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Strong Employment Numbers Keep Mortgage Rates High

U.S. Treasury securities continued to sell after the strong July employment gain, sending yields, which move in the opposite direction of prices, to four-month highs. But a rate hike by the Fed that retained its “measured” approach to increases halted selling and will likely lead to the first positive week for Treasuries in a month and a half. A rash of positive, although not excessive, economic reports gave bond traders little reason to buy, but the unrelenting rise in oil prices is working on the side of Treasuries, as traders believe they will slow the economy without aggressive Fed action. Mortgage rates moved up steadily--especially those with adjustable rates. But increases have leveled off and rates are holding firm. A sharp increase in hourly labor costs in July warned of wage inflation and concerned bond traders. This concern was somewhat alleviated when second-quarter Productivity & Costs showed a 2.2 percent increase in productivity--below first-quarter totals - and a smaller-than-expected rise in unit labor costs. In a separate report, Wholesale Inventories in June climbed 0.7 percent and sales rose 0.6 percent, due to autos. Retail sales in July climbed 1.8 percent, due to “employee-discount” auto sales. When these were excluded, sales rose by a disappointing 0.3 percent. The labor market showed continued strength as first-time unemployment claims for the week ended August 5 fell to 306,000. The more closely watched four-week average hit its lowest level since February, coming in at 309,250.

The trade deficit for June rose to $58.6 billion-- the third highest ever--but high oil prices played a major role in the increase. July's export and import price indexes also were adversely affected by oil, but in line when energy prices were excluded. Concerns about oil prices drove consumer sentiment down in August. The University of Michigan index dropped to 92.7 from 96.5.

Purchase applications edged up while demand for refis dwindled during the week ended August 5. According to the Mortgage Bankers Association, applications to purchase rose 0.9 percent, while refis fell 3.3 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is just below 5.75 percent, while the 15-year fixed-rate is slightly above 5.25 percent. The introductory rate on the volatile one-year ARM soared to 4.25 percent.

Upcoming releases feature two economic reports on inflation - the July Producer and Consumer Price indexes -- as well as a pair of regional manufacturing reports. Also on tap are Housing Starts/Building Permits and Industrial Production, all containing July data. The two prices indexes will be key for Treasuries due to the negative impact inflation has on fixed-rate assets. But reports on manufacturing could also sway the markets, as they are good indicators of economic strength. Signs of inflation and strong manufacturing conditions would weigh on Treasuries and put upward pressure on mortgage rates. If the reports come in on forecast, however, rates should hold near current levels.

Carolyn Siegel

carolyn@interest.com