What is going on with Mortgages?

Mortgage Market News for the week ending January 7, 2011

Events This Week:
Employment Rose
ISM Services Higher
Factory Orders Rose
Manufacturing Up
Events Next Week:
Tues 1/11 3-yr Auction
Wed 1/12 Beige Book 10-yr Auction
Thur 1/13 PPI 30-yr Auction
Fri 1/14 CPI Retail Sales Industrial Prod.


Mortgage Rates Little Changed
The volatility in mortgage rates continued during the first week of the year. Prior to Friday's Employment report, nearly all the economic data was stronger than expected, which was negative for mortgage rates. Rates improved after the Employment data, though, and ended the week nearly unchanged.
Over the last two months of 2010, investors began to focus on a trend toward stronger economic growth, which helped push mortgage rates higher over that period. Nearly every economic report released this week showed greater than expected improvement from last month, including Services, Manufacturing, and Construction. Stronger economic growth and job creation is positive for home sales, but it also results in higher inflation, which leads to higher mortgage rates.
The condition of the labor market is among the most important economic data every month, and this week there was some additional suspense. On Wednesday, ADP, a private payrolls firm, released its forecast for private sector job growth in December, and it was for an increase of an enormous 300K jobs. The ADP forecast has always been considered an imprecise labor market predictor, but the sheer magnitude of the ADP forecast caused many investors to increase their expectations for the government's monthly Employment report. Friday's data showed that the economy added 103K jobs in December, and revisions to prior months added an additional 70K jobs. The combined total of 173K jobs was close to the original consensus estimate, but was below the number that some investors expected after the ADP forecast, and mortgage rates improved after the news. Another big surprise came from a drop in the Unemployment Rate to 9.4% from 9.8% in November, far below the consensus forecast of 9.7%, and the lowest level in 19 months. Economists suggest that seasonal factors may have played some role in the large decline in the Unemployment Rate, so next month's results will be highly anticipated.


Also Notable:
The four-week average of Jobless Claims fell to the lowest level since July 2008
The ISM Services index rose to the highest level since May 2006
The Fed's Hoenig warned that stimulus may lead to undesirably high levels of inflation
The Treasury will auction $66 billion in 3-yr, 10-yr, and 30-yr securities next week


Average 30 yr fixed rate:
Last week:
+0.01%

This week:
+0.01%

Stocks (weekly):
Dow:
11,700
+100
NASDAQ:
2,700
+25


Week Ahead
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales, an important indicator of economic growth, will be released on Friday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, is also scheduled for Friday. The Fed's Beige Book, the Trade Balance, Import Prices, and Consumer Sentiment will round out the week. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.