Weekly Mortgage Overview: 7/7/2014

What’s on the agenda for this week?

Intra-Day Lock Status: Today is a real “yawner” with no major economic data until Tuesday. Bond Traders are actually not back into full force until then. There is really no technical nor fundamental justification for any real price improvement today. It will take an unexpected geo-political event (and we have had plenty of those in the past 6 months) to move mortgage backed securities (MBS).

MBS Overview

We have a light week for economic data with Wednesday’s release of the FOMC’s minutes and Thursday’s Wholesale Inventories getting the most attention from bond traders.

We have a large supply of debt hitting the market with three major Treasury auctions this week:

07/08 3 year note
07/09 10 year note
07/10 30 year bond

The 10 year will get the most attention as the bell-weather indicator for longer-term rates

We have some “Talking Fed’s” this week:

07/08 Minneapolis Fed Kocherlakota
07/10 Kansas City Fed George
07/11 Atlanta Fed Lockhart

None of the Fed speeches above will announce any new policy and are unlikely to move MBS pricing.

Today’s Events

Chicago PMI: Came in at 62.6. The consensus estimates ranged from 61.0 to 63.0 – so this was right in that range. A reading above 50 shows manufacturing expansion and any reading above 60 is red-hot. This is a slight negative for MBS.

Pending Home Sales: Blew away the consensus estimates of +1.5% with a reading of +6.1%.

What happened last week?

MBS lost -64 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move to higher for the week. We saw the best rates on Monday and worst rates on Thursday.

We had a holiday-shortened week that more than erased the prior week’s +37 BPS gains. We had a -108 BPS swing from intra-day highs on Monday to intra-day lows on Thursday.

To over simplify things a bit, the weaker the economy is….the better it is for mortgage rates. The stronger the economy market is…the worse it is for mortgage rates. And we certainly saw some good economic data last week that has traders and economists looking past the weak 1st quarter GDP readings.

On the manufacturing front we saw fantastic readings with the Chicago PMI (62.6) and ISM Manufacturing (55.3). A reading above 50 for both of these is expansionary. Total Vehicle Sales hit 17 million on an annualized basis and the servicing sector (non-manufacturing which accounts for 2/3 of our economy) was very strong with a ISM reading of 56.0. Plus, Pending Home Sales were very strong with a monthly gain of 6.1%. All of this data points to growth and pushed your rates upward.

But last week’s focus was on jobs, jobs, jobs. And we got a slew of better than expected labor reports that really sent MBS downward and therefore mortgage rates upward as the Unemployment Rate dropped from 6.3% to 6.1% and more importantly, the Non-Farm Payroll (NFP) data was very strong. NFP hit 288K vs market expectations of only 213K. But just as important was the fact that May and April were both revised upward with April breaking above 300K and was the best reading in 12 months. This is key because April is the first month of the 2nd quarter after that very weak 1str quarter GDP data. Mortgage rates hit their highest level on Thursday after the NFP report.

An improving labor market and economy is always good news for the housing industry as demand for housing is driven primarily by employment and not rates.