After a lower opening, mortgage backed securities managed to rally later in the day recapturing all the losses from earlier.  This allowed some lenders to pass along better rate sheets as the gains held all the way to close.   In total, MBS improved by more than 60 basis points from the lows of the day.  Not all lenders repriced which should allow for them to pass along better rate sheets this morning, assuming we hold onto the gains when rate sheets are issued around 10am eastern time.   MBS start trading at 8am eastern time.

We have quite a few economic reports to digest this morning including Fed speak from the man in charge Ben Bernanke.   At 10am eastern time, Ben Bernanke will be testifying before the House Budget Committee on the many challenges facing our economy.   Optimistic market participants  have sparked a nice rally in the equities market which has pulled money away from MBS causing the spike in mortgage rates.  Many recent economic reports have shown the economy is turning but we also need to keep in mind the massive amount of government stimulus that has hit the economy.  Some believe that this economic optimism will be short lived and point to the jobs outlook as proof.  We have unemployment approaching double digits and on Friday we get the ever so important employment situation report.   As always, anytime Big Ben speaks market participants will be paying attention for any hints of future monetary policy and his outlook on the economy.   The MBS Commentary blog will cover his testimony and give a full analysis afterwards. 

Onto the economic data for the day.

First out this morning is the weekly Mortgage Bankers’ Association Purchase Applications report which measures the weekly increase/decrease in purchase and refinance activity.  Many economists believe that until housing picks up our economy will remain weak.   Home purchase applications, which has been relatively flat all year,  posted a nice 4.3% gain for the week of May 29 while the refinance activity posted a sharp decline of 24%.  With the sudden spike in mortgage rates, it is not surprising to see a decrease in the refinance activity.   The increase in purchase applications is a positive sign, but will the spike in mortgage rates put a damper on future improvements?

With the ever so important Employment Situation report coming Friday, we do get a couple lesser known reports on jobs this morning.  First is the Challenger Job-Cut Report which totals the number of announced corporate layoffs.  The report has shown that last month corporate layoffs fell to 111,182 from the prior months 132,590.  This report, though, does not include any potential layoffs resulting from the GM bankruptcy but it has shown continued improvement over the last few months with less and less layoffs.   We also received the ADP Employment report which is similar to the Nonfarm Payrolls report we get on Friday but this report is compiled by a private company and not the government and only includes private payrolls and no government jobs.  Historically, this report has not been very accurate but it is garnering more attention of late and its accuracy appears to be improving.   The ADP report estimates that 532,000 jobs were lost in the month of May following last month’s revised reading of 545,000(initial reading was -491,000) hinting at no improvement in the jobs outlook.   Following the release, stock futures have moved lower and money has flowed into the MBS and treasury markets.

Next we received the monthly factor orders report which totals the dollar level of new orders for both durable and non durable goods.  An increasing trend in factory orders points to a growing healthy economy which can lead to inflation.  The MBS market prefers a moderately growing economy which results in a lesser threat of inflation, their mortal enemy.  Following last month’s reported decline of -0.9%, factory orders gained .7% vs expectations of a 1.1% gain.  Last month’s numbers where revised considerably lower to a drop of -1.9%. which will mitigate the positive increase for this month.

The last report for the day is the non ISM index which measures the strength of the non manufacturing segment of our economy, this includes service industries, agricultural, mining, construction, retail, etc…  This index is compiled by surveying nearly 400 firms from across the US.  Readings above 50 indicate an expanding or growing sector while reading below 50 indicate a contracting economy.  Last month’s reading continued to show contraction with a 43.7 reading which was an improvement from the prior month.  Economists’ surveyed had expected continued improvement with a  consensus of 45 but the actual reading fell a little short at 44.0 but still improved from the prior month.   

Well, that’s it for economic data and all in all the data is positive for MBS.  Since the release of all reports, the stock  market bulls have disappeared with the stock market dropping over a 100 points.  MBS are up on the day continuing the improvements we enjoyed yesterday.  Early reports from fellow mortgage professionals are indicating better rates this morning with the par 30 year conventional rate mortgage dropping to the 5% to 5.25% range depending on the lender.  To qualify for a par interest rate, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.  As always, you can elect to pay less in closing costs and take a higher interest rate or you can pay additional discount points and buy a lower interest rate. 

For intraday updates check out the MBS Commentary blog.  I highly encourage anybody that is floating to check out that blog for daily movements of MBS which might result in reprices for the better or for the worse.  So far this morning things are looking decent, so let’s hope that trend continues so rates can get back under 5%!