Weekly Mortgage Commentary_April 29th, 2013

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This week is quite busy in terms of the number of economic reports and other events scheduled and the significance of the data being released. There are eight pieces of economic data that may influence mortgage rates along with a two-day FOMC meeting.

There is relevant data being released every day of the week, so expect to see plenty of movement in mortgage rates the next five days. 

March’s Personal Income and Outlays data is the first of the economic releases, coming early Monday morning. It helps us measure consumers’ ability to spend and current spending habits, which is important to the mortgage market due to the influence that consumer spending-related data has on the financial markets. If a consumer’s income is rising, they are more likely to make additional purchases in the near future, fueling economic growth. This raises inflation concerns and has a negative impact on the bond market and mortgage rates. Current forecasts are calling for a 0.3% increase in the income reading and a 0.1% rise in spending. If we see smaller than expected readings, the bond market should open higher Monday morning, making an improvement to mortgage rates a good possibility.

The second report of the week is the 1st Quarter Employment Cost Index (ECI) early Tuesday morning that tracks employer costs for wages and benefits. This gives us a measurement of wage-inflation. If it shows a large increase, we may see wage inflation concerns rise as employers will need to pass those increases into the pricing of their products and services. That would cause the bond market to fall and mortgage rates to rise. A smaller than expected increase would be good news for the bond market and mortgage pricing. Current forecasts are showing a rise of 0.5%.

April’s Consumer Confidence Index (CCI) will also be released Tuesday morning, but at 10:00 AM ET. This index is considered to be key indicator of future spending by consumers. The group surveys 5,000 consumers from across the country about their personal financial situations. If sentiment is strong or rising, it is believed that consumers are more apt to make large purchases in the near future. However, if they are concerned about issues such as job security and savings, they will probably delay making large purchases. The latter is better for the bond market and mortgage rates because the expected slowdown in spending would keep inflation and economic growth concerns to a minimum. On the other hand, a sizable increase could hurt the bond market, pushing mortgage rates higher Tuesday. It is expected to show a reading of 61.0, which would be an increase from March’s 59.7 reading. The lower the reading, the better the news it is for mortgage rates.

The Institute for Supply Management (ISM) will post their manufacturing index for April late Wednesday morning. This is usually the first important economic report released each month and gives us an indication of manufacturer sentiment. A reading above 50 means that more surveyed trade executives felt business improved during the month than those who felt it had worsened. This points toward more manufacturing activity and could hurt bond prices, pushing mortgage rates higher. Analysts are expecting to see a reading of 51.0, which would be a slight decline from March’s 51.3. Ideally, bond traders would like to see a reading below 50.0 as it would hint at contraction in the manufacturing sector rather than growth.

This week’s FOMC meeting will begin Tuesday but will not adjourn until Wednesday afternoon. It will likely adjourn with an announcement of no change to key short-term interest rates, but we may see some volatility in the markets following the 2:15 PM ET post-meeting statement. If the statement gives any hint of change in their current forecasts on when they expect to adjust key short-term interest rates, we could see a sizable change to mortgage rates Wednesday afternoon.

Thursday has two pieces of monthly or quarterly economic reports scheduled, but neither is considered to be highly important. The first comes from the Labor Department, who will release its 1st Quarter Productivity and Costs data early Thursday morning. This information helps us measure employee productivity in the workplace. High levels of productivity help allow low-inflationary economic growth. If employee productivity is rapidly rising, the bond market should react favorably. However, a smaller increase than what is forecasted could cause bond prices to drop and mortgage rates to rise slightly Thursday morning. It is expected to show a 1.2% increase in productivity.

