Monday, December 3, 2012

Mortgage Rates: Who and What to Believe?

Mortgage rates will open higher this morning based on early trading action for mortgage-backed securities and indications from pre-market activity in the equity markets.  But are they likely to stay higher?  I suppose it depends on who you choose to listen to and what other news you find meaningful.

Early trading activity is focused on Secretary of the Treasury, Timothy Geithner’s statements over the weekend that Republicans would ultimately accept the Administration’s plan for higher taxes on top earners (and all investors).

This would enable the country to resolve the so-called “fiscal cliff.”  The trouble with focusing on these statements by Secretary Geithner is that they are completely contradicted by statements made by the leaders of the Republican Party in Congress.  I do tend to agree that Republicans in the House of Representatives will ultimately decide to accept higher rates on top earners, but I don’t think it will happen soon or without specific spending cuts put forth by the president.

In real economic news today there are several important developments.

First, China reported the first growth in its manufacturing sector in over a year.  This is a sign that worldwide demand is beginning to increase, which will likely show up in US data as well.  

We will find out at 10 AM ET when the monthly ISM Index of US manufacturing activity is released. Expectations are for a slight drop from last month’s levels, but this could simply be a function of the after-effects of Hurricane Sandy. An upward surprise could cause rates to rise even more.

Also at 10 AM this morning will be the monthly construction spending report. Much like with the ISM report the forecast is for a slight decline.  But again a surprise higher could fuel a spike in mortgage rates as it would signal stronger economic activity than anticipated.

This week is crucial for mortgage rates and most of the potential pressure is for higher rates.

If the data on manufacturing, services and employment this week come in as expected we will buy a little more time with all-time low mortgage rates.  If however we get a surprise to the high side a sudden spike in rates could occur.  It really boils down to whether Hurricane Sandy had the impact on the economy that the experts believe it had.  We’ll know very soon.

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