THE BASIS POINT

Mortgage Applications Hit Six Year Low, ADP Jobs Report Off Mark Again

I went to a seafood disco last week…and pulled a mussel.

MORTGAGE INDUSTRY ROUNDUP
Mortgage applications have dropped to their lowest level in six years, due to (surprise?) higher rates and restrictive guidelines. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 15% to the lowest level since April 2002, with the purchase index -5.4% and refinancing -26%.

MARKET ROUNDUP
Traders and economists looks for indications about what the economy is doing. These vary from full-blown government reports, questionable or not, down to asking the local florist, “How’s business?” This morning we had the ADP employment report (which doesn’t include government jobs) showing an increase of 40k private sector jobs, substantially better than expectations. For the last several months, the ADP report has been wrong (too optimistic). The company that produces the report blames on the discrepancy on various issues, and traders and economists do follow the number.

Mortgage prices continue to gradually improve, possibly helped by losses in the stock market (due to credit losses in the financial sector). This morning the 10-yr is down to 3.86%. We’re certainly not getting any help from the Fed, who will meet again on June 25th, as Fed Chairman Bernanke spoke and signaled to the market that they are finished loosening monetary policy for now as inflationary concerns move to the forefront. U.S. productivity grew at a slightly faster-than-expected 2.6 percent annual rate during the first quarter on stronger output than was initially gauged. Compared with the first quarter of 2007, non-farm productivity was up 3.3%, which is good to hear. But worker hours shrank 1.8% as businesses cut back on labor inputs to help profits – this is the third straight quarterly decline in hours. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose by 2.2 percent at an annual pace, faster than the 2.0 percent rate forecast by analysts. It is believed that the economy can grow with low inflationary pressures when productivity is high.

The second report for today will be the Institute for Supply Management’s services index, expected to show a reading of 51.0 with the same principals as Monday’s manufacturing index. If this reading varies greatly from forecasts, we may see volatility in the markets and mortgage rates. The only item out Thursday is the usual Jobless Claims, but then Friday’s report is the exciting Labor Department’s Employment data for May. Analysts are expecting to see the unemployment rate climb to 5.1% with approximately 52,000 jobs lost during the month, although given this morning’s ADP numbers the estimates are creeping up. A higher than expected increase in the unemployment rate and a larger drop in payrolls would be good news for rates, but stronger than expected numbers would likely lead to a spike in mortgage rates. Besides, even though mortgage rates are influenced more by supply & demand and market forces, how much can rates improve with the Fed keeping overnight rates the same?

JOKE OF THE DAY
A strong young man at a construction site was bragging that he could out do anyone in a feat of strength. He made a special case of making fun of one of the older workmen.

After several minutes, the older worker had enough. “Why don’t you put your money where your mouth is,” he said. “I will bet a week’s wages that I can haul something in a wheelbarrow over to that building that you won’t be able to wheel back.”

“You’re on, old man,” the braggart replied. “Let’s see you do it!”

The old man reached out and grabbed the wheelbarrow by the handles. Then, nodding to the young man, he said, “All right, dummy, get in.”