Last week financial markets found economic optimism is better than expected data releases and some hopeful verbiage from the Fed. Mortgage rates reacted by moving higher as money flowed from the bond market to the stock market.  For the week, lower MBS price increased consumer borrowing costs by .50 -.75 discount points. 

At the current price level of MBS, most lenders should pass along par 30 year conventional rate mortgages in the 4.625% to 4.875% range for well qualified consumers.   In order to qualify for the best mortgage rates you must have a FICO credit score above 740, a loan to value at 80% or less, and be willing to pay all closing costs associated with loan including 1 point loan origination/discount/broker fee.   For consumers with lower FICO scores that want to obtain the lowest rates, you will have to pay higher fees due to GSE mandated risk adjustors/loan level price adjustments (LLPA) .

Onto to the data for the upcoming week:

Today brings us two reports on housing that will be released at 10 am eastern.  First, we get construction spending which is the dollar amount of new construction activity on residential, non-residential and public projects.   Last month this report showed construction spending falling but not as much as expected.  Economists’ expected this month’s report to decline by 1.0%, the actual data indicated that construction spending increased by 0.3%. Another sign that economic activity is improving.

Pending Home Sales were also released this morning. The National Association of Realtors defines a pending home sale as one in which a contract has been placed on a home, but has not closed yet.  This report is seen as a leading indicator of housing activity.  Strong housing demand indicates a stronger economy, which is generally good for the stock market and negative for the MBS market.  Expectations were for this report to show no change from last month's reading of a 2.1% increase in activity. Pending Home Sales increased by 3.2% in March...stocks rallied on the news.

Tuesday

-ISM Services Index which is a national survey of purchasing managers that gives investors a gauge into the strength of the non manufacturing segment of our economy.  Expectations are for a reading of 42.0 following last month’s 40.8 reading.   Readings above 50 indicate and expanding sector and reading below 50 indicate a sector that is contracting. 

-3 year treasury note auction.  With the added supply of debt on the market, it will apply pressure on treasury yields to rise which will also place pressure on mortgage rates to follow. 

-Federal Reserve Chairman Ben Bernanke will be testifying before the Joint Economic Committee on the economy.   Anytime he speaks the market will be listening for any clue regarding future monetary policy and the outlook on the economy.   This will be the highest impacting event of the day. 

Wednesday

-MBA Refinance Applications Index. Applications may slow due to higher mortgage rates over the past week

-10 year treasury note auction.   With the huge amount of government spending already approved by Congress, the government must issue more treasuries to raise the  funds as they are spending money we do not have.  In times of recessions, the government must increase some spending to get the economy moving forward but the increased supply of debt on the market will continue to apply pressure on mortgage rates to increase. 

Thursday

-Weekly Jobless claims which measures the number of Americans on a weekly basis that have filed for unemployment insurance for the first time.   Initial claims have appeared to peak as claims fell last week by 14,000.   However, continuing claims which measures the amount of Americans that are continuing to file for unemployment insurance due to the lack of finding a new job, is continuing to set all time record highs week after week.  Last week’s continuing claims came in at 6.271 million which was 133,000 more than the prior week.   Expectations are for this report to show a further decline in jobless claims from 635,000 last week  to 631,000.

-Productivity and Costs report which is released on a quarterly basis.  Productivity measures how efficient our labor force is at producing our economy’s goods and services.   An efficient labor force helps to keep overall labor costs down which also keeps prices down which is positive for MBS.   Productivity is expected to show  0.0% after last quarter’s .4% decline.   Labor costs, which measures the labor costs of producing each unit of output.   Lower labor costs keeps wage based inflation in check and is positive for MBS.   Expectations are for a 3.4% increase following last quarter’s 5.7% jump. 

-Federal Reserve Chairman Ben Bernake will be giving an opening keynote address at the Chicago Fed’s Conference on Bank Structure and Competition. 

-30 year Treasury Bond auction.  Again, the added supply of debt will place pressure treasury and MBS yields to increase. 

Friday

-Employment Situation Report which gives us the unemployment rate and the number of jobs lost or created from the prior month.   The unemployment rate is expected to come in at 8.9% following last month’s 8.5% reading.   This is the highest reading since November 1983.  Non farm payrolls, which has moved lower 15 months in a row is expected to show another loss of 630,000 jobs.   In March, our economy lost 663,000 jobs.   Since the start of the current recession which began January 2008, our economy has lost over 5 million jobs!!  Higher unemployment has kept wage based inflation in check which is positive for MBS.   Historically, this report is the highest impacting report we receive on a monthly basis.

Early reports from fellow mortgage professionals are indicating that lenders are offering 4.625% near the par for a 30 year conventional rate mortgage.   MBS, which started the day moving higher has changed course and is now slightly lower on the day.  MBS coupons continue to receive support from the Federal Reserve, however rallying stocks and selling Treasuries will keep MBS gains subdued.   If you would like intraday updates, click over to the MBS Commentary.