Debt Ceiling to Dominate Week, But Don’t Forget GDP
Debt Ceiling to Dominate Week, But Don’t Forget GDP – 7/25/11
After a significant amount of volatility last week, mortgage pricing only worsened by 16 basis points on the week. This can be attributed to significant uncertainty regarding the US Government’s ability to reach agreement on a plan to extend the debt ceiling weakening US asset prices, while continued worries about European assets gave investors few options. The week’s news, what little there was, reflected slightly positively on the US housing market.
This week, while there are several news releases coming, most attention will be focused on the debate in Washington. It’s crunch time, and an answer needs to come about within the next day or so to allow the normal process to run its course in time for Treasury to borrow what it needs prior to next Tuesday’s drop dead day. Any later than that, and the parties will also need to find a means of accelerating the process. In the meantime, the possibility that the ratings agencies may decrease the US Government’s credit rating is rising. Any cut in that rating would have a significant impact on Treasury and mortgage rates almost instantly.
There are also several significant events occurring this week in the economic sphere that could also affect pricing. Here’s a rundown of the week’s events:
Today: no significant events
Tuesday: Consumer Confidence, New Home Sales, 2-year note auction
Wednesday: Durable Goods Orders, 5-year note auction, Beige Book
Thursday: Unemployment Claims, Pending Home Sales, 7-year note auction
Friday: 2nd quarter Advance GDP reading, Chicago Purchasing Managers’ Index, Consumer Sentiment
The most watched report of the week is decidedly the GDP announcement. This will be markets’ first opportunity to see the results of some decidedly mixed economic news over the past few months. At present, predictions are somewhat mixed, but indicate belief that the economy did grow, but very slowly, in the second quarter. Estimates range from +1.0% to +2.1% with 1.9% the most likely figure. I suspect that we may see market disappointment on this factor, as the economic news has been worse than in the 1st quarter when the economy grew by 1.9%, with many indicators suggesting contraction. Unemployment claims will also be monitored closely, as last week was the week in which the Bureau of Labor Statistics conducted its survey of employment for the upcoming July employment situation report due August 5th.
Mortgage pricing is off sharply to start the morning, principally due to the debt ceiling debate’s failure to advance. It is unlikely this situation will improve today, unless a debt ceiling deal is announced. All eyes will be on CNN and other services today for news from Washington, as well as watching newswires for threatened downgrades to the US debt rating. I can’t sanction floating at the moment for all but short sales and other deals with similar issues. While the risk isn’t profound, the consequences of failure to reach a deal would be, as rates would likely increase by 0.5% in the hours following announcement of that failure.
Rate lock recommendations, by days to funding:
<15 days: lock
15-30 days: lock
30+ days: consider locking