Mortgage Rates Eat Macaroni and Cheese August 4, 2011

Mortgage Rates Eat Macaroni and Cheese August 4, 2011 ; Mortgage rates are feeling the effects of a slowing US economy but a strong corporate earnings report from Kraft (famous for their macaroni and cheese) will likely keep current mortgage rates from falling significantly today (though they may fall slightly). Despite the fact that today’s employment data was weak, investors seem focused on tomorrow’s monthly Non-Farm Payroll (NFP) report.

I have typically recommended extreme caution by home purchasers and refinancers lately as it relates to rate locks. However, today, given the virtually universal expectation for a weak NFP report, those with a higher risk tolerance might consider waiting until tomorrow.

Kraft announced higher earnings, raised its guidance for the remainder of 2011 and indicated that it is splitting into two companies. There is no truth to the rumor that the two companies will be known as “Macaroni” and “Cheese”. Kraft is indicative of many US firms that have managed the weak US economy extremely well by cutting expenses and raising productivity. However, at some point these lean and mean companies will need additional employees to continue to grow.

The weekly jobless claims report this morning completely erased the memory of last week’s surprise drop in initial claims. Not only did the report document that just over 400,000 folks applied for first-time unemployment claims, but the revisions to last week’s report took it back over the crucial 400,000 person threshold.

The economic slowdown is not limited to the US. In fact it appears to be a truly global phenomenon. Reports from China, Japan and Europe confirm that growth has slowed worldwide. The Bank of England, which has raised interest rates as of late, decided today to leave rates unchanged as a strategy to leave more liquidity in the system to support growth. Japan, still facing the devastating effects of the earthquake and tsunami, has intervened in the currency market to attempt to reduce the value of its currency to make goods produced there more competitive. Governments are doing what they can to try to stimulate growth. Does the US have any such efforts left in its arsenal?

Tomorrow’s NFP report could be a turning point toward historically low interest rates or it could simply signal more of the same for rates…movement within a relatively small range. No one expects a surprise gain in employment levels tomorrow which would be a harbinger of higher rates. However, with the healthiness of corporate balance sheets and earnings, that turning point toward meaningfully higher rates may not be too far away. Come September, when kids are back in school, and corporate execs are back at work, and barring a decent into recession, I would not be surprised to see the US economy begin to accelerate.