March’s Goods and Services Trade Balance report will also be released early Thursday morning. This report gives us the size of the U.S. trade deficit but likely will not have much of an impact on the bond market or mortgage pricing. It is expected to show a $43.5 billion trade deficit, but it is the least important of this week’s data and likely will have little influence on Thursday’s mortgage rates.
Friday brings us the release of the almighty monthly Employment report, giving us April’s employment statistics. This is where we may see a huge rally or major sell-off in the bond market and potentially large changes in mortgage rates. The ideal situation for the bond and mortgage markets would be an increase in the unemployment rate and a much smaller number of payrolls added to the economy during the month than was expected. Just how much of an improvement or worsening in rates depends on how much variance there is between forecasts and actual readings. This could turn out to be a wonderful day in the mortgage market, but it also carries risks of seeing mortgage rates move higher if the Labor Department posts stronger than expected readings. Current forecasts are calling for the unemployment rate to remain at 7.6% and that approximately 150,000 jobs were added during the month.

March’s Factory Orders data will be posted late Friday morning, giving us another measure of manufacturing sector strength or weakness. It is similar to last week’s Durable Goods Orders, except this report includes non-durable goods such as food and clothing. Generally, the market is more concerned with the durable goods orders like refrigerators and electronics than items such as cigarettes and toothpaste. This is why the Durable Goods report usually has more of an impact on the financial markets than the Factory Orders report does. Still, a noticeably larger decline than the 2.5% that is expected could push mortgage rates slightly lower if the employment data matches forecasts.
Overall, I believe Friday will be the most important day of the week with the employment data being posted since Wednesday’s FOMC meeting likely won’t yield any surprises. The employment data can easily erase the week’s accumulated gains or losses in mortgage rates if it shows noticeable variances from forecasts. We may actually see a sizeable change in rates Wednesday also if the ISM index shows favorable or unfavorable results, but I am predicting Friday to be the most active. Even though I am currently a bit optimistic towards rates improving, this could change at any time and still suggest proceeding cautiously if still floating an interest rate. This would be a very good week to maintain contact with your mortgage professional if you have not locked a rate yet.

Weekly Mortgage Commentary _ April 8th, 2013

This week brings us the release of only three economic reports that are relevant to mortgage rates, in addition to a couple of Treasury auctions and the minutes from the last FOMC meeting that have the potential to be influential on the bond market and mortgage pricing. Corporate earnings season also kicks off this week, which could be instrumental in driving stock prices significantly higher or lower.

There is no relevant economic news scheduled for release Monday or Tuesday. The first events of the week will come Wednesday afternoon. One is the release of the minutes from the last FOMC meeting. Market participants will be looking at them closely as they give us insight to the Fed’s current thought process and individual Fed member opinions. Any surprises in the 2:00 PM ET release, particularly about inflation or the likelihood of an adjustment to their current bond buying program, could cause afternoon volatility in the markets Wednesday and possible changes in mortgage pricing.

The two Treasury auctions are scheduled for Wednesday and Thursday. There is a 10-year Treasury Note sale Wednesday and a 30-year Bond sale Thursday. We could see some weakness in bonds ahead of the sales as participating firms sell current holdings to prepare for them. This weakness is usually only temporary if the sales are met with a decent demand. The results of the auctions will be posted at 1:00 PM ET each day. If the demand from investors was strong, the bond market could rally during afternoon trading, leading to lower mortgage rates. If the sales were met with a poor demand, the afternoon weakness may cause upward revisions to mortgage pricing Wednesday and/or Thursday afternoon.

Friday has all of the week’s highly important economic data scheduled. The Labor Department will start the day by posting March’s Producer Price Index (PPI) at 8:30 AM ET. It will give us an important measurement of inflationary pressures at the producer level of the economy. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. If it shows rapidly rising prices, inflation fears may hurt bond prices since it erodes the value of a bond’s future fixed interest payments, leading to higher mortgage rates. A good size decline in prices would be good news for the bond market and mortgage rates. Current forecasts are calling for a 0.1% decline in the overall reading and a 0.1% rise in the core data.

Also early Friday morning, the Commerce Department will release March’s Retail Sales data. This piece of data gives us a measurement of consumer spending levels, which is very important because consumer spending makes up over two-thirds of the U.S. economy. Forecasts are calling for no change in sales from February to March. If we see an increase in spending, the bond market will likely fall and mortgage rates will rise as it would indicate consumers are spending more than thought, fueling economic growth. However, a weaker than expected reading could push bond prices higher and mortgage rates lower Friday, especially of the PPI gives is favorable results also.

