The Mortgage Market Watch for the Week of August 3, 2009
In his weekly forecasting note, John Herrmann from Herrmann Forecasting stated that "the US recession has ended, and the economy has embarked on a new path of recovery path in the third quarter of 2009." Other analysts are just as optimistic, as the 2nd Quarter Gross Domestic Product (GDP) report released last Friday came in better than expected. The report indicated that the economy dropped only 1% between April and June of this year, indicating that the recession is nearing the end.
Economic Reports to be Released This Week:
There will be no government auctions of Bonds, Notes, and T-Bills this week. There are four economic reports scheduled for release this week that could have an impact on mortgage rates. The most important reports of the week will be the Institute for Supply Management's (ISM) Manufacturing Index on Monday and the employment situation report on Friday, both of which could lead to high volatility in the markets.
Monday, August 3rd:
- Institute for Supply Management's (ISM) Manufacturing Index for July - This index measures manufacturer sentiment by surveying trade executives about business conditions during the month, and is considered fairly importance to the financial markets. Analysts are expecting the index to show a reading of 46.5, an increase from the 44.8 reading last month. While an improvement, a reading below 50.0 means that more surveyed executives felt that business worsened last month than those who said it had improved. However, if the numbers come in as or better than expected, it will indicate that the economic recession is coming to an end. A stronger than expected reading in the manufacturing index could lead to higher mortgage rates.
Tuesday, August 4th:
- Personal Income and Outlays for June - This report helps us measure consumer ability to spend and their current spending habits. Analysts expect a decline of 1.1% in income, and an increase of 0.3% in consumer spending. A smaller than expected decrease in income and a larger than expected increase in spending could lead to higher mortgage rates.
Wednesday, August 5th:
- Factory Orders for June - This report helps us measure manufacturing sector strength by tracking orders for both durable and non-durable goods during the month of June. It is similar to the Durable Goods Orders report that was released last week which tracks orders only for big-ticket items. Analysts are expecting to see a 0.9% decline in new orders, a sharp decline from the 1.2% increase the previous month. A smaller than expected decrease in new factory orders could lead to higher mortgage rates.
Thursday, August 6th
- Jobless Claims - New claims for unemployment are tabulated each week to show the number of individuals who filed for unemployment insurance for the first time. Analysts are predicting that 575,000 new claims of unemployment will have been filed last week. Continuing claims for unemployment fell for the third straight week last week to 6.197 million. This still indicates that it's still taking time for the jobless to find work, and some are either finding work or have exhausted their unemployment benefits. With the high rate of people unemployed, the threat of wage based inflation remains subdued. Employers do not have to pay higher wages to attract new employees during high unemployment times as people will be happy just to have a job. This data is usually not considered to be of high importance to the bond or the mortgage backed securities (MBSs) markets.
- Fed's MBS Purchase Program - The results of this week's purchases of mortgage backed securities (MBSs) by the Feds will be released in the afternoon. As of last Thursday, the Feds have purchased over $702 billion in MBSs this year. The Feds plan on purchasing up to $1.25 trillion in MBSs through December 31st.
Friday, August 7th:
- Employment Situation Report for June - This report gives us the unemployment rate, the number of jobs that were added or lost during the month, and the average hourly earnings reading for July. Analysts are expecting to see a loss of 300,000 jobs last month, the 18th straight month of job losses, and an increase in the unemployment rate to 9.7%. The report is also expected to show a 0.1% increase in average earnings. This report is considered to be one of the single most important reports that we see each month. While the rate of job loss is slowing, the rising unemployment rate, a sizable loss of jobs, and little or no change in earnings could lead to lower mortgage rates. However, due to the importance of these readings, we could see high volatility in the markets and mortgage pricing if numbers vary greatly from expectations.
How do Economic Data Releases Affect Mortgage Rates?
One of the easiest and most important things for you to know when deciding when to lock in the interest rate on your mortgage is knowing what economic data is going to be released - and when. Economic data releases are important because they provide a snapshot of what's happening in the economy. They also provide a foreshadowing of any upcoming market volatility.
While an in depth review of an economic event can help you make an informed decision, understanding the nuances of a release can't help you if you don't know when it's happening. It's just as important to know when these data releases are happening as knowing what basic effect these releases can have on the market.
Recent Mortgage Rate Activity:
The chart below shows the upward trend in the price of the MBS 30-Year 4.5% coupon over the past two weeks:
Remember - as the price of MBS goes up, the yield goes down - and mortgage rates go down with it.
Mortgage Interest Rate Outlook:
Moderate to High Volatility. Overall, I'm expecting to see another week of volatility for mortgage interest rates. The information in the ISM index, to be released on Monday, and the economic situation report, to be released on Friday, could lead to high volatility in the markets those two days. The middle of the week is likely to be a little calmer. However, the ADP employment report, being released on Wednesday, could lead to pressures in the markets ahead of the release of the employment numbers on Friday. While the ADP jobs report is estimating 345,000 job losses, it doesn't account for government jobs. Also, maintain vigilance on the stock markets and watch for significant moves that can affect trading in bonds and mortgage backed securities. Please act accordingly and maintain contact with your mortgage professional.
East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB