Last week, progress was made in the mortgage market as Treasuries rallied and prices of mortgage backed securities moved higher. By week's end "rate sheet influential" MBS coupons improved in price by almost 0.50 discount points, bringing the par 30 year fixed rate mortgage back under 5% for the first time in almost two months. This rally in fixed income was led by a shift in investor sentiment from recovery to a stagnate economic outlook. This shift has resulted in market participants liquidating their risky equity positions and moving money into safer/risk averse fixed income assets like MBS and Treasuries.
The week ahead has several scheduled data sets that will have an impact on the investment outlook for financial markets. To remind readers, better than expected economic data is generally a positive for stocks while worse than expected data is generally positive for lower mortgage rates.
Today is the lightest day for economic data with the only data set being the Treasury Budget which is a monthly account of the surplus or deficit of the federal government. May's budget report showed that the US government had a deficit of $189.7 billion dollars and the consensus for June is another deficit of $97.0billion. Unless this report varies greatly from expectations, it usually isn't a major market mover. This report is released at 2pm eastern by the U.S. Department of Treasury.
- - Producer Price Index(PPI) which measures inflation at the producer level, will be released at 830AM. Last month's report showed producer prices increasing 0.2% following April's 0.3% increase. Economists surveyed expect June's number to post a month over month gain in headline prices of 0.8% and when excluding food and energy a 0.1% increase. The recent increase in oil prices will likely be the cause of the increase to the headline number. MBS tend to benefit with lower readings.
- - Retail Sales, which measures the total receipts at stores and indicates the month over month change, will also be released at 830AM. Since our economy is driven by consumer spending, this report has the ability to move money in the financial markets. As we have stated recently, for MBS to improve the first thing that must happen is for equities to confirm their recent bearish bias. If this report indicates strength, the recent "flight to safety" rally in the fixed income markets could be unwound which would result in higher mortgage rates. May's report came in surprising strong at a month over month increase of 0.5%. For June, economists surveyed are expecting another 0.5% increase. When excluding auto sales from the report, the consensus is for a month over month increase of 0.6%.
- - Goldman Sachs Releases Earnings Report
- - At 7am eastern, The Mortgage Bankers' Association Weekly Applications index will be released which tracks the month over month change in purchase and refinance activity at major lenders.Last week's report indicated that purchase and refinance activity improved from an eight month low as mortgage rates have moved lower from recent highs. As mortgage rates continued to fall last week, we suspect this report will indicate further borrower interest in new mortgage loans. This data set will likely be ignored as market participants will be focused on the consumer inflation report.
- - At 8:30am eastern, the US Department of Labor will release the Consumer Price Index(CPI) which is a measure of the average price level of a fixed basket of goods and services purchased by consumers. With the recent rise in energy prices, economists surveyed are expecting the headline reading to come in at a month over month rise of 0.7% following May's 0.1% rise. When excluding food and energy from the reading, expectations are for a month over month rise of 0.1% matching May's report. The Federal Reserve has stated many times that inflation is not a immediate concern and recent economic data has backed that up.
- - At 830 am the Empire State Manufacturing Survey will be released by the New York Fed. They survey about 175 manufacturing executives across New York and the results of the survey indicates whether manufacturing is expanding or contracting. Strong manufacturing is a positive for the stock market while MBS tend to benefit when manufacturing is weaker than expected. Readings above 0 indicate an expanding sector while readings below 0 indicate a contracting sector. Last month's report showed that manufacturing worsened to -9.4 from the prior month's -4.55.Economists are expecting this month's report to read -4.5.
- - 915am: Industrial Production. This data set gives market participants an idea of how much our nation's factories, mines and utilities are producing. An increasing trend is a positive signal for a growing economy, so MBS tend to benefit with a lower than expected reading. May's report showed that industrial production dropped 1.1% and economists surveyed are expecting June's report to show a slight improvement to -0.7%.
- - The Federal Open Market Committee(FOMC) will release the minutes from the last fed meeting. Most of the information from the minutes will already be known, but market participants will still review for any hint at future monetary policy, their outlook on inflation and their outlook for the overall economy.
- - 830AM: Weekly jobless claims. This release totals the number of Americans that filed for first time unemployment benefits for the prior week. MBS tend to benefit with higher unemployment as that would keep wage pressures down. If unemployment is high, employers do not need to attract new employees by offering higher wages, they can just offer a job. Last week's report came in surprisingly better than expected at 565,000, however it should be noted that this print only accounted for a four day week. Economists surveyed are expecting this week's report to show continued improvement with only 535,000 new claims. A higher than expected reading would add further confirmation to the notion that the economic recovery will be a long drawn out process.
- - 10AM: Philadelphia Fed Survey. This data set gives market participants a read on the strength of manufacturing around the Philadelphia area. Last month's report indicated a sharp improvement in conditions coming in at -2.2 following the prior month's -22.6. Economists surveyed are expecting a slight pull back on this month's reading with a -5.0. Readings below 0 indicate a contracting sector while readings above 0 indicate expansion.
- - JP Morgan will publish earnings report
- - 830AM: Housing starts. This data totals the number of new homes that construction has begun. An increasing trend in housing starts would be a positive signal for stocks since the construction of a new home would lead to purchases of flooring, appliances, plumbing, etc... Also, an increasing trend in housing starts would be positive for employment as more homes being built would require hiring of construction workers. May's report indicated a 17.2% increase following April's 12.9% drop. Economists surveyed are expecting a slight dip to an annualized pace of 530,000 following May's 532,000 pace.
So far today, although stocks are rallying, Treasuries and MBS are mostly flat. Early reports from fellow mortgage professionals are indicating that mortgage rates today are very similar to Friday's. This places the par 30 year fixed rate mortgage in the 4.875% to 5.125% for the best qualified consumers. In order to qualify you must have a FICO credit score of 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 are planning to access home equity (cash out), you should expect a slightly higher interest rate or be prepared for higher fees due to the loan level price adjustors.