Mortgage Rates Facing Volatility in the Next Week

Mortgage rates for the last three trading days have been basically in a holding pattern, but ever so slightly moving in the wrong direction – up.  Each of these three days we have seen the MBSs and the 10yr slowly increasing in rate and declining in price as markets increase interest in the February employment data on Friday. So far this week there has not been any significant data. 

Tomorrow begins the employment countdown in earnest when ADP reports its private jobs report for February. The present consensus estimate is for an increase of 183K jobs. ADP recently has been revising the previous data, look for revisions to the January report that was originally 246K jobs. The report hits at 7:15AM.  A little later, we get Q4 revisions to productivity and unit labor costs. In a sense it is backward data but it is as current as we get. Productivity is expected to increase from 1.3% when the preliminary data was reported a month ago. Unit labor costs expected to be revised from 1.7% to 1.6% with productivity increasing.  

At 9:00AM, January wholesale inventories expected to have declined 0.1%, as inventories are a key component to GDP calculations.

This afternoon Treasury auctioned $24B of 3yr notes. The demand, as expected, was soft ahead of next week’s FOMC meeting. Tomorrow Treasury will sell $20B of 10s, reopening the 10yr that was issued last month in the quarterly refunding.

The House released its plan for health care and kicked off what will be an active debate before any solid consensus is formed. The Senate so far has not tossed their ideas into the salad.

There is no change in my outlook - once the current trading range of the 10yr is broken there will be a quick and big move in the direction of the breakout. The present situation looks like the break will be to the upside for interest rates and mortgage rates will increase along with treasuries since we have closed above 2.50% for two days in a row – something that does not feel right with me.

In summary, the next week scares me as there is too much volatility out there, as I continue to favor locking once within 30 days of funding.  Until next week’s FOMC announcement is released, bonds will have a tough time mounting any meaningful rally.  Even if they do, banks will be slow to pass along improvements.  So for now, not much to gain by floating but a lot to risk.