This week's Mortgage Commenatary_June 24, 2013

This week brings us the release of six economic reports for the markets to digest in addition to two Treasury auctions that have the potential to come into play. Unfortunately, even weaker than expected economic news may not be able to derail this downward spiral in bonds and upward spike in mortgage rates. It appears that the markets are looking forward and basing their trading on future events, not past. With the benchmark 10-year Treasury Note yield closing above 2.50% Friday, this upward move in rates may continue until it gets much closer to 3.00%. Hopefully this will change, but until we get some stability in the bond market, we should progress with extreme caution.

 

May’s Durable Goods Orders will kick off this week’s data early Tuesday morning, giving us an indication of manufacturing sector strength. It tracks orders at U.S. factories for big-ticket items, or products that are expected to last three or more years such as electronics and appliances. This data is known to be quite volatile from month to month and is expected to show an increase of 3.0% in new orders from April to May. A large decline would be the ideal scenario for the bond market and would hopefully lead to a decline in mortgage pricing as it would indicate manufacturing sector weakness.

 

Tuesday also has May’s New Home Sales report, but during late morning trading. It helps us measure housing sector strength by tracking sales of newly constructed homes. This report is similar to last week’s Existing Home Sales report, but covers a much smaller portion of sales than last week’s report did. It is expected to show a small increase in sales, but will likely not have much of an impact on mortgage rates because this data gives such a small snapshot of the housing sector. I believe it will take a large rise in sales or a sizable decline for this data to influence mortgage rates.

 

June’s Consumer Confidence Index (CCI) is the third report of the day. It will also be posted at 10:00 AM ET Tuesday and is important to the financial markets because it measures consumer willingness to spend. If consumers are more confident about their own financial situations, they are more apt to make large purchases in the near future. If it shows a sizable increase in confidence from last month, we can expect to see the bond market falter and mortgage rates rise slightly. Current forecasts are calling for a reading of 74.9, down from last month’s 76.2 reading. The lower the reading, the better the news it is for bonds and mortgage rates.

 

Wednesday’s only economic data is the final reading to the 1st Quarter Gross Domestic Product (GDP). The GDP is the sum of all products and services produced in the U.S. and is considered to be the best measurement of economic growth or contraction. However, this particular data is quite aged now (covers January through March) and will likely have little impact on the bond market or mortgage pricing unless it varies greatly from previous readings. Market participants are looking more towards next month’s release of this quarter’s initial GDP reading. Last month’s first revision showed a 2.4% rise in the GDP, which is what analysts are expecting to see again. An increase would be considered negative for rates as it means stronger economic activity.

 

May’s Personal Income and Outlays data is scheduled for release Thursday at 8:30 AM ET. This report gives us an indication of consumer ability to spend and current spending activity. They are important because consumer spending makes up over two-thirds of the U.S. economy. If consumer income is rising, they have more money to spend each month. Analysts are expecting to see an increase of 0.2% in income and a 0.4% rise in the spending portion of the report. Declines in both of these readings would be good news for the bond market and mortgage rates.

 

The University of Michigan will close out this week’s data when they update their Index of Consumer Sentiment for May late Friday morning. This index gives us a measurement of consumer willingness to spend. As with Tuesday’s CCI, if consumers are more comfortable with their own financial situations, they are more apt to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, any related data has the potential to affect bond trading and mortgage rates. A downward revision would be considered good news for bonds and rates, but forecasts are calling for little change from this month’s preliminary reading of 82.7.

 

Also worth noting is the fact that the Fed will be selling more debt this week. These sales may influence broader bond trading enough to affect mortgage rates if they show strong or weak investor demand. There are sales every day except Friday but the two most likely to affect rates are Wednesday’s 5-year Note sale and Thursday’s 7-year Note auction. If they are met with a strong demand, we could see bond prices rise during afternoon trading. This could lead to afternoon improvements to mortgage rates also. But, if the sales draw a lackluster interest from investors, mortgage rates may move higher during afternoon trading those days.

