The Mortgage Market Watch for the Week of October 26, 2009
Events Affecting the Mortgage Market This Week:
There are Treasury Note auctions scheduled for every day this week except Friday. However, the two Note auctions that are most likely to influence mortgage interest rates are the 5-Year Note auction on Wednesday and the 7-Year Note auction on Thursday. If these auctions are met with a strong demand, prices of mortgage backed securities may rise during afternoon trading on Wednesday and Thursday which in turn will lead to lower mortgage interest rates. But a lackluster demand may cause investors to sell mortgage backed securities which in turn will lead to higher mortgage interest rates. A week ago, the Treasury sold only $12 billion worth of 30-Year bonds. That auction didn't meet market expectations and caused a large increase in mortgage interest rates.
There are a number of quarterly earnings reports scheduled for release again this week that could affect the stock markets. If the earnings reports are good or better than expected, then you can expect traders to sell bonds and mortgage backed securities and move those funds into stocks. If, on the other hands, earnings reports are worse than expected, then you can expect traders to sell stocks and move those funds into bonds as a safe-haven.
Economic Reports to be Released This Week:
There are seven economic reports scheduled for release this week that could have an impact on the mortgage market, so expect a volatile week for mortgage interest rates.
Monday, October 26th:
- There are no economic reports scheduled for release today.
Tuesday, October 27th:
- Consumer Confidence Index (CCI) for October - this index is watched closely because consumer spending makes up two-thirds of the U.S. economy. This index gives us a measurement of consumer willingness to spend. It's expected to show a reading of 54.0, an increase from last month's reading of 53.1. Generally, retail sales follow consumer confidence. The higher the index reading, the more likely consumers are likely to make large purchases in the near future. If the index reading comes in higher than expected, we will likely see higher mortgage interest rates as prices of mortgage backed securities fall.
Wednesday, October 28th:
- Durable Goods Orders for September - posted by the Commerce Department, this report tracks orders at U.S. factories for big-ticket items which in turn gives us a measurement of manufacturing sector strength. Analysts are forecasting a 1.5% increase in new orders. If we see a larger than expected increase in orders, we will likely see higher mortgage interest rates as prices of mortgage backed securities fall.
- New Home Sales Report for September - this report is expected to show an increase in sales of new homes to an annualized rate of 440,000, up from 429,000 the previous month. However, this report usually has little or no impact on mortgage interest rates.
Thursday, October 29th:
- Preliminary Reading of the 3rd Quarter Gross Domestic Product (GDP) - the GDP is considered to be the benchmark measurement of economic growth because it is the sum of all goods and services produced in the U.S. As such, the report is likely to have a major impact on the financial and mortgage markets. Analysts predict the report will show a 3.0% increase in the GDP, much higher than the 0.7% decrease the following month. A larger than expected increase in the GDP most likely will lead to higher mortgage interest rates as prices of mortgage backed securities fall.
- 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 525,000 new claims for unemployment will have been filed last week. With a decreasing trend in the filing of new claims for unemployment, this suggests that the labor market is improving. However, this data is usually not considered to be very important to the mortgage market.
- Fed's MBS Purchase Program - The results of this week's purchases of mortgage backed securities by the Feds will be released in the afternoon. As of last Thursday, the Feds have purchased over $959 billion in mortgage backed securities this year. The Feds plan on purchasing up to $1.25 trillion in mortgage backed securities through March 31st.
Friday, October 30th:
- 3rd Quarter Employment Cost Index (ECI) - this index tracks employer costs for salaries and benefits. It is expected to show an increase in costs of 0.5%. A larger than expected increase in the ECI will raise concerns about wage inflation and most likely will lead to higher mortgage interest rates as prices of mortgage backed securities fall.
- Personal Income and Outlays Report for September - this index is also watched closely because consumer spending makes up two-thirds of the U.S. economy. This data gives us an indication of the consumer's ability to spend and as well as their current spending habits. A rising income indicates that consumers have more money to spend and makes economic growth more of a possibility. Analysts are expecting to see no change in income, and a 0.5% decline in outlays. If the index comes in as or worse than expected, most likely we'll see lower mortgage interest rates as prices of mortgage backed securities rise.
- Update to University of Michigan's Index of Consumer Sentiment - analysts expect the index to rise slightly to 70.0, up this month's preliminary reading of 69.4. This index is moderately important because consumer sentiment is directly related to the strength of consumer spending. Because consumer spending makes up two-thirds of the U.S. economy, any related data will have an impact on the mortgage market.
How do Economic Data Releases Affect Mortgage Interest Rates?
One of the 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 - and how it may impact the mortgage market and mortgage interest rates.
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. 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. It's just as important to know when these data releases are happening as knowing what effect these releases can have on the mortgage market.
The chart below shows the price trend of the FNMA 30-Year 4.5% coupon over the past 30 days:
Recent Activity in Mortgage Backed Securities:
Remember - as the prices of mortgage backed securities goes down, the yields go up - and so do mortgage interest rates. Conversely, as the prices of mortgage backed securities goes up, the yields come down - and mortgage interest rates come down with it.
Mortgage Interest Rate Outlook:
Moderate to High Volatility. Overall, most likely it will be an active - and volatile - week for the mortgage market and mortgage interest rates. While Monday may be the quietest day of the week, expect some volatility in mortgage interest rates the rest of the week. The most volatile day of the week most likely will be Thursday with the release of the preliminary 3rd Quarter GDP and the results of the 7-Year Note auction.
The corporate earnings reports can also have an impact on the mortgage market and mortgage interest rates every day this week. If we see a significant rally or sell-off in the stock markets on any particular day, it may end up bringing us the biggest single day change in mortgage pricing.
There is strong evidence that the worst of the economic recession is behind us. If you have not yet locked in your mortgage interest rate, please proceed with caution and maintain contact with your mortgage professional.
East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB