A Mortgage Update from Jay Skwierawski for the Week of November 2
Hello Everybody!
Mortgage rates increased slightly last week, as the markets digested news that the Federal Reserve had lowered its target Fed Funds rate by 1/2 percent. Mortgage rates typically do the opposite of what the Fed does, so it was not so unusual to see rates go up last week. There wasn't much in the way of surprises on the credit crunch, and that helped to keep rates in check. This week, the markets will be probably react to tomorrow's election results and Friday's employment report.
A quick look back on the economic reports that came out last week:
On Monday, New Home Sales were reported to be 464,000 in September, compared to the 450,000 that were expected. On Tuesday, Consumer Confidence came in with a reading of 38, vs. the 52 that was expected and the 61.4 that was reported in August. This was a huge drop. Wednesday we found out that Durable Goods Orders increased by .8 percent, instead of dropping 0.1 percent as was anticipated. This was good news for the economy, and unexpected. Also on Wednesday, the Federal Reserve announced that it had lowered the Fed Funds rate and the Discount Rate by 1/2 percent. This was widely expected. In making the moves, the Fed said that the risk for the economy slowing down was bigger that the risk of inflation, especially with the economy slowing down. Although the headlines read "Fed cuts rates by 1/2 percent," mortgage rates typically go up after such a move, which really confuses consumers. When the Fed lowers interest rates, the markets start to fear that decreasing short term rates will cause inflation to rise.
As a result, long-term rates, which affect mortgage rates, typically move up. The opposite holds true when the Fed raises rates. After the Fed raises rates, we will usually see a decrease in mortgage rates. Go figure! On Thursday, it was reported that the Gross Domestic Product (GDP) decreased by 0.3 percent in the 3rd quarter, less than the 0.5 percent decrease that was expected. This number is subject to two revisions, and will probably be revised to show that the decrease was larger than the 0.3 percent reported. The GDP Chain Deflator, an inflation gauge, came in slightly higher than expected at 4.2 percent, but that takes into account the price of oil prior to recent decreases. First Time Unemployment Claims came in slightly higher than expected at 479,000. We weren't done yet! On Friday, Personal Income came in higher than expected, while Personal Spending came in lower than expected. The Fed's favorite inflation gauge - the Personal Consumption Expenditures (PCE) and Core PCE, excluding food and energy costs, both came in better than expected, while the Chicago Purchasing Managers' Index came in much lower than expected, in full recession mode. All in all, for the week, news was bond friendly, except for the Fed's decision to lower interest rates.
This week, the markets will be watching for the following reports to come out (shown with their typical impact on mortgage rates):
Monday - Industrial Supply Managers' (ISM) Index (HIGH)
Tuesday - Election Day (Potentially HIGH) Be sure to get out and vote, if you haven't already!
Wednesday - ISM Services Index (Moderate)
Wednesday - ADP National Employment Report (HIGH) This report sometimes is used to predict the employment report, which comes out on Friday.
Thursday - First Time Unemployment Claims (Moderate)
Friday - Employment report, including jobs lost or gained (a loss is expected,) unemployment rate, average work week and average hourly earnings. (HIGH)
The interest rate markets will also take its cue from news out on the credit crisis, the price of oil and major movements in the stock market. We will keep you updated on any major movements in either direction.
Above is a chart that shows the price of mortgage bonds for the past 90 days. Keep in mind that the price of mortgage bonds moves opposite of mortgage rates. So, on this chart - up and green are good, while red and down are bad. You will notice that there was a big drop in the price on Monday (increase in rates,) which was follow through selling that started on the previous Thursday, followed by a relatively flat market the rest of the week.
Have a great week!
Thank you!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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