Sparse Data, even Fewer Traders Define Week

Summer vacations evident; Jobless claims continue rise; Mixed data from businesses; GDP revisions pending, with durables orders and housing data this week.

In a week in which it appeared that half of Wall Street had run off to the Hamptons, economic data showing the economy might or might not be as well off as it was 2-3 months ago caused some wild swings in mortgage pricing. Mortgage pricing is close to its all-time peak right now, meaning that investors who bought mortgage-backed securities when the average 30-year fixed rate was 4.75% have substantial unrealized gains now that the average 30-year fixed rate is 4.42%. Because of this, many of those traders have been hasty to sell anytime market trends, or economic data, point to some hint of a silver lining.

Unfortunately for mortgage originators, and consumers hoping to refinance this summer, with the substantial number of summer vacations currently happening, this means that when the investors looking to take their money off the table  seek to sell, there may not be another trader willing to accept that security at the market price. The new challenge presented by the current market: liquidity. From an economic perspective, liquidity is defined as the ability to convert an asset into cash with little or no loss of value compared to current market pricing.

Reviewing the chart of Friday’s trades, it is apparent that there were several periods of 15 minutes or more during which few or no mortgage-backed securities changed hands, concluding in a late-day sell-off on no data. Around 1:30 PM, it looks like most of the market participants who were in for the morning decided to take the rest of the day off. The result? Mortgage-backed security prices declined by 30 basis points because there was no one left to buy them. I believe this decline will be reversed in this morning’s trades, though, as there was no underlying data to support the decline.

Last week had started on a good foot for mortgage pricing on news that China had overtaken Japan as the world’s 2nd largest economy. This was triggered by a decline in the Japanese GDP growth rate to a meager 0.1%, and resulted in huge demand for the safest security out there – US Treasury bills and notes. Mortgage pricing remained relatively flat, though; traders weren’t buying Treasuries because market rates were declining, rather, they were buying in a flight to safety, a move to buy the most secure investment available. The US housing industry brought mixed data, showing an uptick in construction, but a decrease in permits for new projects.

On Tuesday, traders grappled with concerns about the value of mortgage-backed securities as the future of Fannie Mae and Freddie Mac were debated the day before. The two companies have been operating under government conservatorship since late 2008 when mounting losses brought concerns about the ability of those firms to continue operation. Tuesday’s conference brought plenty of questions, but few answers about the future for these firms. What became clear is that there is no simple solution to the problems presented by these firms that are currently buying more than half of all new mortgages. Changes to the system could have a dramatic impact on the value of new MBS produced by those companies or their successors.

Tuesday also brought news about industrial production, up slightly in July.

Wednesday brought very little data, but Thursday made up for it in spades. That day we learned that new claims for unemployment had risen for the 4th week in a row, to 500,000 new claims this past week. Economists had been looking for the number of claims to drop towards 450,000, a level more consistent with employment growth. Claims for unemployment benefits have grown sharply since mid-July, fueling concerns that the economy may actually be losing jobs.

Later Thursday, the Federal Reserve Bank of Philadelphia released its monthly business conditions survey. The results were shocking. The survey hinges around o as a level of no growth, and was recently at 5.1 in July. It plummeted to -7.7, indicating that the outlook for growth in that bank’s region, Delaware, Pennsylvania, and New Jersey, has worsened sharply. Traders took this sign poorly, leading to a sharp drop in stocks, and to mortgage pricing once again testing all-time highs.

As discussed above, Friday was an odd, data-free day, characterized by the late day decline in pricing as traders packed in the week early.

The coming week brings us significant data about housing, industry, and GDP, as follows:

Monday:

• no significant data; Treasury auctions

Tuesday:

• Existing home sales
• additional Treasury sales

Wednesday:

• Durable goods orders
• New home sales
• MBA purchase mortgage applications

Thursday

• Weekly unemployment claims
• more Treasury auctions
• Fed Balance Sheet; Money Supply

Friday

• Preliminary (2nd) reading on 2nd quarter US GDP
• Consumer sentiment

Of all these, the existing home sales, durable goods, unemployment claims and GDP revision will be most closely watched. Those looking for further improvements in interest rates will be looking to see declines in home sales, durables orders and GDP, and an increase in unemployment claims. Of all of these, the most likely is the decline in GDP. the Advanced reading on 2nd quarter GDP showed 2.4% growth, and current estimates for the preliminary reading suggest traders expect it to have been scaled back by about 1%. Remember, though, that with  mortgage pricing at or near all-time highs, it will take continued bad news to keep rates from rising.

In the following week, we’ll get our usual array of employment data for August. While we have a busy week this week, next week will probably be even busier. Coming off of a real snoozer like last week, it doesn’t sound all that bad. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

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