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Mortgage Rates Begin to Creep Up Just as mortgage rates edged down on bond-friendly news the week ended Sept. 2, they reversed course during the holiday-shortened week. A strong report from the service sector, inflationary news on wages, and only a small dip in first-time jobless claims weighed on U.S. Treasury securities, which lenders use as a guide to set mortgage rates. In addition, Chicago Federal Reserve Bank President Michael Moskow said Wednesday that the Fed is not likely to pause its rate-hike program in spite of Hurricane Katrina, which ran contrary to a report in Thursday's Wall Street Journal saying, "Fed officials have not ruled out a pause." The question will be resolved at the Fed's Sept. 20 meeting. In addition, rising energy prices, which bolstered Treasuries due to their negative economic impact, have eased. This, along with the other factors caused Treasury yields, which move in the opposite direction of prices, to climb, and mortgage rates have begun to climb with them. The ISM index on the service sector in August jumped to 65, with a sharp rise in employment largely responsible for the increase. Any number above 50 indicates expansion. In a separate report, revised second-quarter productivity rose by a slower-than-expected 1.8 percent - down substantially from the previous 2.2-percent increase. Labor costs, however, shot up 2.5 percent, and are a key inflationary measure that affects corporate profits. On the other hand, first-quarter labor costs were downwardly revised to a gain of 2.2 percent from 3.6 percent. First-time unemployment claims for the week ended Sept. 2 fell by 1,000 to 319,000, although it was noted that these numbers were little impacted by the hurricane. The statistics for that week, however, did include 10,000 claims from Mississippi, Alabama and Louisiana. The more closely watched four-week average rose for the fourth straight time - up 2,000 to 318,500. Low employment means less inflation, which is a main concern of bond traders, as it erodes the value of fixed-rate assets.

Lower mortgage rates during the week ended Sept 2 resulted in a surge in applications, according to the Mortgage Bankers Association. Applications to purchase rose 6.1 percent, while refis climbed 7.7 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is above 5. 5 percent, while the 15-year fixed-rate is below 5.125 percent. The introductory rate on the volatile one-year ARM fell to 3.75 percent. The economic calendar for the week of Sept. 12 is packed with news, including the release of August Retail Sales and inflation data. Also due are August Industrial Production and the University of Michigan's preliminary consumer sentiment survey for September. Most of these data will not reflect conditions in the wake of Hurricane Katrina. Treasuries, however, will be focusing on the Consumer and Producer price indexes with an eye out for signs of inflation. If it remains in check, mortgage rates could hold fairly steady.

Carolyn Siegel

carolyn@interest.com