Debt Deal On the Way As Markets React to Reeling Economy
Debt Deal On the Way As Markets React to Reeling Economy – 8/1/11
Mortgage rates dove on Friday as the shocking GDP report revealed that the US economy is much worse off than anyone expected. The economy’s growth has barely kept up with population growth over the last two quarters, and, factoring in inflation is practically moving backwards. While the headline 1.3% annual growth in the 2nd quarter was bad, even worse was the revision to the 1st quarter’s figures, which brought that quarter from 1.9% growth to a scant 0.4% growth. Describing this growth as anemic would be an understatement. The resulting surprise drove down stocks and caused Treasury rates to break through recent lows. The 10-year Treasury ended the week yielding just over 2.80%, it’s lowest in over 8 months. Stocks ended their worst week in a long time off over 5% on the week. Meanwhile, Congress and the White House failed again to agree on a plan to raise the debt ceiling.
This week will be exceedingly busy with significant economic news releases and with the debt limit battle coming to a head today. After weeks of bickering, it appears that a plan was reached late Sunday which would cut $2.2 trillion in current and future spending, and would allow the debt ceiling to increase by $2.1 trillion. The plan is expected to be enacted just in time to allow the US Treasury to keep the country from defaulting on its obligations. The high deficit in the current budget is still expected to cause ratings agencies to downgrade US debt at some point in the not too distant future.
This week’s data started this morning with two important reports, both at 10:00. Construction spending in June was marginally higher, improving by 0.2%. Meanwhile, the Institute for Supply Management’s manufacturing survey was sharply lower, coming in at 50.9 versus expectations of 54.0. A level of 50.0 is considered to mean neither growth nor contraction. This has caused a lot of concerns on Wall Street. Indexes were as much as 1% higher at market open due to the budget agreement, but have since reversed those gains, and are currently in the red. Mortgage and Treasury prices had been slightly worse, and have turned sharply higher.
Later this week, we will see significant data that will again influence pricing. Here’s what to expect:
Tuesday: Personal Income and Outlays
Wednesday: ADP Employment Report, Factory Orders, ISM Non-manufacturing index
Thursday: Weekly Unemployment Claims
Friday: Employment Situation Report
Clearly, this week is about as busy as it could be for economic data, and we could see significant volatility in pricing. Employment expectations are not as high as they have been in recent months, so it will take a poor report to cause significant improvement; that said, we haven’t seen an employment report with a positive surprise recently. It’s tough to call at this point. The risk of floating loans already in process prior to last Monday is pretty low at this time, but there is a lot of risk at the lowest end of the rate spectrum. For months, we’ve been writing loans that were mostly destined for the Fannie Mae 4.0% and 4.5% securities, but the recent improvement has brought the 3.5% security, which contains loans with rates from 3.75% to 4.125%, back into positive territory. These lowest rates are most subject to volatility and could easily disappear from rate sheets if floated.
Rate lock recommendations by time to loan funding:
<15 days: lock
15-30 days: consider floating
30+ days: float