GDP Says Recession is Over Causing Rates to Be Pressured Higher
Posted 10-30-2009 at 08:25 AM by VictorBurek
Better than expected data on Gross Domestic Product yesterday led to a large rally in the stock market. As is quite typical, when the stock market rallies it is at the expense of the fixed income sector. Market participants sold low yielding fixed income investments to free up cash to invest in higher yielding stocks. We commonly refer to this as the flow of money. Mortgage backed securities and treasuries both moved lower in price which forced lenders to reissue rate sheets passing along higher consumer borrowing costs.
We have a few rather key economic reports hitting the wires today. First out is the Personal Income and Outlays report. This data tracks the monthly change in the income and spending of consumers. If consumers are making more money, they will have more to spend into the economy. Thus market participants track changes in monthly income to gauge future spending. The outlays portion lets us know whether consumers are spending more or less than the prior month. The income part is more important as it will indicate future spending while the outlays portion looks at spending last month. Also included with this report is the Fed’s favorite gauge of inflation with the Personal Consumption Expenditure.
The release of the report by the U.S. Department of Commerce shows income and outlays coming in right on expectations. Income was unchanged from last month while spending declined 0.5%. The inflation component of this report continues to show that inflation is not a concern today. Headline PCE increased a modest 0.1% and the core reading, which strips out food and energy prices due to their volatility, also moved higher by 0.1% matching last month’s increase. On a year over year basis, the core PCE is up only 1.3% well within the Fed’s comfort zone for price increases. We have another report indicating that inflation is not a concern which should allow the Fed to maintain the current accommodative monetary policy for the foreseeable future.
Next comes a report on the strength of business conditions in the Chicago area with the Chicago PMI survey. This survey of both manufacturing and non manufacturing companies lets us know whether business conditions are improving or contracting in the Chicago region. Readings above 50 indicate expansion while readings below 50 indicate contraction. September’s reading fell to 46.1 from 50.0 in August breaking a run of several months in a row of improving conditions. Economists surveyed for this month’s report expect conditions to improve to 48.5.
The release indicates that business conditions in the Chicago region improved much more than expected to a 54.2 reading. We get a reading on the national strength of business conditions next week with the ISM index which is much more important than this regional report.
The final report on the day gives us a reading on how you, the consumer is feeling with the Consumer Sentiment report. The University of Michigan’s Consumer Survey Center questions 500 households each month on their personal financial conditions and attitudes about the overall economy. An optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save. Last month’s report showed consumers becoming less optimistic falling more than 4 points from the prior month to a 69.4 reading. Economists surveyed for this month’s report are expecting a small increase to 70.0.
The survey says…consumers are more optimistic than expected coming in at 70.6. Since this was very close to expectations there wasn’t much reaction in the markets.
Early reports from fellow mortgage professionals indicate lender rate sheets are similar to yesterday mornings’. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.
After the release of all the data today, MBS have regained the losses from yesterday and continue to hold in the middle of the recently established trading range. Following the strategy of lock at the price highs and float the lows, I am going to recommend cautiously floating your rate over the weekend if your loan is closing in more than a week. For consumers closing within the next week, time to cash in and take advantage of the lower rates. This strategy has worked well for gauging lock float decisions over the past few months.
Everyone have a great weekend.
We have a few rather key economic reports hitting the wires today. First out is the Personal Income and Outlays report. This data tracks the monthly change in the income and spending of consumers. If consumers are making more money, they will have more to spend into the economy. Thus market participants track changes in monthly income to gauge future spending. The outlays portion lets us know whether consumers are spending more or less than the prior month. The income part is more important as it will indicate future spending while the outlays portion looks at spending last month. Also included with this report is the Fed’s favorite gauge of inflation with the Personal Consumption Expenditure.
The release of the report by the U.S. Department of Commerce shows income and outlays coming in right on expectations. Income was unchanged from last month while spending declined 0.5%. The inflation component of this report continues to show that inflation is not a concern today. Headline PCE increased a modest 0.1% and the core reading, which strips out food and energy prices due to their volatility, also moved higher by 0.1% matching last month’s increase. On a year over year basis, the core PCE is up only 1.3% well within the Fed’s comfort zone for price increases. We have another report indicating that inflation is not a concern which should allow the Fed to maintain the current accommodative monetary policy for the foreseeable future.
Next comes a report on the strength of business conditions in the Chicago area with the Chicago PMI survey. This survey of both manufacturing and non manufacturing companies lets us know whether business conditions are improving or contracting in the Chicago region. Readings above 50 indicate expansion while readings below 50 indicate contraction. September’s reading fell to 46.1 from 50.0 in August breaking a run of several months in a row of improving conditions. Economists surveyed for this month’s report expect conditions to improve to 48.5.
The release indicates that business conditions in the Chicago region improved much more than expected to a 54.2 reading. We get a reading on the national strength of business conditions next week with the ISM index which is much more important than this regional report.
The final report on the day gives us a reading on how you, the consumer is feeling with the Consumer Sentiment report. The University of Michigan’s Consumer Survey Center questions 500 households each month on their personal financial conditions and attitudes about the overall economy. An optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save. Last month’s report showed consumers becoming less optimistic falling more than 4 points from the prior month to a 69.4 reading. Economists surveyed for this month’s report are expecting a small increase to 70.0.
The survey says…consumers are more optimistic than expected coming in at 70.6. Since this was very close to expectations there wasn’t much reaction in the markets.
Early reports from fellow mortgage professionals indicate lender rate sheets are similar to yesterday mornings’. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.
After the release of all the data today, MBS have regained the losses from yesterday and continue to hold in the middle of the recently established trading range. Following the strategy of lock at the price highs and float the lows, I am going to recommend cautiously floating your rate over the weekend if your loan is closing in more than a week. For consumers closing within the next week, time to cash in and take advantage of the lower rates. This strategy has worked well for gauging lock float decisions over the past few months.
Everyone have a great weekend.
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