Market Review…last week

Investor sentiment about the economic recovery fell last week, and the stock market declined. Expectations for slower economic growth are favorable for bond markets, including mortgage-backed securities (MBS), and mortgage rates ended the week a little lower.

The important monthly Employment report showed mixed results. Against a consensus forecast for a loss of -225K jobs in August, the economy lost -216K jobs. This was the smallest level of monthly job losses since August 2008 and was far below the monthly average of -691K seen during the first quarter of the year. The biggest surprise in the data came from the Unemployment Rate, which jumped from 9.4% to 9.7%, the highest level since 1983. The unexpected increase was mostly due to previously discouraged workers returning to the labor pool to look for jobs. Average Hourly Earnings, a proxy for wage growth, rose at a moderate 2.6% annual rate.

The future of Fannie Mae and Freddie Mac made the headlines this week when the Mortgage Bankers Association (MBA) released its restructuring proposal. While the MBA suggested the elimination of the two agencies, it would replace them with new entities which would perform many of the same functions, with many of the same people. Its plan would maintain a government guarantee of principal and interest for MBS investors. The two agencies have played a pivotal role in keeping mortgage rates low and in expanding homeownership, and the MBA proposal would retain these benefits. It’s very early in the process, and the Obama administration indicated that its proposals for Fannie and Freddie may not be revealed until early next year.

Treasury auctions may have the greatest impact on mortgage rates this week. There will be $70 billion in 3-yr, 10-yr, and 30-yr auctions on Tuesday, Wednesday, and Thursday. It will be a light week for economic data. The Fed’s Beige Book will be released on Wednesday, and the Trade Balance will come out on Thursday. Import Prices and Consumer Sentiment are scheduled for Friday. Mortgage markets will be closed on Monday for Labor Day.