Mortgage Commentary

[Adam in CO]

Mortgage Market News for the week ending October 5, 2007

Events This Week:

Employment Strong
Wage Inflation Up
Housing Weaker
Manufacturing Steady

Events Next Week:
Tues 10/09
FOMC Minutes
Thurs 10/11
Trade Balance
Import Prices
Fri 10/12
PPI
Retail Sales
Sentiment

Job Market Stronger Than Expected


Friday's highly anticipated Employment report was expected to be the main event last week, and it did not disappoint. It was not the newly released September figures, however, which caused the large reaction, since the headline number almost matched the consensus forecast. Instead, it was the enormous upward revisions to the data from the prior months which led to a quick jump in mortgage rates. Last month, the decline of -4K jobs received a great deal of attention, but that figure was revised to a gain of 89K, and additional jobs were added to the July totals. According to the Bureau of Labor Statistics, the vast majority of the revisions involved jobs in education, which are hard to measure over the summer months. The report also contained bad news for mortgage markets on inflation, as average Hourly Earnings, a proxy for wage growth, increased at a sharp 4.1% annual rate. Friday's rise in mortgage rates offset a decline earlier in the week, leaving them slightly higher than the prior week.

Since the large half-point Fed rate cut on September 18, investors have been watching very carefully for signs of future inflation, and their expectations for future policy action has frequently shifted. Prior to Friday's Employment report, investors were pricing in a near certainty of a quarter-point Fed rate cut at the next meeting on October 31. When the strong jobs numbers were announced, though, the implied chance of a rate cut dropped to below 50%. The rest of this month's economic data will be especially important to shaping future Fed policy, particularly the inflation reports.

In the housing sector, the August Pending Home Sales index fell -6.5% from July, more than the expected decline, to the lowest level on record. The index was down -21.5% from one year ago. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show declines. The National Association of Realtors (NAR) attributed the weakness to tightened lending standards. Like last week's housing sector data, this was the first month to fully reflect the credit crunch. Many analysts advised, however, that the worst may be over for the housing market.

• Also Notable:
• In September, the Unemployment Rate edged higher to 4.7% from 4.6% as expected
• Former Fed Chief Greenspan placed the chance of recession in the US between 33% and 50%
• Both the Bank of England and the European Central Bank held interest rates unchanged as expected
• The Dow Jones stock index reached a new record high

Average 30 yr fixed rate:
Last week:-0.06%
This week:+0.02%

Stocks (weekly):
Dow:14,071+172
NASDAQ:2,774+73

Week Ahead

Mortgage markets will be closed on Monday in observance of Columbus Day. After that, the Minutes from the September 18 FOMC meeting will be released on Tuesday. Investors will be hoping to find more clues about future policy in this detailed discussion of the debate between the Fed officials. Thursday, figures on the Trade Balance and Import Prices will come out. Next week's most significant economic reports will be released on Friday, when PPI and Retail Sales are announced. Almost without exception, higher inflation leads to higher interest rates, and the Producer Price Index (PPI) is a widely watched indicator. The PPI inflation data focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. The Retail Sales report will provide a read on the health of the economy. Consumers account for about 70% of economic activity, and this report is a major indicator of spending levels by consumers. Consumer Sentiment will come out on Friday as well.