Construction Spending Rises More Than Expected
Construction spending rose 1.1 percent, the largest gain since May, to an annual rate of $970.99 billion, according to a new report from the Commerce Department.
The upbeat construction data suggests some momentum in the economy early in the fourth quarter, The economy grew at a 3.9 percent annual pace in the third quarter.
Private construction spending increased 0.6 percent, with outlays on residential projects recording their biggest rise since December of last year. Residential spending was boosted by increases in both single and multi-family homes as well as renovations.
Spending on public construction projects increased 2.3 percent in October, buoyed by a 19.3 percent surge in federal government outlays, the largest such increase since October of 2006. State and local government investment increased 0.9 percent after two straight months of declines.
What Happened to Rates Last Week:
Mortgage backed securities (MBS) lost -61 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move higher from the prior week. We had our best pricingon Monday and our worst pricing on Friday.
Mortgage Backed Securities sold off (worse rates for you) due to the powerful combination of better than expected U.S. economic data and inaction of the European Central Bank (ECB).
ECB: While the U.S. QE is ending, the European Central Bank is said to be getting ready to kick off their version which would be positive for MBS. While much of the market sentiment is that it will begin in the first quarter of 2015, many traders have “Draghi Fatigue” as ECB President Mario Draghi keeps stating that they are preparing for QE at each of their central bank meetings and press conferences, nothing has actually been done. Plus, the ECB’s plans to purchase sovereign bonds faces significant opposition from Germany and is currently locked up in a court case.
U.S. Flexes its Economic Biceps:
Last week was a strong week for domestic economic data. And economic growth always equals higher rates. Construction Spending was almost double market expectations (1.1% vs est of 0.6%) and ISM Manufacturing was stronger than expected (58.7 vs est of 58.0). This is huge reading because anything over 50 is expansionary. And its not just the manufacturing sector, the services sector (2/3 of our economy) jumped up to 59.3 according to the ISM Services report.
U.S. auto sales broke above 17 million units and the Fed’s Beige Book showed improving labor market, and economic conditions in all 12 of their districts.
Jobs, Jobs, Jobs….and more Jobs!
The Unemployment Rate remained at 5.8% but bond traders don’t pay any attention to that reading, but they do focus on Non-Farm Payrolls (NFP) and it shot up to 321K which is basically 100K higher than market expectations. This was best reading since 2012 and the prior two months were revised upward by a combined total of 44K.
The three month average is now at 278K. Across the board this was a strong report with gains (finally) in average hourly wages. We have seen consistent job growth but an increase in earnings has been missing until now. MBS sold off sharply as a result and gave us our highest rates of the week as a result.
What to Watch Out For This Week:
|Date||Time (ET)||Economic Release||Actual||Market Expects||Prior|
|9-Dec||10:00 AM||Wholesale Inventories||–||0.20%||0.30%|
|9-Dec||10:00 AM||JOLTS – Job Openings||–||NA||4.735M|
|10-Dec||7:00 AM||MBA Mortgage Index||–||NA||-4.30%|
|10-Dec||10:30 AM||Crude Inventories||–||NA||-3.689M|
|10-Dec||2:00 PM||Treasury Budget||–||-$59.0B||-$135.2B|
|11-Dec||8:30 AM||Initial Claims||–||295K||297K|
|11-Dec||8:30 AM||Continuing Claims||–||2350K||2362K|
|11-Dec||8:30 AM||Retail Sales||–||0.40%||0.30%|
|11-Dec||8:30 AM||Retail Sales ex-auto||–||0.20%||0.30%|
|11-Dec||8:30 AM||Export Prices ex-ag.||–||NA||-0.90%|
|11-Dec||8:30 AM||Import Prices ex-oil||–||NA||-0.20%|
|11-Dec||10:00 AM||Business Inventories||–||0.30%||0.30%|
|11-Dec||10:30 AM||Natural Gas Inventories||–||NA||-22 bcf|
|12-Dec||8:30 AM||Core PPI||–||0.10%||0.40%|
|12-Dec||9:55 AM||Mich Sentiment||–||89.5||88.8|
It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets. Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.