Mortgage Rate Update for Week Ending 07-08-05

Rate-Hike Concerns Send Mortgage Rates Up

It's been a bumpy ride for U.S. Treasury securities, which continued to sell even after the long holiday weekend. Selling heated up after the Fed announced on June 30 that rate hikes would continue at a "measured" pace, when traders were hoping for a pause. Bullish economic reports paired with upbeat corporate news kept the pressure on, with Treasury yields, which move in the opposite direction of prices, climbing 18 basis points in three sessions. A spike in oil prices and terrorist bombings in London turned Treasuries around. The much-anticipated employment report for June, however, turned out to be a non-event. Although safe-haven buying in Treasuries sent the yields back down, they are significantly higher than they were eight days ago and most mortgage rates edged up accordingly.

Treasury traders were still reeling from the Fed rate announcement when the ISM index on June manufacturing conditions came in at a stronger-than-expected 53.8. These data didn't support theories that manufacturing might be slowing. The ISM index on the service sector also showed strength, climbing to 62.2 in June, with big increases in employment and a jump in prices paid, both of which could prove inflationary down the road. While these reports weighed on Treasuries, the rising price of oil ironically provided relief because bond traders believed that high oil prices could slow economic growth and replace Fed tightening. Employment numbers for June showed a gain of only 146,000 jobs - far below estimates. Wage increases remained in check, but the unemployment rate, which is based on a separate survey, fell to 5 percent - its lowest level in four years. Weekly first-time unemployment claims for the week ended July 1 also were bond-friendly, with claims rising by 7,000 to 319,000. Some increases were chalked up to temporary layoffs of autoworkers while factories are retooled and summer school closings, which eliminate the need for service jobs. The more closely watched four-week average fell to 320,000 - its lowest level since March 5.

Mortgage applications climbed for the week ended July 1, according to the Mortgage Bankers Association. Applications to purchase rose 9.1 percent, while refis soared 10.2 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is closing in on 5.50 percent, while the 15-year fixed-rate is just below 5.125 percent. The introductory rate on the one-year adjustable-rate mortgage is just shy of 4.0 percent.

There are a number of market-moving economic reports on the docket for the week of July 11, but a good percent of them won't come out until the end of the week. Of the eight reports scheduled, the most closely watched will be Retail Sales for June, which monitors spending habits of the American public. Individual reports from major chains have been positive, and analysts are expecting a 0.9-percent increase. The Consumer and Producer Price Indexes for June will be analyzed for signs of inflation at the retail and wholesale levels, respectively. If the reports signal strong economic growth, or signs of inflation, it would put pressure on Treasuries and mortgage rates could climb higher.