Mortgage Rates Step Back, August 2, 2010

Mortgage Rate Trend Direction:     Up

Economic Reports/Rate Impact:    Construction Spending, 10:00 AM ET, Moderate Rate Impact

                                                              ISM Index, 10:00 AM ET, High Rate Impact

Key News:                                           European Companies Earnings, Economic Reports from China

Last week was a very good week for mortgage rates.  This week appears poised for a step back--at least initially.  Early stock trades are sending the market higher and leading to a sell-off in mortgage-backed securities.  At 10:00 AM ET the ISM Index will be released which provides a fairly comprehensive look at the manufacturing sector  in the US.  Lenders may wait until this report is out to release their initial pricing for the day. Based on available data this morning, we believe that mortgage rates will start the day higher than they closed on Friday.

Impact of economic reports

The ISM Index is an excellent leading indicator of the strength of the US economy and the results this morning may be the key influencer of market activity and mortgage rates until the Friday Jobs Report.  Expectations are for a modest decline in the ISM Index.  Any surprise, higher or lower could cause an immediate reaction in the markets.

Construction Spending numbers are also expected to show a decline in activity.  However, this report is not nearly as influencial as the ISM Index.  A big surprise could affect markets.

Impact of international or political events

Very positve earnings reports from European companies, particularly financial services firms, has moved stock markets in Europe decidedly higher. 

Two reports out of China desire attention over the next few weeks.  First a positive report on the real estate activity in China seems to support a belief that there is no risk of a collapse in property values and the loans that underlie them.  However, the report shows that the majority of activity in China's real estate sector was from government owned companies.  This creates concern that the government may be purposely supporting the sector.

Another report shows that manufacturing activity has slowed or actually declined.  This report is also concerning because continued growth in China is crucial to the world economy.   In a strange twist, markets are initially interpreting this slowdown as a positive sign--a breather in an economy at risk of growing too fast.  The issue of whether this is a one-time blip in growth or the start of a downward trend is an important issue to watch.