Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

Last Week; interest rates increased on treasuries but remained unchanged for the mortgage markets The stock market rallied, defying those that continue to expect a big decline. Equity markets had a small retracement two weeks ago but it only lasted a few days and took the DJIA down 6.0% from its recent high last year. Jan personal income was less than expected, up 0.1% while personal spending was strong at +0.5%. Feb auto sales were expected to have increased, and they did; the only company that reported a decline was Toyota.

The Feb employment report last Friday capped a good week for the various economic reports; non-farm job losses early in the week were for a decline of 10K but as the week progressed the estimates rose to -70K based on guesses as to what the bad weather might have done to employment. A waste of energy as it turned out, non-farm job losses were only down 29K and when the revisions to Jan and Dec are taken into account, there have been no job losses in the past 3 months. On the housing front; Jan pending home sales jumped 12.3% frm Dec. Summing it; the data last week was better than expected and rallied equities while forcing treasury yields higher.

This Week; there are only a few data points that will garner attention; they do not appear until Thursday and Friday when retail sales, weekly jobless claims and the U. of Michigan consumer sentiment index hit. The key this week is Treasury auctions; a total of $74B in 3 yr and 10 yr notes and a 30 yr bond on Tuesday, Wednesday, and Thursday. While the rate markets don’t pay direct attention to them; Treasury also will sell an additional $136B in Treasury bills (obligations with one year or less in duration). Each month Treasury sells $192B in notes and bonds (2 yr through 30 terms), so far the demand for the debt has been very good, foreign investors and direct bidders (anonymous) are stepping up to the table of deficits to fund it. The interest markets are still holding firm, but hitting up against strong technical resistance on the bellwether 10 yr note at 3.60%/3.58%.

Its been a solid resistance level since mid-January; the 10 yr note closed at 3.68% last Friday after declining to a 3.59% close the previous Friday (2/26); last week the 10 yr tested the resistance level everyday, until Friday. The 10 yr note rate at Friday’s close is the highest since 2/23. Mortgages have held strong against treasuries recently, ignoring the choppy and generally non-trending treasuries. Although the mortgage markets are presently holding well, if treasury rates break out to an up-trending move (3.75% on the 10 yr) mortgage rates will follow quickly. Unless there is a major shift in sentiment about the strength of the economic rebound, to the view of a double dip coming, interest rates won’t likely decline much more. The overall view is for increasing rates this year; estimates from 4.15% on the 10 yr note to as high as 5.00%; we don’t see 5.00%, more likely 4.25%. That would mean 30 yr mortgage rates at 5.50% to 5.60%

Summary:

If you’re shopping for a home or a refinance, though, don’t rest on your laurels. After Friday’s big sell-off, this week opens into a major headwind and, plus, the Federal Reserve’s support for mortgage markets ends in just 3 weeks. (You can also see my blog post as well.)  So, without much data for the markets to lean on, I’m afraid upward momentum is the name of the game. After last week’s mortgage rate performance, Thursday may have been the best day to lock in. To minimize your risk, consider locking in against any further rate hikes.

Last Week; wasn’t a good one for the economic bulls, and particularly those that think the housing markets are making a turn. Jan existing home sales were expected to have increased about 1.0%, they tanked to a decline of 7.7% with the inventory of unsold homes increasing to 7.8 month from 7.2 months in Dec. New home sales in Jan really fell, with the forecast of an increase of 3.7% over a weak month in Dec, sales plunged 11.2%. Bernanke testified in Congress last week, it went OK and markets only took out of it that once again Bernanke reiterated interest rates would stay low for a lot longer.

We are hearing that it will likely be four more meetings before the FF rate is increased, that takes to out to the latter part of this year. It all depends on the economy; we still think the foundations of the present optimism are too optimistic are too excessive, but that is that famous wall of worry it takes. Not only housing data; consumer confidence in Feb declined substantially; the Conference Board’s index of confidence dropped over 10 points (20%) from Jan to Feb to a low read of 46.0; the U. of Michigan consumer index didn’t slide at all and remained unchanged on the month——more to be confused about. Although the week was punctuated with very soft economic data, the equity markets held well with very little change in the key indexes. The interest rate markets improved; the 10 yr note yield fell 16 basis points to 3.62% and 30 yr mortgage rates declined about 8 to 10 basis points.

This Week; we believe will be one of the most important weeks in the last few months for the financial markets. Very key economic data this week; but none more important than Friday’s Feb employment data. The key data points this week are personal income and spending for Jan, both ISM manufacturing and services reports, Feb auto and truck sales, and the Fed’s Beige Book release. What will make this somewhat of a watershed week, and the relevance of the data releases, is what occurred last week with the very deep decline in consumer confidence. Markets are translating the collapse in confidence to more job losses and no improvement in wealth. We will add that many consumers that have managed to hold on, and hoped to wait the recession out, are now beginning to retreat as the end is slipping farther out for many that so far have “weathered” the economic recession. The early estimates for the Feb jobs report are for just 20K jobs lost and the unemployment rate to increase to 9.8% from 9.7% in Jan.

