On Friday, mortgage backed securities (MBS) aggressively rallied, recapturing about half the losses suffered  on "Black Wednesday".  The majority of lenders repriced for the better but many remained cautious and did not pass along gains to the extent that MBS coupons rallied, which is typical for a Friday.  If you would like to see a graph of the action, click here.   

So far this morning, we have given back half of Friday's gains after better than expected economic data.  The week ahead is packed with economic reports to digest with the highest impacting report scheduled to be released on Friday: The Employment Situation Report.

 Today brings us several relevant reports to discuss. 

-           Personal Income and Outlays report which provides us data on the dollar value of income received from all sources and consumer purchases of durable and non durable goods, and services.  Last month, both income and spending  declined from the prior month by -0.3% and -0.2% respectively.  Economists surveyed are expecting continued declines with income and spending both expected to drop an additional -0.2%.  Since consumer spending is the lifeline of our economy, it will be very difficult for our economy to recover until spending picks up.   Personal income came in much higher than expected at a 0.5% increase but it did not lead to much more spending with the outlays coming in at a -0.1%.  It appears that the sharp jump higher in income is being attributed to increased government social benefits including unemployment insurance.  Consumer optimism is picking up, income is moving higher but spending is still lagging.  Imbedded within this report is a measure on inflation with the Personal Consumption Expenditure index.  The core PCE index came is higher than expectations at a month over month increase of 0.3% following last month’s 0.2% increase.   This places year over year core PCE at 1.9%.  With oil continuing its move higher, currently up more than a dollar to $67.50 a barrel, let’s hope that the inflation genie is not out of the bottle yet.  The 1.9% year over year reading is within the Fed’s comfort zone but rising oil prices will continue to apply pressure on consumer goods to move higher in price.   High unemployment should contain inflation for now but we do have a couple months in a row of higher than expected month over month increases in inflation.  Following the release, MBS have moved considerably lower in price giving back half the gains from Friday.

-          ISM Manufacturing index which gives us a measure of the strength of the manufacturing segment of our economy.   This is a survey of more than 300 manufacturing firms on employment, production, new orders, supplier deliveries and inventories.   Readings above 50 indicates growth in manufacturing, readings from 43 to 50 indicates that the economy is growing even though manufacturing is contracting and any level below 43 indicates the economy is in recession.   Last months’ report came in much better than expected rising from 36.3 to 40.1 which helped to spark the optimism that the recession is nearing its end.   Economists’ expectations are for continued improvement to a reading of 42.0 and the actual report came in at 42.8.  Following the release of this better than expected data and the construction data,  MBS have now given back all of Friday’s gains.

-          Construction spending which is the dollar value of new construction activity on residential and non residential projects.  Rising construction spending is a key indicator of a growing economy since businesses tend to only build new factories when they are confident that the economy is healthy enough to justify the expansion.    Construction spending for March rebounded to a surprising 0.3% increase but expectations are for a sharp decline to -0.8% for April.   The release has come in much higher than expected at a month over month increase of 0.8%. 

Tuesday

-           Pending Home Sales Index will be released by the National Association of Realtors.   This index is a leading indicator of  housing activity in the existing home sales market.  A pending sale is one in which a contract has been placed on a home but the sale has yet to close.   Strong housing demand is viewed as a huge positive for economic growth due to a person would have to feel very positive about their own financial position to buy a home.   In addition, high housing demand usually leads to other purchases such as appliances, flooring, window treatments, etc… which leads to higher sales of goods and services.

Wednesday

-           Weekly Mortgage Bankers’ Applications Index. This data set measures new applications at mortgage lenders. This report gives investors a gauge into demand for housing which has a big impact on economic momentum.   Higher demand for housing usually leads to higher demand for many products to fill the home thus the stock market generally rallies with a improving number.

-      Factory Orders which represents the dollar value of new orders for both durable and non durable goods.  An increasing number suggests economic momentum and is seen as a positive for stocks and a negative for MBS.      Last month’s report came in at a decline of -0.9% and economists’ surveyed are estimating a sharp rebound to an increase of 1.1%

 -     ISM Non-Manufacturing Index which gives us a measure of the strength of the non manufacturing segment of our economy.  Last month this index rose to 43.7 and economists surveyed are expecting continued  improvement with a  45.0 reading.   This index is compiled by surveying 400 firms across the US.

Thursday

-          Jobless Claims, expectations call for 620,000 filers for first time unemployment insurance following last week’s 623,000.   The bigger concern is the continuing claims, which is the number of citizens who continue to file for unemployment insurance, which has set a record week after week and is currently over 6.6 million.    A higher than expected number would be a positive for MBS and mortgage rates.

-          Productivity and Costs  measures the growth of labor efficiency and unit labor costs.   An efficient labor force can help contain inflation by lowering unit labor costs.  If a company can produce a higher  amount of goods and services, with the same labor force, that helps to keep prices and inflation down.

-          We also get an announcement from the Treasury Department regarding the total amount of Treasuries that will be auctioned at the next auction.  The added supply of debt will apply pressure on treasury and MBS yields to rise.   Currently the yield on the benchmark 10 year treasury note is at 3.65%.  Our government needs to issue more treasuries to fund the ever increasing spending.

Friday

-          Employment Situation which is the highest impacting economic report we receive on a monthly basis.  Higher unemployment leads to less consumer spending and less pressure on wages so it is positive for MBS and lower rates when unemployment is high.   Economists’ surveyed are expecting the number of jobs lost from last month to be at 530,000 following the April’s loss of 539,000.  It is also expected that the unemployment rate will move from last month’s 8.9% to 9.2%.   In a sign of optimism for our economy, March’s job loss total was 699,000 so we are seeing some improvement in the amount of jobs lost.   If this report comes in better than expected, the stock market will probably continue to move higher as investors sell their fixed income investments to move their cash into higher yielding equities. 

After the very welcomed rally we had on Friday, it is very disappointing to watch the sell off this morning.  Early reports from fellow mortgage professionals are indicating better rates than we had at the end of last week but disappointing after the huge rally on Friday.  Again, this just shows you how quickly things can and will change.   Today’s par 30 year conventional rate mortgage is near 5.00% for the best qualified consumers.  In order to secure this rate you will have to have a FICO credit score 740 or higher, a loan to value 80% or less and be willing to pay all closing costs associated with your refinance including 1 point loan origination/discount/broker fee. 

If you would like to see intraday updates on the movement of MBS, visit our MBS Commentary blog.