Weekly Mortgage Commentary_May 20, 2013

This week brings us the release of three pieces of relevant economic news in addition to the minutes from the most recent FOMC meeting and a speaking engagement with Fed Chairman Bernanke and a congressional committee. Only one of the economic reports is considered to be highly important to the markets and mortgage rates, but the others do carry enough significance to influence mortgage rates if they show a wide variance from forecasts.

Monday and Tuesday have nothing of importance scheduled, so look for stock movement to heavily influence bond trading and mortgage rates. Stock gains will probably pressure bonds and cause mortgage rates to move higher. If the major stock indexes show losses during the first couple days, we may see bonds thrive and mortgage rates remain unchanged or move slightly lower.

The National Association of Realtors will give us their Existing Home Sales report at 10:00 AM ET Wednesday. This data tracks resales of existing homes in the U.S. during April, giving us a measurement of housing sector strength. This type of data is relevant because a weakening housing sector makes a broader economic recovery less likely. Current forecasts are calling for an increase in home sales between March and April. Ideally, the bond market would prefer to see a decline, indicating housing sector weakness. A large increase in sales could lead to bond weakness and a small increase in mortgage rates Wednesday morning since a strengthening housing sector raises optimism about broader economic growth.

Also late Wednesday morning will be testimony from Fed Chairman Bernanke to the Joint Economic Committee of Congress. He will be updating them on the status of the economy and the Fed’s outlook for future growth and monetary policy. This will be watched closely and is one of those speaking engagements that can cause considerable movement in the financial markets and mortgage rates.

Furthermore, the minutes of the last FOMC meeting will be released Wednesday afternoon. Market participants will be looking for how Fed members voted during the last meeting and any comments about inflation concerns in the economy and economic growth. The goal is to form opinions about the Fed’s next move regarding interest rates and their current bond-buying program (QE3). Since the minutes will be released at 2:00 PM ET, if there is a market reaction to them it will be evident during afternoon trading Wednesday.

April’s New Home Sales report is the sister report of the Existing Home Sales and will be released late Thursday morning. It gives us a similar measurement of housing sector strength and future mortgage credit demand, but tracks a much smaller portion of housing sales than Wednesday’s report does. Actually, it is the least important release of the week and probably will not have much of an impact on mortgage pricing unless it shows a sizable variance from forecasts. It is expected to show gains in sales from March’s level, meaning the new home portion of the housing sector also strengthened last month.

Friday has the week’s most important economic report with April’s Durable Goods Orders being posted. This data gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket products. These are items made with an expected life span of three or more years. It is currently expected to show an increase in new orders of approximately 1.6%, indicating the manufacturing sector remained strengthened a little last month. That would be relatively bad news for the bond market and mortgage rates, but this data is known to be quite volatile. Therefore, a small variance from forecasts would likely have little impact on Friday’s mortgage rates.

Overall, I believe Wednesday will be the most important day for rates, although Friday should be active also as it will be shortened due to the early close ahead of the Memorial Day holiday and has the most important report of the week. Still, Wednesday’s economic data and Chairman Bernanke’s testimony in the morning and FOMC minutes in the afternoon means we could see a couple changes to mortgage rates that day. I suspect that Tuesday will be the calmest day of the week. There is nothing to be concerned with Monday, but strong selling in bonds late Friday means there is a fairly large increase in mortgage rates waiting if your lender did not make an upward revision during afternoon trading. I don’t think we will see as much movement in rates that we saw last week, however, it is still recommended to maintain contact with your mortgage professional if you have not locked an interest rate yet.

Weekly Mortgage Commenatry_May 13, 2013

 

The first piece of data this week is April’s Retail Sales at 8:30 AM ET Monday morning. This is an extremely important report for the financial markets since it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so this data can have a pretty significant impact on the markets. Current forecasts are calling for a 0.3% decline in sales from March to April. A weaker than expected level of sales should push bond prices higher and mortgage rates lower Monday morning as it would signal that economic activity may not be as strong as thought. However, an unexpected increase could renew theories of economic growth that would lead to more stock buying and bond selling that would push mortgage rates higher.

 

There is nothing of relevance scheduled for Tuesday, but Wednesday has two reports that we will be watching. April’s Producer Price Index (PPI) is the first at 8:30 AM ET. It helps us measure inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, indicating inflation is not a concern at the producer level, we should see the bond market improve. The overall index is expected to fall 0.5%, while the core data that excludes more volatile food and energy prices has been forecasted to rise 0.1%. A decline in the core data would be ideal for mortgage shoppers because inflation is the number one nemesis for long-term securities such as mortgage-related bonds. As inflation rises, longer-term securities become less appealing to investors since inflation erodes the value of those securities’ future fixed interest payment. That is why the bond market tends to thrive in weaker economic conditions with low levels of inflation.

