A Mortgage Update from Jay Skwierawski for the week of March 9
Hello Everybody!
Monday, Monday, can't trust that day,
Monday, Monday, sometimes it just turns out that way,
Oh Monday morning, you gave me no warning of what was to be
Oh Monday, Monday, how could you leave and not take me....
What a difference a week makes!
If you read my update last week, I was very optimistic about the future course of interest rates. The mortgage market had just gone through a period of four great days, and all indications were that this new-found euphoria in the market was going to continue.
But then came Monday, and like the Mamas and Papas song lyrics above suggest, sometimes Monday gives no warning of what was to be!
The week started out with some members of the Federal Reserve warning of higher inflation ahead and by now you know that the interest rate markets hate inflation. Also on Monday, the ISM Manufacturing number came out slightly higher than expected. Although it wasn't much higher, the markets have been quick to sell off (causing rates to go up) on any positive signs in the economy. The market sold off on Monday, but that wasn't too unusual, coming off of a great run the previous four days. Tuesday the market would surely reverse course and rates would continue their trek downward, right? WRONG! Tuesday, there were no significant economic reports out, but there was a lot of "Fed-speak", including a couple of speeches by two of the inflation hawks on the Fed. In addition, Citigroup announced that they were going to be seeing more large losses having to do with subprime loans. So the market sold off on Tuesday. No big deal, the markets would surely regain their composure and rates would retreat on Wednesday, right? WRONG! News released on the economy was mortgage rate friendly, but for some reason, the mortgage bond market sold off and interest rates jumped, leaving rates higher than they were before the positive run they had the week before. Certainly this sell-off was overblown, and rates would go down on Thursday, right? WRONG! The only economic news out on Thursday was first time unemployment claims, which came in slightly lower than expected, while the continuing jobless claims came in at a level consistent with an economy teetering on a recession. This should have been positive news for mortgage rates. But, the mortgage bond market rallying, and interest rates retreating, we saw the mortgage bond market sell off with a vengeance, and mortgage rates jumped. In fact, it was one of the quickest, steepest run ups in mortgage rates over a four day period in history. Now, I like being a part of history just like the next guy, but this was ridiculous! By the end of the day, we found out what caused the sell off on Thursday. Two large mortgage holders - Thornburg Mortgage and The Carlyle Capital Group had recently experienced such large losses in their mortgage holdings, that they had some of their financial backers ask for some of their cash back in the form of a "margin call". Because these two didn't have enough capital to cover these margin calls, they were forced to sell some of their "good" mortgages on the secondary mortgage market. This huge influx of mortgages for sale on the open market caused a huge, rapid increase in rates. Okay, so the damage was done for Thursday, but Friday would certainly be a better day for mortgage rates, wouldn't it? YES! Friday brought news that the economy had lost 63,000 jobs in February, instead of a 25,000 gain in jobs as the market expected. Also, December and January's numbers were revised downward. The unemployment rate, itself, went down to 4.8% from 4.9%, but the reason given for this was that a certain number of people had "given up" finding a new job, and were no longer being counted as unemployed. The mortgage market rallied on this news, and the news from earlier in the day that the Federal Reserve had announced that it was going to be adding more liquidity to the economy, in the form of low rate auctions. This was seen as a positive move by the Fed, without being as inflation causing as a reduction in short term rates.
So, here we are at the beginning of another week that could hold as much volatility as the week that just passed. I certainly don't want to sound too optimistic about mortgage rates in the week ahead. I was optimistic last week, and look where that got us - mortgage rates about 3/8% higher than they were the week before. Fundamentally, mortgage rates should be dropping. We should have rates sitting at or near historically low levels. But, there is so much more than fundamentals affecting mortgage rates these days, that it's hard to tell what will happen. For instance, mortgage bonds and 10 year U.S. Treasury Bonds often trade similarly to one and other. If rates on the 10 year go up, then rates on mortgages typically go up. Recently, however, Treasury Bonds and Mortgage Bonds have become disconnected. This was certainly true this week. As we saw the stock market sell off to its lowest level in 18 months, we saw money flow from the stock market into the bond market. This caused the 10 year Treasury rate to drop, but there was not a like trade into mortgage bonds, and we actually saw mortgage rates head the opposite way.
This week, the following economic reports will be coming out (shown with their typical affect on mortgage rates):
Thursday - Retail Sales (HIGH Impact) - Our economy is consumer driven - was the consumer out spending in February?
Thursday - Retail Sales, ex-auto (HIGH Impact) - Because auto sales cause wild swings in sales, it is reported with and without auto sales
Thursday - First time unemployment claims (MODERATE impact) - Will the number of first time claims continue its upward trend this week?
Friday - Consumer Price Index (CPI) (HIGH) - Is inflation continuing to rise, as the markets have been worrying about?
Friday - CPI, less food and energy costs (HIGH) Did inflation rise, even excluding volatile food and energy costs?
Friday - Consumer Sentiment Index (MODERATE) Can consumers possibly get over their doldrums about the economy, and start to buy things like houses?
Although it's not a huge week for economic reports, there will undoubtedly be more news out on the state of the mortgage industry that will cause rates to move one way or the other. We will keep you posted on any wild swings either way.
The chart above shows the movement of the market this week. The four large red bars on the right side represent the sell-off in mortgage bonds from Monday through Thursday, followed by the lone green bar at the end on Friday, when the price of these bonds regained some of what was lost earlier in the week. The dark blue line across the bottom is the 200 day moving average for these mortgage bonds. If the bars go below this line, as they did on Thursday, it is sometimes an indication that we are headed for a period of higher mortgage rates for months to come. Fortunately, the bond was able to fight its way back above the blue line on Friday. This week will bring a tug of war above and below this line. Above - good, below - bad. Let's all hope that good prevails!
Monday, Monday, so good to me,
Monday, Monday, it was all I hope it would be...
Have a great week!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
is a registered service mark of The Prudential Insurance Company of America. Equal Housing Opportunity. Midwest Realty Ventures LLC. All Rights Reserved.