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An Active week potentially for rates

This week brings us the release of five economic reports to be concerned with. Two of the reports are considered to be only moderately important while one is of extreme importance to the bond and mortgage markets. With the key reports spread throughout the week I am expecting to see a fairly active week in mortgage rates.

The week's first data comes tomorrow morning with the release of the Institute for Supply Management's (ISM) manufacturing index for February. This index measures manufacturer sentiment and can have a pretty large impact on the financial and mortgage markets if it varies from forecasts. It is expected to show a decline from January's 50.7 to 49.0 last month. This is important because a reading below 50.0 is a recessionary indicator, meaning that more surveyed manufacturers felt business worsened during the month than those who felt it had improved. If we see a weaker than expected reading, we will likely see a fairly sizable rally in bonds. However, a higher than forecasted reading could lead to major selling in bonds, causing mortgage rates to rise.

There two reports scheduled for release Wednesday morning. The first is the revised Productivity index for the 4th Quarter of last year. The preliminary reading posted last month showed an annual rate of 1.8% increase in worker output. Analysts are expecting to see no revision to last month's initial reading. Employee productivity is watched closely because a higher level of output per hour is believed to mean that the economy can expand without inflation concerns.

January's Factory Orders will be posted late Wednesday morning, which will give us a measurement of manufacturing sector strength. This data is similar to last week's Durable Goods, except this report covers orders for both durable and non durable goods. Current forecasts are calling for a drop in new orders of approximately 1.5%. A larger than expected drop wo uld be good news for the bond market and could lead to an improvement in mortgage rates.

The Fed Beige Book will be posted Wednesday afternoon. This report details economic activity throughout the country by region. The Fed relies heavily on this data during their FOMC meetings, so look for a potential reaction during afternoon trading Wednesday. It probably will not cause a major sell off in the stock or bond markets, but could cause enough movement in bond prices to possibly improve or worsen mortgage rates slightly if it reveals any significant surprises.

The biggest news of the week comes Friday morning when one of the single most important monthly reports we see will be posted. The Labor Department will release February's Employment report at 8:30 AM ET Friday. Some of the important portions of the report will give us the unemployment rate, number of new jobs added or lost and the average hourly earnings reading. The best combination for the bond m arket and mortgage rates would be an increase in the unemployment rate, a large drop in payrolls and little or no increase in earnings. Current forecasts are calling for 0.1% increase in the unemployment rate to 5.0% and approximately 40,000 new jobs added.

Overall, look for a fairly active week unless comparing to last week's volatility. I suspect there will be some optimism leading up to Friday's Employment report, which is of concern to me. I believe the market is expecting to see very weak numbers Friday morning and has already built that into current pricing. The problem is that is it meets forecasts, or is even slightly stronger than expected, we could see bonds drop and mortgage rates rise. Because of this, I may be extending the lock recommendation to longer periods before Friday's data. Friday is undoubtedly the biggest day of the week, but tomorrow may also bring noticeable movement in mortgage rates. Please be careful this week if still floating an interest rate.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Float if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Chris McDonald on 03/03/2008 11:07 AM

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