The final release of the week is the University of Michigan’s Index of Consumer Sentiment at 9:55 AM ET Friday. Their consumer sentiment index will give us an indication of consumer confidence, which hints at consumers’ willingness to spend. If confidence is rising, consumers are more apt to make large purchases. But, if they are growing more concerned of their personal financial situations, they probably will delay making that large purchase. This influences future consumer spending data and can have a moderate impact on the financial markets. Good news would be a sizable decline from March’s 78.6 reading. Current forecasts are calling for a reading of approximately 78.0.

Overall, look for the most movement in rates the latter part of the week, particularly Friday. The PPI and Retail reports are the biggest names on the agenda. Either of them can cause significant movement in the markets and mortgage rates. Look for the stock markets to also influence bond trading and mortgage rates the a good part of the week as traders react to the earnings news, but I believe we will see the most movement in rates the latter part. I am expecting it to be an active week for the mortgage market, so please maintain contact with your mortgage professional if still floating an interest rate.

Weekly Mortgage Commentary_March 25, 2013

This week brings us the release of six pieces of relevant economic data along with two Treasury auctions that have the potential to affect mortgage rates. This is also a holiday-shortened week with the bond market scheduled to close early Thursday and remain closed Friday in observance of the Good Friday holiday. The stock markets will be closed Friday only.

Monday’s only event is a speaking engagement by Fed Chairman Bernanke early afternoon. He will be speaking at the London School of Economics at 1:15 PM ET Monday. The topic of his speech is what was learned from the past financial crisis. I am not expecting this to be a market moving appearance, but anytime he does speak, the markets listen. Therefore, we will be watching for any reaction to his words.

There are three pieces of data set for release Tuesday. The first will come from the Commerce Department at 8:30 AM ET, who will post February’s Durable Goods Orders. This report gives us a measurement of manufacturing sector strength by tracking new orders for big-ticket items, or products that are expected to last three or more years such as electronics, appliances and airplanes. This data is known to be volatile from month to month but is still considered to be of fairly high importance to the markets. Analysts are expecting it to show an increase in new orders of approximately 3.8%. A much larger increase would be considered negative for bonds as it would indicate economic strength and could lead to higher mortgage rates Tuesday morning.

March’s Consumer Confidence Index (CCI) will be posted at 10:00 AM ET Tuesday morning. This index gives us an indication of consumers’ willingness to spend. Bond traders watch this data closely because consumer spending makes up over two-thirds of our economy. If this report shows that confidence in their own financial situations is falling, it would indicate that consumers are less apt to make a large purchase in the near future. If it reveals that confidence looks to be growing, we may see bond traders sell as economic growth may rise, pushing mortgage rates higher Tuesday morning. It is expected to show a decline from February’s 69.0 reading to 66.9 for March. The lower the reading, the better the news it is for bonds and mortgage rates.

The Commerce Department will also give us February’s New Home Sales figures late Tuesday morning. They are expected to announce a small decline in sales of newly constructed homes. This report tracks a much smaller percentage of home sales than last week’s Existing Home Sales report covered, so it should have a much weaker influence on the markets and mortgage pricing. A large increase in sales would be negative for the bond market and mortgage pricing because it would point towards economic strength.

The next relevant data is Thursday’s final revision to the 4th Quarter GDP. This is the second and final revision to January’s preliminary reading of the U.S. Gross Domestic Product, or the sum of all goods and services produced in the U.S. It is expected to show that the economy grew at an annual pace of 0.3% last quarter, up slightly from the previous estimate of 0.1% that was released last month. Analysts are now more concerned with next month’s preliminary reading of the 1st quarter than data from three to six months ago, so I don’t expect this report to affect mortgage rates much.

