Mortgage Rates Recover Some Today

Mortgage rates were able to recover some of the ground lost this week after the important Employment Situation Report showed slightly less job creation than expected. Had the report been stronger, rates could have easily continued the week's strong move higher. As it stands, we're settling down very close to Monday's levels, which is a major victory based on the tenor of the past 3 days. The most prevalently-quoted conforming 30yr fixed rate remains at 4.25%. 

In a world and life filled with uncertainty it is gratifying to watch markets behave exactly as they should.  Bonds and mortgages got a bad scare on Wednesday, rates up sharply, but as the full picture revealed itself rates are back where we started. A lot else is not where it began this week, nor will it be soon.  The catalyst for Wednesday, like an overdone pool-table break: 2nd quarter GDP arrived at a 4% growth rate. Everyone expected a rebound from the negative 1st quarter, but not an upward revision in that negative (from minus 2.9% to minus 2.1%), and especially not indications of rising spending, incomes and inflation. Real personal consumption expenditures jumped 2.5% in Q2 versus 1.2% in Q1, and the PCE "deflator" (converting nominal to after-inflation) popped to 1.9% from 1.4%.

The immediate reaction - here comes the Fed.  Bonds and mortgages instantly flipped to bearish trend.  But the world is a big, complicated, and interconnected place. On Wednesday Europe at last dropped meaningful sanctions on Czar Vladimir, certain to slow the world to some degree from wherever it was going.   On Wednesday the stock market sat and watched the show. Thursday morning another Fed scare - the employment cost index (ECI) in Q2 jumped in Q1. Then, beginning in Europe, stocks free-fell.  Friday morning... the gorilla job data for July. Payroll gains were slimmer than forecast as there was no acceleration anywhere in the report.  The pattern continues - most of those taking jobs seem to be throwing in the towel, accepting inferior pay.  Revisiting data from the day before -  the rise in ECI came from benefits, not wages, likely transient or another accounting quirk of ObamaCare.

Tie all of this together -  the stock market is very vulnerable to the Fed, whenever it does move. The data do not support the Fed moving any earlier than sometime mid- to late 2015, and the Fed will need to see a lot of growth and income gains before then.

In summary, there are times that come along every now and then when the prudent thing to do, is to do nothing while markets are uncertain and volatile - this is one of those occasions. The 10yr note rate will stay in a new and wider trading range, between 2.66% and 2.44%; MBS prices will also stay in their price ranges - for the time being. Instead of trying to make an assessment about the markets, we will simply refrain now until next week when we have more information and have a better understanding of the numerous factors in play now.