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Last Week:
Mortgage pricing continued to improve slightly again last week for the third week in a row. MBS and Treasuries were both improved last week with the 10-year TSY closing at 3.42%.
The economic calendar was light last week and the market watched the Treasury note auctions closely since the Fed was not participating this time. The auctions went well on the 3yr and 10yr, but was a little light on the 30yr. Overall, strong demand continues for bonds - keeping a lid on mortgage pricing.
Additional good news for mortgage rates could be found in the spread between the conforming 30-year fixed and the benchmark 10-year TSY. The spread is back to more normal levels of 160 bps- meaning at the current 3.42% 10-year TSY, you could expect the 30-year fixed to be approximately 5.08%. The spread for Jumbo pricing is still very elevated and has another 60bps or so before it comes back to normal levels. All of this means credit markets continue to heal and normalize, but are still very fragile as secondary markets, x-Fed, are relatively nonexistent.
Consumer sentiment came in weaker than expected and still shows a consumer that is feeling the lingering effects of the recession, while corporations and Wall Street seem to be doing better. good news for would be employees as corporations are now running very lean and productive, which will lead to hiring and investment once they feel they are out of the woods of the recession completely.
Stock markets held up and closed near highs for the year. Gold also settled at a new record at over $1,100 an ounce as the US Dollar continues to weaken.
The Week Ahead:
This week brings us the release of six monthly economic reports for the markets to digest. With very important data scheduled for release three different days and relevant data four of the five days, we will likely see a fair amount of volatility in the markets and mortgage pricing this week.
Overall, look for any of the first three days of the week to be the most important with very important reports scheduled each day. The quietest day will most likely be Friday since there is no relevant data scheduled for release that day.
Since this is likely to be a fairly active week for mortgage rates, it would be prudent to maintain regular contact with your mortgage professional if still floating an interest rate.
MONDAY:
The first data is one of the most important reports of the week. The Commerce Department will give us October's Retail Sales figures early tomorrow morning. This data measures consumer spending, which is considered extremely important because it makes up two-thirds of the U.S. economy. It is expected to show a 0.9% rise in spending, meaning consumers spent much more last month than they did in September. This would be considered negative news for bonds because large increases in spending fuels an economic recovery and raises inflation concerns in the marketplace. If tomorrow's report reveals a smaller than expected increase in spending, bonds should react favorably, pushing mortgage rates lower. If it shows a larger than expected increase, mortgage rates will likely move higher tomorrow.
TUESDAY:
There are two reports scheduled to be posted Tuesday. The first is October's Producer Price Index (PPI) that is one of the two key inflation readings on tap this week. The PPI measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. If it reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and should drive mortgage rates higher. If we see in-line or weaker than expected numbers, mortgage rates should fall Tuesday. Current forecasts are calling for an increase of 0.5% in the overall reading and a 0.1% increase in the core reading.
Tuesday's second report is October's Industrial Production data. It gives us a measurement of manufacturing sector strength by tracking outpu t at U.S. factories, mines and utilities. It is expected to reveal a 0.4% increase in production. Stronger levels of production would be considered bad news for the bond market and mortgage rates, but this data is not as important as the PPI readings are.
WEDNESDAY:
October's Consumer Price Index (CPI) will be released at 8:30 AM ET Wednesday morning. This index is similar to Tuesday's PPI, except it measures inflationary pressures at the more important consumer level of the economy. The overall reading is expected to show an increase of 0.2% while the core data is expected to rise 0.1%. Weaker than expected readings would be good news for bonds and mortgage rates, while larger than forecasted increases could lead to higher mortgage rates Wednesday.
Wednesday's second report is October' s Housing Starts. This data gives us an indication of housing sector strength, but usually does not have a noticeable impact on mortgage rates. I don't expect this month's version to be any different unless it varies greatly from analysts' forecasts and the CPI matches expectations. It is expected to show a small increase in starts of new homes.
THURSDAY:
The Conference Board will release its Leading Economic Indicators (LEI) late Thursday morning. This is a moderately important report that attempts to predict economic activity over the next three to six months. It is expected to show a 0.4% increase, meaning economic activity will rise over the next couple of months. Generally speaking, this would be bad news for bonds. However, since this data is considered only moderately important, its results need to vary greatly from forecasts for it to affect mortgage rates.
Two-Month Rate Forecast:
With rates at multi-year or near historic and all-time lows, it's tough to expect that they have considerable space to decline much from here, especially in the face of a modestly improving economic climate and improving corporate earnings picture.
Rates that were lower earlier this year were fueled by an apocalyptic economic state and near-term view forward. While this has improved, investor lack of appetite to take risk, weak economic growth, and the low near-term prospects for inflation should serve to keep a lid on any serious increases, too.
We expect mortgage rates to likely wander in a range from about 4.875% to 5.375% on the Conv. 30-year fixed, but to be choppy in that range as the stock and bond markets search for new trend line.
Mortgage Market Advisory Disclaimer
This is only our opinion and cannot be guaranteed to be in the best interest of any or all parties. This service is provided for informational purposes only and is not intended for trading purposes. None of the information provided constitutes a solicitation, offer, or recommendation by NHLA to buy or sell any security, or to provide legal, professional, tax, accounting, or investment advice. Every lender's price desk has their own strategies and reactions to market movements. Our information is simply based on market movements and does not predict or report potential pricing adjustments by particular lenders.
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