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Mortgage Rates Fall Then Rebound on Data, Fed

Mortgage rates dipped early in the week only to rebound in the wake of a batch of economic reports and the Fed's expected rate hike. The release of weaker-than-expected fourth-quarter Gross Domestic Product data spurred aggressive buying in U.S. Treasuries, sending prices up and yields, which move in the opposite direction of prices, down. Treasury yields remained low until stronger economic news slowed buying then prompted selling. The Fed hiked short-term interest rates by another quarter of a percentage point, but this was fully priced into the markets. What did rattle traders was slower fourth-quarter productivity, which could bring on inflationary pressures. The January employment report gave Treasuries a boost, coming in below estimates. This could keep the Fed at bay. Although the week was tumultuous, in the end mortgage rates returned to previous levels. January employment data showed only 146,000 new jobs added to non-farm payrolls - far short of the 190,000 expected. The unemployment rate, determined by a separate survey, fell to 5.2 percent - the lowest level since September 2001. But that's not the one that counts. Manufacturing data also were key, with the Chicago PMI index on manufacturing conditions beating estimates. The ISM index, which looks at the national manufacturing picture, fell to 56.4 - below forecasts - but showed increases in employment and productivity. Fourth-quarter productivity came in at a weaker-than-expected 0.8 percent. Productivity -- the hourly output of work -- rose 4.1 percent in 2004, short of the 4.4-percent reading for 2003. The ISM index on the service sector, which accounts for about 80 percent of the nation's economic activity, fell to 59.2 in January from 63.9. Jobless claims for the week ended January 28 fell by 9,000 to 319,000.

Continued low mortgage rates -- and perhaps the specter of a Fed rate hike -- ignited a refinance boom for the week ended January 28. The Mortgage Bankers Association said refinances soared 16.6 percent, while applications to purchase rose only 0.2 percent. Mortgage rates are holding, with the 30-year fixed-rate mortgage (based on zero discount points) somewhat under 5.5 percent, and the 15-year fixed-rate well below 5.0 percent. The introductory rate on the volatile one-year adjustable-rate mortgage fell to just above 3.375 percent.0

There is little in the way of market-moving news scheduled next week. Of the handful of economic reports due, the U.S. trade balance report will be closely watched, as the growing trade deficit is partially responsible for the weak dollar. Wholesale trade and first-time unemployment claims are the only other reports due that could impact the markets. The weaker-than-expected January employment report will likely drive U.S. Treasuries for the first few days of the coming week. The rally that began on Friday morning should continue if nothing happens to reverse buying. Rising Treasury prices and sinking yields will likely result in lower rates on many mortgage products.