Mortgage Commentary

[Adam in CO]

This week brings us little economic data of any importance. There actually is only one report scheduled for release that would fall under the moderately important or important categories. This leaves the bond market to be influenced by outside factors such as stock market movements.

The only monthly report being released of any importance is Wednesday?s Productivity and Costs data for the 4th Quarter. Since a high level of productivity is thought to allow economic growth without inflationary concerns, this data can cause enough movement in the bond market to affect mortgage rates. If it varies greatly from analysts? forecasts of a 1.7% increase, we may see some movement in mortgage rates Wednesday.

Besides Thursday?s weekly unemployment claims, the only other information that may lead to changes in mortgage rates are a few Treasury auctions scheduled for this week. Included in this week?s sales are 10 year Notes on Wednesday and the 30 year Bonds Thursday. It is typical to see a little weakness in bonds ahead of these sales as investors prepare for them. If the auctions are met with a strong demand from investors, particularly international traders, we should see bonds move higher during afternoon trading of the sale days. This should lead to afternoon improvement in mortgage rates.

Overall, I expect to see a fairly quiet week in the mortgage market. The economic data is of no significant importance and the Treasury auctions usually have no major impact on rates. We may see a little movement from day to day, but I would be surprised if we saw either a sizable rally or sell off in the bond market the next several days.

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.

[CO Hummer]

I was going to tell you all of that, but you wouldn't return any of my calls.

[KenP]

That reminds me of what I wrote yesterday stating that fourth-quarter productivity will be the highlight of the week, "if there is one," joked Warren Lovely, an economist for CIBC World Markets. Other indicators include the Institute for Supply Management's nonmanufacturing survey, consumer credit, and wholesale inventories.

With gross domestic product rising a robust 3.5% during the quarter, productivity probably picked up to its fastest pace since the first quarter.

The data will be released on Wednesday at the Labor Department. Economists surveyed by MarketWatch were calling for a 2.2% annualized gain in productivity after a dismal 0.2% gain in the third quarter.

Unit labor costs, which are a key inflationary gauge, should also improve markedly. The median forecast of the economists sees costs rising at a 2% annual rate, down from 2.3% in the third quarter.

Unit labor costs are the difference between compensation growth and productivity growth. Unit labor costs "should look a little friendlier for inflation," wrote Credit Suisse economists in their outlook.

For the year, productivity probably rose 2.2%, with unit labor costs up about 2.7%.

Productivity is one of the most important economic concepts. High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits.

But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.

In any given quarter, productivity will closely mirror gross domestic product growth. That's because productivity is simply output divided by hours worked.

Over a longer period of time, productivity trends will determine how fast the economy can grow.

The expected rise in fourth-quarter productivity "is actually a bit better than the sustainable trend," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley.

Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually.

Productivity has slowed in the past few years. One of the big debates in the economy is whether that slowing is structural or related to the business cycle. If it's structural, Americans will have to get used to slower growth. If it's cyclical, then the long-term speed limit of the economy will stay above 3%.