  reading of 45.0 following last months’ 42.8.  MBS tend to benefit with a  lower than expected reading.

-          Construction Spending, which is the dollar value of new construction activity for residential and non residential properties.   Last month’s report indicated a unexpected jump in construction spending coming in at a month over month increase of 0.8%.  Economists surveyed are expecting this month’s report to show a -0.5% decline.  The stock market tends to rally with a better than expected reading since higher construction spending would lead to increases in other spending which is good for the overall economy and corporate profits; however the increased spending could lead to higher inflation which is negative for mortgage rates.

-          Pending Home sales which is released by the National Association of Realtors and tracks the monthly increase/decrease in pending home sales.  A pending sale is one in which a contract has been signed but is yet to close.   Last month’s report indicated a sharp increase in pending sales coming in at 90.3 from the prior month’s 84.6 reading which is a month over month increase of 6.7%.  Higher home sales should lead to increase in other consumer buying so the stock market generally benefits with a better reading.

-          ADP national employment report.  This report gives us a private companies reading on the employment situation ahead of the governments report we get tomorrow.  Historically speaking, this report has varied greatly from the official government report but is becoming more accurate.  Since jobs are a key foundation to any economy, investors are starting to pay more attention to this report as a gauge for the official report.

Thursday

-          Employment Situation will be released by the Department of Labor.  We usually receive this report on Friday but due to the shortened week we get it today.  This report gives us a couple pieces of data to digest.  The biggest piece is the nonfarm payrolls which shows how many jobs were lost or created from the prior month.   May’s nonfarm payrolls shocked all by coming in considerably better than expectations at -345,000 when economists’ had expected over 530,000!  Economists are expected June’s numbers to come in close to last month’s at -350,000.  Every month since January, the nonfarm payrolls has continued to show a decreasing trend in the amount of jobs lost helping to stoke the optimistic investor’s belief that the end of the recession is here.  MBS tend to benefit with a worse than expected reading.  Next, we get the official Unemployment rate which is expected to climb to 9.6% from last month’s level of 9.4% which is the highest level we have seen since August 1983.  This report is the single most important  piece of economic data that we receive on a monthly basis. 

-          Jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week.   Last week’s report indicated that 627,000 Americans filed for unemployment in the week of June 20 and expectations are for this week’s report to show 619,000 more have filed for unemployment benefits.   An increasing trend of claims suggests a weakening labor market which would result in less consumer spending which is bad for the overall economy.   So, MBS tend to benefit with a higher than expected reading.

-          Factory orders which totals the dollar value of new orders for both durable and non durable goods.  An increasing trend is a signal of growing demand by consumers which would lead to higher sales and higher corporate profits.  The stock market likes for this report to come in higher than expected while the MBS market which prefers slower economic growth tends to benefit with a worse than expected reading.  Economists’ surveyed expect this report to show an increase in factory orders of 1.4% following last month’s 0.7% increase.

-          The Treasury Department will announce the total allotment of treasuries to be auctioned at next week’s auctions.   Up for the bidding will be a new supply of 30 year bonds, 10 year treasury notes and 3 year treasury notes totaling $65billion.   The added supply of debt on the market will apply pressure on treasury yields to move higher which would be negative for MBS pricing.  Higher yields on Treasuries will force MBS to move lower in price increasing their yields and overall mortgage rates.  Last week, the Treasury Department held 3 auctions with each having large demand from overseas investors.  High demand from overseas accounts is a sign of a successful auction and is the reason why treasury yields have been moving lower.  As treasury yields have move lower, it has made MBS look more attractive due to their higher yield thus the rally we have seen over the last few days in mortgage rates.

 

Early reports from fellow mortgage professionals are indicating that borrowing cost continue to move lower.  The par 30 year fixed rate mortgage is in the 5.0% to 5.25% range for the best qualified consumers.  In order to qualify, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. 

 

If you would like to track intraday changes to MBS price,  check out Mortgage News Daily’s Mortgage Rates page.