Early this week we are not expecting any additional improvement in the bond market, and equity markets to be relatively quiet. Based on the early estimates for the non-farm jobs, we believe the decline in jobs will be more than that, and the unemployment rate will be closing back toward 10%. The decline in interest rates last week had two legs; the continued increase in sovereign debt caused by debt problems in Greece, and safe haven moves by investors into treasuries that are taking some money off the table. Look for the week to become increasingly volatile at mid-week as players make adjustments for employment data.

Summary:  Las Week’s Negativity

• Consumer Confidence posted 16% short of expectations
• New Home Sales posted 13% short of expectations
• Initial Jobless Claims were higher than expected

Rates look fantastic right now; however all the risk of floating (not locking your interest rate) falls to Friday and the employment numbers.  The markets expect that 30,000 jobs were lost in February.  If the actual figure is better than 30,000 jobs lost, mortgage rates will rise. If it’s worse, rates will fall.

On the first Friday of every month, the U.S. government releases its Non-Farm Payrolls data from the month prior. The data is more commonly known as “the jobs report” and it swings a big stick on Wall Street.

Especially now — many analysts believe job growth is tightly linked to the future of the U.S. economy.

Therefore, when January’s jobs report hits the wires at 8:45 AM ET tomorrow, home buyers would do well to pay attention. A net job reading that is much higher (or lower) than Wall Street’s expectations can make a serious change in home affordability.

Wall Street expects that the economy added 13,000 jobs last month.  It would mark the second time in 3 months that the jobs report showed a net monthly gain.

In November 2008, the economy added 4,000.

Jobs matter to the economy for a lot of reasons, but one of the biggest is that when Americans are working, Americans are buying and consumer spending accounts for 70 percent of the economy.

Job growth spurs the economy and draws money to the stock market. Unfortunately for rate shoppers, that kind of stock market growth happens at the expense of the bond market which is where mortgage rates are made.

Good jobs data usually means higher mortgage rates.

Also, job growth can lead to higher home prices. This is because working homeowners are less likely to default on a mortgage versus non-working homeowners.  In this way, job growth helps hold foreclosures to a minimum which, in turn, suppresses the housing supply.

Less supply means higher prices for home buyers.

Mortgage rates are idling this morning in advance of tomorrow’s data.  If you’re shopping for a mortgage rate, the prudent play may be to lock your rate before the jobs data is released.  A jobs figure that’s higher than the 13,000 expected could cause rate to rise sharply.

In a news-heavy week, mortgage markets improved last week, adding to a 3-week rally.

But, given last week’s data and domestic story lines, it’s surprising that rates actually fell.

1. The Federal Reserve said the economy continues to strengthen
2. Consumer Confidence pushed to a 2-year high
3. 4th Quarter domestic output exceeded Wall Street’s expectations

Usually, events like these draw money away from the bond markets and into the stock markets and Wall Street preps for better corporate earnings. The movement pressures mortgage rates to rise.

Last week, however, different stories trumped the headlines including a report from Standard & Poor’s that said U.K. banks are no longer counted among the world’s most stable.  This research, in particular, triggered a flight-to-quality among investors that pumped the U.S. dollar and sparked new demand for mortgage bonds.

It’s one reason why we ended the week on a rally and it just goes to show how unpredictable mortgage rates can be.

This week figures to be a challenge, too.

First, we start the week with key inflation data.  When inflation runs hot, it’s usually bad for mortgage rates.  Inflation is expected to be tame, however — a point the Fed made several times in its press release last week.  That said, inflation data is closely watched by markets and can make a big impact on rates.

Then, on Wednesday, ADP releases its private sector job report.  The ADP data is a precursor to the government’s own Non-Farm Payrolls report which is due to hit Friday.  ADP is expected to show a net loss of roughly 85,000 jobs.  Depending on where the actual numbers comes in, mortgage rates could wiggle a bit.

If the ADP report shows much fewer than 85,000 jobs lost, expect mortgage rates to rise.  The same is true for Friday’s job report.  A miss on expectations will cause mortgage to ratchet higher.

Since peaking on the last day of December, mortgage rates took a slow, steady descent through January. They’ve have taken back close to two-thirds of December’s overall losses.  This week, rates could fall some more, or they could bounce back up.  The most prudent time to lock would be prior to Tuesday’s closing. 

After that, the respective jobs reports will take over and rates could go either way with force.