Friday has two reports that could affect mortgage rates, but since the financial and mortgage markets will be closed we will have to wait for next Monday to see them react to these reports. The first is February’s Personal Income & Outlays report early Friday morning. This data helps us measure consumers’ ability to spend and current spending habits, which is important to the mortgage market because of the influence that consumer spending- related information has on the financial markets. If a consumer’s income is rising, they are more likely to make additional purchases in the near future. This raises inflation concerns, adds fuel for economic growth and has a negative effect on the bond market and mortgage rates. Current forecasts are calling for a 0.8% increase in income and a 0.6% rise in spending. Smaller than expected increases would be ideal for bond traders and mortgage shoppers.

The final report of the week comes from the University of Michigan just before 10:00 AM ET Friday. Their revision to their March Consumer Sentiment Index will give us another indication of consumer confidence, which hints at consumers’ willingness to spend. As with Tuesday’s CCI report, rising confidence is considered bad news for the bond market and mortgage pricing. Friday’s report is expected to show a small increase from the preliminary reading of 71.8. Favorable results for bonds and mortgage rates would be a decline in confidence.

In addition to this week’s economic reports, there are two relatively important Treasury auctions that may also influence bond trading enough to affect mortgage rates. There will be an auction of 5-year Notes Wednesday and 7-year Notes on Thursday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. However, strong sales usually make bonds more attractive to investors and bring more funds into the bond market. The buying of bonds that follows often translates into lower mortgage rates. Results of the sales will be posted at 1:00 PM ET auction day, so look for any reaction to come during afternoon hours.

Overall, I believe Tuesday will be the most active day for mortgage rates with three reports scheduled, including the week’s most important (Durable Goods). I would not be surprised to see pressure in bonds Monday due to progress in Cyprus this weekend, so be prepared to see movement in rates Monday also. There doesn’t appear to be too much to be concerned with, however, any day could bring something unexpected that leads to a big move in the markets and mortgage pricing. Therefore, it would be wise to keep an eye on the markets if still floating an interest rate and be ready to contact your mortgage professional.

Weekly Mortgage Commentary_March 18, 2013

This week brings us the release of four monthly reports for the bond market to digest, but none of them are considered to be highly important. In addition to the economic reports, we also have a Fed-filled day in the middle part of the week. With none of the reports likely to move the markets, we could see a couple fairly calm days in mortgage rates.

There is nothing of importance scheduled for release Monday, so look for the stock markets and overseas news to be the biggest influences on bond trading and mortgage rates. News about a potential bailout for Cyprus and some unprecedented requirements that are being considered could help push stocks lower Monday. As word spread about a potential tax on deposit accounts there, many people rushed ATM’s to get cash out over the weekend. Even though Cyprus’s President addressed the nation to calm fears, the news is expected to drag down international stock markets when they open for trading. That should bode well for the bond market as investors may look towards bonds as safety from any volatility. And what is good for the bond market is generally good news for mortgage shoppers.

Two of the week’s four reports that are scheduled give us insights into the housing sector. They begin early Tuesday morning when February’s Housing Starts will be posted. This report tracks construction starts of new housing. It doesn’t usually cause much movement in mortgage rates and is considered one of the less important reports we see each month. It is expected to show an increase in housing starts, indicating growth in the housing sector. Good news for the bond market and mortgage rates would be a sizable decline in new starts, but unless we see a large variance from forecasts the data likely will not lead to a noticeable move in mortgage pricing.

Wednesday is the day with several Fed events scheduled. They start with the 2:00 PM ET adjournment of the FOMC meeting that began Tuesday. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting, but there is rising concern in the market that the Fed may cut back their current bond-buying program (QE3) to help ease future issues. Any word on this topic either way could heavily influence the markets and mortgage rates.

Also worth noting is that the FOMC meeting is ending a little earlier than the traditional 2:15 PM because it is one of the meetings that will be followed by a press conference with Fed Chairman Bernanke. The meeting will adjourn at 2:00 PM while the press conference will begin at 2:30 PM and will probably lead to afternoon volatility in the markets and mortgage rates Wednesday. The Fed will also update their economic and monetary policy projections at 2:00 PM. Any significant revisions to the Fed’s outlook on unemployment, GDP growth or their timetable for keeping key rates at current levels will also cause volatility in the markets and mortgage rates.

