Mortgage Rates Higher as Stock Market Awaits Earnings

After spending the majority of the session in a stable range yesterday, prices of mortgage backed securities lost their steadiness  and ticked lower heading into the close forcing most  lenders to re-price for the worse, increasing mortgage rates.  The bond market sell off was a factor of the stock market moving higher as traders set up for better than expected Goldman Sachs earnings. This morning those expectations were confirmed as Goldman reported Q2 diluted earnings per share of $4.93, easily beating forecasts. Later in the week JP Morgan Chase, Bank of America, and Citi will report earnings, look for the market to buy the rumor, and sell the news...meaning earnings reports will likely be priced into the market before they are released which will make for some illogical price movements following earnings posts.

We do have some data this morning that will affect the flow of money: The Producer Price Index.   PPI measures the changes in prices that manufacturers and wholesalers pay for goods during different stages of production.  If businesses have to pay more for the materials they use to produce their widgets ...they are mostly likely going to pass along those additional costs to you...the consumer. The Producer Price Index is broken down into three progressive stages of production. Crude Goods, Intermediate Goods, and Finished Goods. Finished goods is considered Headline Producer Inflation. The cost to produce a finished goods is affected by the cost of the entire production cycle so one should note which stage of production is adding the most cost to the final product. Here is a breakdown of the production stages and data points.

Crude Goods: raw materials like commodities. Susceptible to supply shocks ( Oil crisis during summer of 2008)

Intermediate Good:  partly finished good used in production of another good. Good has already undergone some transformational processing. (paper, car parts, fabrics)

Finished Goods: good that is ready to be sold to consumer. Inflation at this stage in the production process is usually passed along to the consumer


Core PPI: strips out the volatile costs of food and energy

Headline PPI: includes food and energy costs

 
This morning the report indicated that prices rose much more than anticipated last month with headline inflation surging by 1.8%, a full percentage point higher than forecasts. The core reading also rose higher than expected at 0.5% vs 0.1%.

Most of the increase in prices is being attributed to the recent spike in oil price. Over the last few weeks, oil has moved sharply lower so this trend is likely not to continue and is mitigating reactions to the quite negative report. Year over year, PPI is down 4.7% and the core is up 3.4%. This worse than expected reading on inflation will likely cast a larger light on the Consumer Price Index when it is released tomorrow.

Also out this morning from the U.S. Department of Commerce is the Retail Sales report, which measures the total sales at retail stores. Since our economy is driven by consumer spending, the stock market tends to rally with a better than expected reading. The release indicated that overall sales increased 0.6% in June, a better reading than the 0.5% forecast. Still, the report indicates soft consumer spending as much of the advance is due to the increase in gasoline prices and vehicle sales.   Excluding auto sales, the data fell short of expectations of a 0.6% increase by only posting a 0.3% rise.  When excluding auto sales and gasoline, retail sales posted a month over month decline of 0.2%, indicating that the consumer is still not spending money. On a year over year basis, retail sales are down 9% -- an improvement from last month's annual decline of 9.8%.  When excluding auto sales, the year over year change moved lower to -7.9% from -7.6% in May.  Even though the headline reading is quite positive, once you dig into the numbers it isn't as positive as it looks.

After the release of PPI and Retail Sales, MBS prices moved lower but have since regained the losses suffered after the data hit the wires.  It appears that market participants are more focused on earnings reports than reading through the data at the moment. For MBS to regain yesterday and today's price losses we need a couple things to happen. First, the stock market will have to move lower, specifically the S&P will need to break 870. If that happens, we should then see more money flow into fixed income as investors seek safer assets...specifically Treasuries. This will help MBS prices move higher and mortgage rates move lower.  In the past two weeks this trend started but earnings season has stalled confirmation. Now we must wait for earnings reports to provide the stock market with new direction. The market's gyrations this week will likely be predicated off of earnings reports. Mortgage rate watchers will likely receive no confirmation of "trends to come" until important earnings releases are posted.

Early reports from fellow mortgage professionals are indicating that mortgage rates have ticked higher with the par 30 year conventional rate mortgage in the 5.00% to 5.25% range for the best qualified consumer. 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 one point loan origination/discount/broker fee.

If you are planning on keeping your home for less than 3 years, you should consider paying less in closing costs and taking a higher interest rate.  Today's rates without paying the one point loan origination/discount/broker fee is in the 5.375% to 5.625% range for the best qualified consumers.  Keep in mind: getting a mortgage rate is like buying anything else. If you want a better attorney, you will pay more. If you want a better car, you will pay more.  If you want a better interest rate, you will pay more.