Much like Monday, early morning weakness in the fixed income sector was followed by a rally later in the day in spite of better than expected economic data.   Helping spark the rally in mortgage backed securities yesterday was a large sell off in equities. Today, stocks have traded sideways while Treasuries and MBS have made price gains.

It appears there is a change in sentiment occurring on Wall Street at the moment. Summer is coming to an end and trader's are going back to work. After 6 months of stock rallies, we can only hope that it's the bond market's turn to take the driver's seat. 

While the market awaits the Employment Situation report on Friday, we have some tier II data to digest in the meantime.   First on the docket was the weekly Mortgage Bankers’ Association application index which tracks the monthly change in mortgage applications at major lenders.  This showed a 1% decline in purchase apps and a 3% drop in refinances.  This is slightly troubling as rates last week were under 5% and the government tax credit for first time home buyers is still in effect.   To read more, click here.

Moving on to employment data, we received private payroll data from ADP this morning.  One major difference between this and the official NFP report is the ADP numbers do not include government jobs.   It was expected that the ADP numbers would show a decline in jobs of 250,000 but the report indicated a larger loss of 298,000 jobs.   This is an improvement from last month’s loss of 371,000 but indicates a potentially higher loss on Friday versus the expectation of 200,000. 

The U.S. Department of Labor released their report on Productivity and Costs, the results were very close to expectations.  This data measures how efficient our labor force is at producing our nations goods and services.   The costs portion of this report measures the unit labor costs of producing each unit of output.   A productive labor force indicates that producers can produce more product with the same labor force which keeps costs down which leads to higher corporate profits and places a lid on inflation which benefits both stocks and MBS.  

The final report for today was Factory Orders which represents the monthly change in the dollar level of new orders for durable and non durable goods.  If factory orders are increasing, this would show that companies will be busier in the months ahead to fill those orders.  As companies get busier they might need to hire additional staff which would be a positive sign for our economy.  Recent reports have shown factory orders to be increasing and economists surveyed are expecting that trend to continue with a large month over month gain of 2.3%.  This would follow June’s 0.4% increase and May’s 1.1% rise.  The report shows that factory orders are up less than expected last month by only 1.3%. 

Following the release of all the economic data, MBS moved higher and are approaching levels not seen since early this summer, however given the nature of markets recently, this doesn't necessarily imply causality.  For more on these reports, check out the Top News section of Mortgage News Daily.

Reports from fellow mortgage professionals indicate that the par 30 year conventional rate mortgage remains in the 4.875% to 5.125% range for the best qualified consumers.  There is at least one lender offering 4.75% today.  In order to secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.   If you are seeking to access home equity, expect either a higher interest rate or additional fees regardless of the credit score or loan term. 

Even though MBS moved higher this morning and sentiment appears to be shifting towards a risk averse attitude (good for rates), I will continue to caution you on floating.  With the Employment Situation report coming Friday, it remains very risky to float.  It seems that the market is in wait and see mode waiting for the jobs numbers.  If those numbers are better than expected, MBS can move much lower in price quickly which will increase mortgage rates.  Additionally, the jobs data will be released prior to lenders issuing rate sheets so if we get better jobs data than the rate sheets on Friday morning can look much worse.   We have been on a winning streak for the last week and a half, and now is the time to take your chips off the table.   If you lock today at 4.875% but rates go to 4.625% you might feel like you pulled the trigger too soon but you still have a great rate.  If you float and rates go to 5.25% you will feel the pain in your wallet as each month you will be making a higher payment and pay more interest.    It is always better to lock when you should have floated than it is to float when you should have locked.