Mortgage Rates Dip as New Quarter Begins

Mortgage rates were unchanged as the third quarter came to a close yesterday. MBS prices have moved sideways at their highest levels in over four months after rallying to those levels on Monday.  With today's economic data releases,  prices are moving HIGHER, pushing into levels not seen since the Spring.  With the extremely important Non-Farm Payrolls (employment situation report) coming up tomorrow, there are no guarantees these gains will hold, and we may even see traders drive the price back towards levels that offer them more flexibility ahead of the potentially market moving data.  But so far, today's prices are in the stratosphere, raising the possibility for the best rates you've seen in over four months.

The U.S. Department of Labor released the weekly jobless claims data this morning.  This report totals the number of Americans that filed for first time unemployment benefits in the prior week.   Since our economy is driven by consumer spending, market participants look to jobs numbers for an indication of future spending.  If more people are out of work, it would lead to less spending which is not good for the overall economy, but  is however good for low interest rates.  Today's release indicates that jobless claims moved higher than expected to 551,000 following last week’s revised higher reading of 534,000, signaling that companies continue to lay off workers even as our economy appears to be pulling out of recession.   Continuing claims, which totals the number of Americans that continue to file due to lack of finding a new job, fell last week by 70,000 to 6.09million beating estimates.   Despite jobless claims remaining stubbornly high, tomorrow’s Employment Situation report is expected to show a sizable improvement in the nonfarm payroll numbers.  Expectations call for a loss of 170,000 jobs and the unemployment rate moving higher to 9.8%.

Next, the U.S. Department of Commerce released the monthly Personal Income and Outlays report which tracks how much money people are making and spending.    Personal income rose last month more than expected by 0.2% matching last month’s revised higher reading.   The spending or outlays part of the report indicates a big surge in spending with a higher than expected increase of 1.3%.   Spending was expected to post a big rebound thanks to the cash for clunkers program which ended in August but spending on non autos also posted nice gains indicating that the consumer is getting out there and spending money.  The increase in spending was the largest since October 2001!  But remember it's being measured against extremely low levels.

As part of the Personal Income and Outlays report, we get the Fed’s favorite gauge for inflation with the Personal Consumption Expenditure.  The headline number did post a larger than expected increase in prices but the core reading which strips out food and energy due to their volatility came in a tenth of a percent lower than expectations and continues to operate well within the fed's comfort level.  Once again we have another economic report showing that inflation is of no concern in the near term which should allow the Fed to keep the Fed fund rate low for quite some time.

Also out this morning is a reading on the strength of the manufacturing sector of our economy with the ISM Manufacturing index.   The Institute for Supply Management(ISM) surveys over 300 manufacturing firms across American on their outlook for economic growth.  Readings above 50 indicate growth in manufacturing while readings below 50 indicate contraction.   After hitting the lowest reading in 60 years in December of 2008, this report has shown improving numbers each month with last month’s report being the first above 50 reading since January of 2008.  The report indicates that the manufacturing sector of our economy continues to grow coming in just below expectations but still above the 50 reading indicating that more manufacturers are reporting expansion.

We also received a reading on home sales from the National Association of Realtors.  Pending home sales, which is one in which a contract has been placed on the home but the loan has not closed, showed a sizable increase last month of 6.4%.  All regions of the country did show improvement .  This is a positive economic indicator since more home purchases should lead to other consumer spending on flooring, furniture, etc…  However, a pending home sale does not always turn into a closed transaction.  A government report yesterday showed that 1/3 of all applications for a home loan have been denied this year. 

The final report of the day also comes from the U.S. Department of Commerce with the release of construction spending.  If spending on construction is increasing, that is a positive sign of economic growth.  More construction leads to higher purchases of lumber, roofing, etc.. and will also lead to more jobs as companies hire workers.  The report indicates that spending on construction increased much more than expected, earning it a place among a growing body of data suggesting a turn-around in housing.

Currently, Federal Reserve Chairman Ben Bernanke is testifying on Capitol Hill on regulatory reform in the financial sector.   He is not expected to speak on monetary policy or economic outlook, but market participants will still pay attention to what he has to say.  Matt and AQ will cover any relevant items of his testimony on the MBS Commentary blog. 

With the improvements in MBS this AM,  early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 4.625% to 4.875% range for the best qualified consumers.  In order to secure a par interest rate 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 an estimated one point loan origination/discount/broker fee. 

With the Employment Situation report coming out tomorrow morning at 8:30am, floating an interest rate if very risky.  If the numbers come in better than expected, we could see a quick and large sell off in MBS which will move rates higher.  Always remember that rates move higher faster than they move lower.   I am continuing to caution all my clients on floating and recommending that they lock in today to take advantage of the improvement in rates over the last week.