When mortgage rates touched all-time lows on Tuesday I shifted my outlook to locking.  In hindsight I shifted 3 days too early but when it comes to locking rates it usually better to lock in too early than too late.

Interest rates are responding to a much better than expected monthly jobs report released by the Labor Department earlier today.  The report showed that the private sector added 257,000 new jobs in January (offsetting 12,000 in government job cuts).  They also revised higher previously released figures for November & December.  Overall the report is good news for the economy which is bad news for mortgage rates.

Also fueling optimism about the economic recovery was this morning’s Institute for Supply Management service sector index.  The monthly report showed better than expected activity for the month of January.

Meanwhile, there is still no debt deal between Greece and its creditors.  The markets continue to expect that a deal will get worked out and financial contagion will be averted but if not, I would expect US interest rates to decline slightly as investors rush for “safety”.

Current Outlook: locking

There’s not much going on in the interest rate markets.  Maybe this is the calm before the all-important jobs report storm?

The second leg of this week’s employments reports showed that the number of people filing for jobless claims declined by slightly more than expected last week.  The question analysts have is whether the decline is credited to people finding work or giving up looking because of dull prospects?  We should learn more tomorrow when the Bureau of Labor Statistics releases the jobs report for January.  The markets are currently expecting an unemployment rate of 8.5% (the real unemployment rate is probably closer to 15%) and 170,000 new jobs created in the private sector.

Greece has yet to reach an agreement with creditors to lighten the ailing county’s debt load.  The markets should not be surprised.  European officials have been promising swift reforms for 2 years and yet major risks continue to hang over the continent.  Investors in Spanish debt showed confidence, however, earlier today when demand for a bond auction exceeded expectations.

Mortgage rates continue to hover at all-time lows.  I continue to recommend locking in.  How much better can rates get versus how much higher could they rise if the Greeks strike a deal?

Current Outlook: locking

The first of three employment reports was issued this morning.  The private payroll company ADP released its version of the monthly jobs report earlier and it showed the US economy added 170,000 new jobs in January which was slightly less than expectations.  Currently, the markets are expecting 145,000 new jobs to be reported in Friday’s all-important jobs report.

In other economic news, manufacturing activity was reported better than expected in China, Germany, and the US.  The trifecta of reports has investors hoping that the global economy can weather the headwinds of the European debt crisis.  Good news for the economy is typically bad news for mortgage rates.

Greece is still looking for a settlement with existing debt holders to accept a steep discount so that the ailing country can remain solvent.  Still no agreement at this point.

The 10-year US treasury note, which mortgage rates loosely follow, has traded between 1.80%-2.20% for the past few weeks and it is currently at the low end of that range so I recommend locking.

Current Outlook: locking

Interest rates looked like they may worsen yesterday afternoon after European leaders agreed to a new fiscal pact which includes tighter measures on member state’s budgets and a new round of bailout money.  However, this morning interest rates have stabilized on renewed concerns over Portugal and the US economic recovery.

A LACK OF A DEBT DEAL IN GREECE IS CAUSING CONCERN OVER PORTUGAL

A lack of a deal between Greece and its creditors has investors concerned about the financial health of Portugal.  Yields on Portuguese debt rose sharply this morning which helps create demand for US-denominated debt securities including mortgage-backed bonds.

In economic news, consumer confidence fell sharply in January according to new data from the Conference Board.  This has investors worried about consumer spending in the coming months.  In housing the S&P Case Shiller-Home Price Index showed that home prices continued to fall around the nation as of November.  The year-over-year 20-city index fell by 3.7%  and in Portland home prices fell by 4.8%.

I am going to shift to a locking bias since rates are back at all-time lows and its expected that Greece will reach a deal with creditors later in the week.

Current Outlook: locking

Mortgage rates have dipped back down to all-time low levels following the Fed’s cautious comments last week.  Optimism had been rising regarding the strength of the US economic recovery and now analysts believe the road may turn rocky once again.

AMERICANS CHOSE TO SAVE THEIR EXTRA INCOME IN DECEMBER

The economic calendar will either validate or refute the Fed’s outlook.  The Commerce Department reported that personal incomes grew at a slightly faster clip in December than expected.  However, spending rose by less than expected signaling that Americans are choosing to save their extra cash  instead of consuming it.  This week is employment week so beginning on Wednesday we’ll see the ADP jobs report followed by weekly jobless claims and the all-important jobs report on Thursday & Friday.

Nothing new to report in Europe.  Greece continues to negotiate with private creditors on a discount to its outstanding debt.  If they are unable to secure a deep enough cut then it would result in a disorderly default which would be bad for the EU and help US interest rates.

Current Outlook: neutral

Yesterday’s monetary policy statement + forecast has helped mortgage rates improve.

YESTERDAY'S FED ANNOUNCEMENT HAS HELPED MORTGAGE RATES IMPROVE

Following their 2-day open market committee meeting Fed officials announced that they expect short-term interest rates to remain low through 2014.  The markets had been expected confirmation of low rates through the end of 2013 or mid-2014.  the fact that the Fed announced a longer time frame leads investors to believe that the recovery may be slower than expected which helps long-term rates remain low.

