Weekly Mortgage Market Report

Economic data was the primary force driving mortgage rates this week. Generally weaker than expected data resulted in modest improvement in rates for most of the week. This was completely offset by an increase in rates on Friday due to stronger than expected Employment data, however, leaving mortgage rates nearly unchanged from last week.

Against a consensus forecast for a decline of -50K jobs, the economy lost -36K jobs in February, and the revisions from prior months showed more jobs than previously reported. The Unemployment Rate remained unchanged from January at 9.7%, which was lower than expected. The payrolls figures and the unemployment rate are calculated from two separate sets of data. The payrolls report focuses on larger companies, while the unemployment survey covers all companies. The more volatile unemployment survey surprisingly showed an increase of 308K jobs in February, indicating that smaller companies were a source of job gains.

While investors began the week watching for fresh information about Greece and China, the Fed stole the spotlight on Wednesday with news that was unfavorable for mortgage markets, and mortgage rates ended the week moderately higher.

The Fed currently has significant influence on mortgage rates. Over the last year, the Fed pushed mortgage rates lower by purchasing over $1 trillion in mortgage-backed securities (MBS). Wednesday, the Fed's Plosser suggested that the Fed should begin selling those MBS "sooner rather than later." Later that day, the Fed released the detailed minutes from the January 27 Fed meeting. The minutes revealed that "several" Fed officials favored starting the sale of the Fed's MBS portfolio "in the near future." Investors were not expecting that Fed MBS sales would begin any time soon. Quite simply, adding to the supply of MBS being sold means that yields would need to move higher to attract buyers. Since mortgage rates are largely determined by MBS yields, mortgage rates rose after the news.

Global events in China and Greece had a significant impact on US mortgage markets this week, but in opposite directions. In addition, demand was much weaker than average for the 10-year and 30-year Treasury auctions, which pushed up yields. The net result was a slight increase in mortgage rates from last week.

A surprise announcement Thursday night that China raised bank reserve requirements helped mortgage markets and hurt the stock market. The increase is a form of monetary tightening which is intended to slow economic growth in China. This likely means that China will buy fewer exports from other countries, slowing economic growth globally. Slower expected economic growth reduces inflationary pressures, which is positive for mortgage yields.

In recent weeks, large fiscal deficits in Greece have caused speculation that the country will default on its government debt, which resulted in an investor flight to the relative safety of US bonds. This week, the news that Greece will receive economic aid from other European Union nations prompted investors to reverse this flight to safety by selling US bonds, moving yields higher.

The biggest influence on mortgage rates this week came from outside the US. Concerns about the possible default of sovereign debt in smaller nations caused investors to seek the relative safety of US fixed income securities. This week's economic data was roughly balanced in terms of positive and negative surprises. The added demand for safer investments helped mortgage rates move lower during the week.

The recession has impacted countries in different ways. Some of the hardest hit have been smaller European nations, such as Greece and Spain. As members of the European Union, they must adhere to certain restrictions which limit their flexibility to adjust domestic economic policy. As a result, some countries may be at risk of defaulting on government debt. Investors responded by buying relatively safer assets such as US bonds, including agency mortgage-backed securities (MBS). Investors also withdrew money from global stock markets during the week. In the US, the Dow fell about 200 points.

Friday's important Employment report contained mixed news. Against a consensus forecast for a gain of 15K jobs, the economy lost -20K jobs in January. The big story, though, was an unexpected drop in the Unemployment Rate to 9.7% from 10.0% in December. Two separate sources of data are used to compute the change in jobs and the change in the unemployment rate, and during volatile periods the two methods can show widely divergent results. The decline in the unemployment rate in January was viewed as very good news by many economists, pointing to an improving labor market. On a more negative note, revisions to older data showed that the economy has lost 8.4 million jobs since the start of the recession in December 2007, from the previous reported level of 7.2 million.

Over the last few weeks, many economists have been raising their forecasts for economic growth in 2010. The economic data released this week generally did not support this outlook, however, producing some daily volatility. As a result of the weaker than expected data, mortgage rates ended the week a little lower.

In December, the economy lost -85K jobs, which was lower than the consensus forecast of -5K, and the Unemployment Rate remained at 10.0%. A small revision to the November data created a gain of 4K jobs, the first monthly increase since December 2007. The report indicated that 661K people dropped out of the labor force in December. The details suggest that small businesses may be creating jobs more slowly than larger companies. The manufacturing and constructions sectors continued to perform poorly. Average hourly earnings, an indicator of wage growth, showed a small increase. Overall, the data was weaker than expected, and mortgage rates moved lower after the news.

The housing sector data released during the week was mostly favorable. November Housing Starts rose 9%, and Building Permits, a leading indicator, showed similar results. The December NAHB Homebuilders Sentiment index surprisingly dropped slightly, to the lowest level since June. Given the passage of the extension and expansion of the homebuyer tax credit, the index was expected to rise.