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Interest Rates Report 7/6/12: Lacking Economic Confidence?

This mortgage market report will provide the data and insight from trading on Wall Street. Interest rates are derived from the yield on mortgage backed securities (bonds). When the pricing of mortgage backed securities (MBS) goes up you can expect lower interest rates. When MBS pricing goes down, expect higher pricing on interest rates for home mortgages.

June Employment figures disappointed once again, up only 80K.  April was revised down 9K but May was revised higher by 9K.  Call it a wash.  Net, net, Q2 has produced the least amount of jobs dating back 2 years.  The unemployment rate held steady at 8.2% while the average hours worked rebounded to 34.5 hours and average hourly earnings jumped .3%.  That’s the only silver lining we can find.  Market reaction has been muted with stocks off 122 points on the big board and the 10 year note yield falling a few basis points to 1.57%.  Fast money players are buying treasuries but not in any size.  Some talk about the probability of QE3 (Quantitative Easing #3) on the rise which would most likely come in the form of more mortgage-backed scurities buying. 

The jobs issues is one that starts with capital investment, or the lack thereof.  CEO’s confidence level is now at a post WW2 low which tells you they are scrutinizing every dollar.  Their tentative mind set is driving GDP, now at 1.9%.  We expect that to ratchet itself down closer to 1.50% in the coming months.  GDP or gross domestic product is all the goods and services we produce in this country.  It is also the jobs creator.  So as GDP goes, so does job creation.  That in turn leads to demand for anything from hot dogs to home mortgages, legos to autos.  Europe has been an influence but not the driver of our economic bus.  This has to do with a lack of confidence in our government and our leaders.  Fiscal cliffs, regulation, and squeezing the top to pay for the bottom are just a few of today’s confidence destructive themes.  The good news is that mortgage rates are at historic lows, home prices and affordability are at 15 year lows, and rents are on the rise.  Home ownership has never been in a better place.  That is if you have a job. 

Technically, the response to what looks like lipstick on a pig jobs data has been surprising.  Muted reaction at best with mortgage pricing improving by .125% or a little better depending on the note rate.  We are right back at the top of the range high set 5/31 and as of yet, are failing to take that level out.  For interest rates and mortgage pricing to do better, that level (yield of 1.55% on the 10 year) will need to be breached with a close below that mark.  Otherwise, we expect consolidation right back into the middle of the range.  Big picture, interest rates aren’t going anywhere until we figure out how to grow the economy. 

Scott Eggen                                                                                                                                                                                                                                               Senior Vice President – Capital Markets

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