In terms of economic data, the Commerce Department released a report showing that durable goods orders rose by 3.0% in December which was higher than expected.  In a separate report the Labor Department reported that the number of people filing for jobless benefits rose by less than expected.  Good news on the economy is generally bad news for mortgage rates but the Fed announcement is overshadowing these data points thus far.

Nothing new to report from Europe this morning.  Greek officials are resuming talks with creditors to try and achieve a steeper discount to its debt load.  Without a concession Greece may default on its debt as soon as March.

Current Outlook: neutral

There is lots of noise scheduled for today but nothing that is expected to alter the course of mortgage rates.

Starting in Europe, Greek finance officials and private creditors are meeting in Paris to discuss next steps for the country’s debt crisis.  Greece needs private creditors to accept steeper discounts in order to remain solvent but thus far they haven’t reached a settlement.  Meanwhile, Portugal saw their bond yields rise and Germany saw theirs fall in new bond auctions.  Investors remain confident in the core European nations but nervous about the smaller ones.

In US housing news, the National Association of Realtors released its monthly pending home sales report which showed that on a year-over-year basis homes under contract rose by 5.6%.

THE NAR REPORTED PENDING HOMES SALES ROSE 5.6% YEAR-OVER-YEAR

There will be a lot of commentary today about the Fed’s monetary policy statement which will take place later today.  In their effort to improve transparency the Fed will broadcast their forecast for short-term interest rates.  Currently, the markets expect that the Fed will keep short-term rates low until the end of 2013 or mid 2014.  Unless their announcement deviates significantly I don’t believe that the announcement will impact mortgage rates.

I will remain neutral in my outlook.  There is still nothing that leads me to believe rates will move substantially higher or lower.

Current Outlook: neutral

Starting in Europe, talks between Greek finance officials and private creditors have reportedly stalled.  Greece needs private creditors to accept deep cuts in order to qualify for another round of bailout relief and has yet to gain concessions.  Meanwhile, the International Monetary Fund is renewing warnings that if European leaders are unable to put in place policies to curb contagion that they foresee a severe recession lasting multiple years.  Although this level of uncertainty is scary on many levels it does help keep US mortgage rates low through the process call “flight-to-safety”.

Here in the US the Treasury kicks off its first of three auctions this week with $35 billion in 2-year notes.  It is widely expected that the sale will be met with sufficient demand which should help rates remain low.

PRESIDENT OBAMA'S STATE OF THE UNION IS NOT EXPECTED TO IMPACT THE MARKETS

The President will deliver the annual State of the Union address later tonight.  He is expected to speak about the economic fairness and energy production.  Its unlikely this will impact the markets since this is an election year.

Tomorrow the Federal Open Market Committee will convene a 2-day monetary policy meeting.  At this point the market is not expecting any change to monetary policy so the only factor that could impact rates are comments regarding the outlook on the economy.

Current Outlook: neutral

European leaders are meeting today in Brussels to try and hash out fresh ideas for how to prevent financial catastrophe.  Meanwhile, the International Monetary Fund chief warned that if EU leaders are unable to generate effective policies it could result in, “a 1930s moment.”

ACCORDING TO IMF, EU LEADERS NEED TO COME UP WITH A PLAN TO AVOID A "1930s MOMENT."

The meat of the domestic economic calendar kicks off Wednesday when the Fed will deliver it monetary policy statement.  It’s widely expected they’ll leave existing policies in place but their comments about the economy could move the markets.

Mortgage rates will have to complete with $99 billion in new US Treasury supply which kicks off tomorrow when the Treasury will auction $35 billion in 2-year notes.

Rates have migrated .125% higher from a week ago but there is no reason to believe they’ll move sharply higher as the problems in Europe persist with no quick resolution in sight.  However, the US economy is showing signs of recovery so there is also not a compelling reason to believe rates will move lower.  I will maintain a neutral position.

Current Outlook: neutral

Optimism regarding the outcome of the European Debt Crisis is the main culprit in pushing rates higher.  So far this year Spain, Italy, and France have managed to successfully auction off new rounds of debt.

OPTIMISM REGARDING THE EU DEBT CRISIS MAY BE SHORT LIVED.

Furthermore, rumors are that Greece has reached a deal with private creditors to accept even more of a discount to their debt holdings which would stave off a default.  A default would trigger credit default swap contracts (which act like insurance) and undermine the stability of the EU financial sector.

However, I believe it’s a little too soon to put this issue in the rear-view mirror.  Many of the suspect European nations (i.e. Italy & Spain) have significant debts that need to be refinanced in the first quarter of this year.  If they have trouble attracting investors it would likely push interest rates lower in the US.  Furthermore, austerity cuts by EU nations are likely to slow economic growth in Europe which would also help rates remain low here in the US.

After being in a locking position for a few days I am shifting back to neutral.  However, borrowers should be cautious.  How much better are rates really going get?

Current Outlook: neutral