 

Overall, it is difficult to label one particular day as the most important of the week. None of the data on the agenda is considered to be highly important, but Tuesday has two of the more important reports of the week. It will be interesting to see if Friday’s late sell-off extends right into Monday’s trading. If it does, it could be another difficult day for mortgage shoppers. Until the dust settles and logic returns to the market, we will be taking things day by day. And if still floating an interest rate, I strongly recommend being extremely careful and maintain contact with your mortgage professional.

This Week's Mortgage Commenatry_June 10, 2013

This week has four pieces of economic data that are relevant to mortgage rates in addition to two Treasury auctions that can also be influential. None of the relevant data is schedule until Thursday, so look for the stock markets to influence bond trading and mortgage rates the first couple of days. We are going into the week with an increase in rates due to weakness in bonds late Friday. If your lender did not revise rates higher Friday afternoon, you have an increase waiting when the markets open Monday morning.

 

The two relevant Treasury auctions will be held Wednesday and Thursday. 10-year Treasury Notes will be sold Wednesday while 30-year Bonds will be sold Thursday. Results of both auctions will be posted at 1:00 PM ET on the sale days. If investor demand was high, we may see bonds rally during afternoon trading, however, weak demand for the securities could lead to selling and an increase to mortgage rates. It is common to see some pressure in bonds right before these sales as investors prepare for them, but as long as the sales are not weak those pre-auction losses are usually recovered once they are completed.

The first data of the week comes Thursday when the Commerce Department posts May’s Retail Sales data at 8:30 AM ET. This report gives us a very important measurement of consumer spending, which is highly relevant to the bond market because consumer spending makes up over two-thirds of the U.S. economy. Analysts are expecting to see that retail-level sales rose 0.3% last month. A decline in sales, signaling a slowing economy, would be negative for stocks, good news for the bond market and could lead to lower mortgage rates Thursday morning. On the other hand, a stronger level of sales will likely equate to an increase in rates.

Friday has the remaining three pieces of economic data that we will be watching. The first of those is one of the two key measurements of inflation that we get each month. May’s Producer Price Index (PPI) will be released early Friday morning, helping us measure inflationary pressures at the producer level of the economy. There are two readings of this index, the overall and the core data. The core data is considered to be the more important one because it excludes more volatile food and energy prices. A large increase could raise concerns about inflation rising as soon as the economy gains some traction. This would not be good news for bond prices or mortgage rates since inflation erodes the value of a bond’s future fixed interest payments. Rising inflation causes investors to sell bonds, driving bond prices lower, pushing their yields upward and bringing mortgage rates higher. Analysts are expecting to see increases of 0.1% in both readings, signaling inflation was subdued at the manufacturing level of the economy last month.

May’s Industrial Production data will be released at 9:15 AM ET Friday and is considered to be moderately important. It measures output at U.S. factories, mines and utilities, giving us a fairly important measurement of manufacturing sector strength. If it reveals that production is rapidly rising, concerns of manufacturing strength may come into play in the bond market. A larger increase than the expected 0.1% would indicate the manufacturing sector is stronger than thought and would likely push mortgage rates slightly higher.

June’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be posted late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. It is expected to show a reading of 83.0, which would be a decline from May’s 84.5. A smaller than expected reading would be considered good news for bonds because it would mean that surveyed consumers were less optimistic about their own financial situations than thought. That often means they are less likely to make large purchases in the near future, but since this report is only moderately important it likely will not influence mortgage rates considerably unless it shows a significant variance from forecasts.

Overall, look for Thursday or Friday to be the biggest day of the week with both having important economic data scheduled. The least important day of the week will probably be Tuesday. We saw plenty of movement in the markets and mortgage pricing again last week and it is quite likely that this week will also be active. However, I suspect that it will be to a less degree than last week was. The stock markets will also influence bond trading and mortgage rates, so watch the major indexes in addition to the economic reports. It is highly recommended that you maintain contact with your mortgage professional this week if still floating an interest rate.