The second report of the day Wednesday is April’s Industrial Production at 9:15 AM ET. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.2% decline in production, indicating that manufacturing activity is growing. A larger than expected decrease in output would be good news for the bond market and mortgage rates because it would indicate that the manufacturing sector is not as strong as thought. This report is considered to be moderately important, so it will likely need to show unexpected strength or weakness to cause movement in mortgage rates. The PPI report will probably be the biggest influence on bond trading and mortgage rates Wednesday.

April’s Consumer Price Index (CPI) will also be posted at 8:30 AM ET Thursday. It is the sister report of Wednesday’s PPI report, but measures inflationary pressures at the more important consumer level of the economy. These results will be watched closely and could lead to significant volatility in the bond market and mortgage pricing if they show any surprises. Current forecasts are calling for a 0.2% decline in the overall index and a 0.2% rise in the core data reading. As with the PPI, the core data is the more important of the two readings and will help dictate mortgage rate direction.

Also early Thursday will be the release of April’s Housing Starts. This data measures housing sector strength and mortgage credit demand by tracking newly issued permits and actual starts of new home construction. It is expected to show a drop in new starts from March’s reading, hinting at housing sector weakness. However, since this report is not considered to be of high importance to the bond market, it likely will have little impact on mortgage rates unless it varies greatly from forecasts, especially with a key measurement of inflation being posted at the same time.

The last two pieces of data come late Friday morning. May’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be released just before 10:00 AM ET Friday. This index measures consumer willingness to spend, which relates to consumer spending. If consumers are more confident in their own financial situations, they are more apt to make large purchases in the near future. This report usually has a moderate impact on the financial markets though, because it is not exactly factual data. It is expected to show a reading of 78.5, which would be an increase from April’s final reading, indicating consumers are more confident and more likely to spend than they were last month. If it shows a large decline in consumer confidence, bond prices could rise and mortgage rates would move slightly lower because waning confidence means consumers are less apt to make a large purchase in the near future.

The week’s calendar closes with the release of April’s Leading Economic Indicators (LEI) at 10:00 AM ET Friday. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.3% increase from March’s reading, meaning that economic activity is likely to strengthen slightly over the next few months. A decline would be good news for the bond market and mortgage rates, while an increase could cause mortgage rates to inch higher Friday.

Overall, it is likely going to be an active week for the financial and mortgage markets. I am predicting Monday or Thursday will be the most important day for mortgage rates, but we could see noticeable movement in rates multiple days this week. The lightest day will likely be Tuesday unless it is an overly volatile day for stocks. Accordingly, I strongly recommend maintaining contact with your mortgage professional if still floating an interest rate and closing in the near future.

Weekly Mortgage Commentary_May 6, 2013

This week has little scheduled that is expected to drive bond trading and mortgage rates. There are no relevant monthly or quarterly economic reports on the calendar. In fact, the only economic news even worth watching is the weekly unemployment update from the Labor Department that usually draws little attention. We do, however, have two Treasury auctions that can potentially affect rates the middle part of the week.

Friday’s Employment report led to a significant sell-off in bonds and a large spike in mortgage rates. With nothing scheduled to help bond traders forget about Friday’s selling, the negative tone in stocks could carry into Monday’s trading. This is especially true if stocks open the week in positive ground. In other words, we could be in for further increases to mortgage rates the next day or two.

The Treasury will hold a 10-year Note sale Wednesday and a 30-year Bond sale Thursday. Results of the auctions will be posted at 1:00 PM ET each day. If they are met with a strong demand from investors, we could see bond prices rise enough during afternoon trading to cause downward revisions to mortgage rates. However, lackluster bidding in the sale, meaning longer-term securities are losing their appeal, could lead to higher mortgage pricing those afternoons. After Friday’s selling, it is difficult to portray a scenario that gives us high hope for these auctions. At best, I believe we will be fortunate if they are a non-factor towards mortgage rates.

The week closes with a speaking engagement from Fed Chairman Bernanke mid-morning Friday. He will be speaking at a Fed banking conference in Chicago. Since this is the first time he will be public since last Friday’s employment news and the reaction the markets had, look for his words to cause a little volatility in the broader markets, and possibly mortgage rates.

Due to the lack of factual economic data to drive the markets this week, we should see bond trading and mortgage pricing to be heavily influenced by stock market direction. If the major stock indexes move higher, mortgage rates will probably follow suit. Ideally, mortgage shoppers should hope for stock market weakness as it would be the best scenario for mortgage rates to take back some of Friday’s increases.

Overall, I think we will see Monday be a fairly active day as Friday’s stock and bond market sentiment will probably carry into Monday’s trading. That will likely mean we start off the week with an increase in mortgage rates, but to a much smaller scale as last Friday’s move. Wednesday’s 10-year Treasury Note auction could also cause movement in rates during afternoon hours. However, any of this week’s moves will most likely be much smaller than some of last week’s changes were, comparatively speaking. With little to be optimistic about and the negative tone in bonds that will probably continue at least during the first day or so of trading this week, it is difficult to justify floating an interest rate if closing soon. Therefore, I strongly recommend maintaining contact with your mortgage professional if you have not locked an interest rate yet.