Tuesday 6/3/08 ..... 2 Steps Forward 1.7 Steps Back
Reasonably stronger than expected economic data combined with an already sell-biased MBS market this morning to erase an appreciable chunk of yesterday's gains (not all of them yet though).
To Lock or Float?
Still a tough call as we have the most critical data of the week still on tap. So much depends on your own visceral premonitions about the employment numbers later this week. We are still in the middle ground of historical ranges so prices should either go up or down and are likely not comfortable holding steady. With the general trend over the past week being down, locking is the safe play. Only float if you have confidence in much weaker than expected data to come. Personally, I don't feel like the stock market is yet ready to move back down towards 12,000 range which further suggests locking in the near term. However, even the bulliest of the bulls will have to face reason if the data is weak enough.
The Numbers:
New Term: OTR ("on the run" which is an abbreviation you'll need to remember for the future, meaning the most current coupon settlement date for MBS)
6.0% FNMA OTR is only down 4/32nds on the morning
5.5 FNMA OTR down by 6/32nds
This should peel off .25 YSP in price this morning as lenders will hedge on the downward price curve. This means that even if we hold steady, we could get price improvements later. So until we hit 8/32nds down in the 6.0's (if we hit it I mean!), keep floating.
The News:
- Factory orders
- This came in at +1.1%, much better than the expected -0.1%. Much of this is chalked up to energy, but nonetheless MBS doesn't like it
On Tap For The Rest Of The Week:
WEDNESDAY
- ADP EMPLOYMENT REPORT, this measures job growth or loss in the
private sector and is not given nearly as much credence as Friday's
report
- PRODUCTIVITY AND COSTS Report. This report
speaks to inflation conditions. The higher the labor costs are, the
higher the indication of inflation, which is bad for mortgage rates.
- Non-Manufacturing Index, which measures business expansion or
contraction in non-manufacturing industries. Worse than expected can
be good for mortgage rates.
- Oil Inventories. This does
not directly affect mortgage rates, but if oil is significantly more or
less plentiful than expected, it will effect crude oil prices which
seem to have a much greater than normal effect on markets these days.
If this report causes stocks to rally, it could hurt mortgage rates.
THURSDAY
- JOBLESS CLAIMS, which is a weekly report of how many new applicants
have come forward for unemployment benefits. The more jobs lost, the
better for mortgage rates.
FRIDAY
- EMPLOYMENT SITUATION. This is a hugely important monthly report that tracks "non-farm" payrolls which is the most closely watched indicator of the labor market. The lower the number, the better for rates.
Conclusion
Again, if you can't afford to lose any ground, there is not guarantee of rate improvements, so locking is in order. But over the past few months, the employment numbers have generally been worse than expected. Friday's consensus of -60,000 NFP (non farm payrolls) accounts for this, but with last month being one of the only "beats" for the report in recent memory, we either have an indicator that is in line with the "turn around" theory for the economy, or we have the bow pulled taught for a very disappointing number indeed. Take a look at the previous 5 months expectations versus actual numbers on Bloomberg and draw your own conclusions. Only the most aggressive transactions should be floated, but that can pay off well if Friday does come in lower than expected.