After a brutal beat down on Wednesday, mortgage-backed securities managed to recapture some of those losses yesterday.   Although we didn’t have a monumental rally but after 4 days of MBS selling and steadily increasing mortgage rates....it was nice to see some green on the board.  To put it into perspective, in total since last Thursday the 21st, MBS prices have moved lower by 250 basis points. Yesterday we got back 25 basis points.   This selloff has moved the par 30 year fixed rate mortgage from 4.5% on Thursday to 5.25% yesterday!  The improvement yesterday should result in better rate sheets this morning.

Let’s move on to the economic data for the day.

First out this morning were the first revisions to first quarter gross domestic product. Preliminary GDP gives us a measure of total activity across all economic sectors.   The advanced reading showed that our economy contracted by -6.1% during the first quarter of 2009.  Today the Commerce Department revised that reading slightly better to -5.7%, which fell short of economists’ expectations for -5.5%.   Included in this report is a measure on inflation...the Personal Consumption Expenditure index which is the Fed’s preferred gauge on inflation because  it measures inflation on the consumer level.  The Fed would like to see this index fall between 1% to 2%. This morning’s PCE reading was 1.00% overall with a core reading of 1.5%, indicating inflation is still in check.  The core reading strips out food and energy due to supply side volatility.   Since this report is backward looking and it fell within the market expectations it has had very little effect on financial markets.

Next is the release of Chicago PMI which provides a peek into the strength of business conditions in and around the Chicagoland area.  A reading above 50 indicates a expanding business sector while readings below 50 indicates a contracting sector.  Economists’ had expected this report to continue to show an improvement in business conditions with a 42.0 reading following last month’s 40.1.  The actual numbers came in considerably worse with a 34.9 reading!   Many reports have been indicating the end of the recession is in sight  which has led to the rally in the Dow and a selloff of MBS and treasuries, but this report indicates the opposite.   Following the release of this report, the stock market immediately reversed course and turned negative.

The last report of the day is consumer sentiment which gives investors an idea of how consumers feel about their own personal financial conditions and their outlook on the economy.  An optimistic consumer is much more likely to spend while a pessimistic consumer is more likely to save.  Since our economy is driven by consumer spending, the Dow generally rallies with a  better than expected reading.  This report is a survey of 500 households from across the country and is conducted by the University of Michigan’s Consumer Survey center.   The actual reading came in very close to economists’ expectations indicating only a slight improvement over last month with a 68.7 versus expectations of 68. 

Early reports from fellow mortgage professionals are indicating mortgage rates to be noticeably better with the par 30 year fixed rate mortgage coming in at 5.125% for the best qualified consumers.  Halfway through the trading session MBS have made massive gains and lenders are beginning to pass along better mortgage rates.  If you are currently floating, than float away for now, but keep in mind that things can change very quickly.  I strongly recommend that all floaters check in on the  MBS Commentary blog were MBS pricing will be updated throughout the day.