February’s Existing Home Sales will be posted late Thursday morning by the National Association of Realtors. It will also give us a measurement of housing sector strength and mortgage credit demand. It is expected to reveal an increase in home resales, meaning the housing sector strengthened last month. Ideally, bond traders would prefer to see a decline in sales, pointing towards a still weakening housing sector. However, a small increase is expected, so it shouldn’t cause much alarm in the bond and mortgage markets. Bad news would be a sizable increase in sales, indicating that the housing sector is gaining momentum. That could be troublesome for the bond market and mortgage rates because housing and unemployment were the two biggest hurdles the economy had to overcome. Recent reports have some traders much more optimistic about the employment sector, so overwhelmingly strong housing news could lead to another rise in mortgage rates.

The Conference Board will post its Leading Economic Indicators (LEI) for February late Thursday morning also. This index attempts to measure economic activity over the next three to six months. It is considered to be moderately important, but likely will not have a significant impact on mortgage rates. Current forecasts are calling for a 0.5% increase, meaning it is predicting that economic activity will likely expand moderately in the coming weeks. A smaller than forecasted rise, or better yet a decline would be considered good news for the bond market and mortgage rates.

Overall, I am considering Wednesday as the key day of the week with the Fed events scheduled, but Monday could be interesting if the Cyprus news does cause stock selling when our markets open in the morning. The least important day will probably be Friday, however, we could see movement in rates any day. It appears that the recent stock rally could be losing steam and if that is true we may see funds shift back into bonds in the near future. Accordingly, I am shifting to a more optimistic stance on rates- at least for the time being.

Weekly Mortgage Commentary_March 11, 2o13

This week brings us the release of five relevant This week brings us the release of five relevant economic reports along with two Treasury auctions for the markets to digest. A couple of the week’s reports are considered highly important, so we could see a fair amount of movement in rates again. There is nothing of relevance to mortgage rates being released or taking place Monday or Tuesday, so all of the week’s events are scheduled over three days.

The first thing on the calendar will come from the Commerce Department early Wednesday morning when they post February’s Retail Sales data. This data is extremely important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, data that is related usually has a big impact on the markets. This month’s report is expected to show an increase in sales of approximately 0.5%. If it reveals a larger than expected increase, the bond market will likely fall and mortgage rates will move higher as it would indicate a stronger level of economic growth than many had thought. If it reveals a much smaller than expected increase, I expect to see bond prices rise and mortgage rates improve Wednesday morning.

There are two Treasury auctions this week that could potentially affect mortgage rates. The first is the 10-year Treasury Note auction Wednesday and the 30-year bond sale will be held Thursday. Results of both sales 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 as it would hint that investors still have an appetite for longer-term securities. However, weak demand in the sale could lead to selling and an increase in mortgage rates late Wednesday and/or Thursday.

The Labor Department will post February’s Producer Price Index (PPI) early Thursday morning. This important index measures inflationary pressures at the producer level of the economy. There are two portions of the index- the overall reading and the core data. The core data is more important and watched more closely because it excludes more volatile food and energy (including gasoline) prices. If the index shows a large increase, inflation concerns will rise, making long-term investments such as mortgage-related bonds less attractive to investors. This would lead to higher mortgage rates Thursday morning. Current forecasts are calling for a 0.7% increase in the overall reading and a 0.2% increase in the core data.

Friday has the remaining three economic reports scheduled. February’s Consumer Price Index (CPI) will be released early Friday morning, which measures inflationary pressures at the very important consumer level of the economy. Its results can definitely have a huge impact on the bond market, especially long-term securities such as mortgage-related bonds. It is expected to show a 0.5% increase in the overall index and a 0.2% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall Friday.

The day’s next report will come mid-morning when February’s Industrial Production report is posted. This report measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.4% increase from January’s level. A decline would be considered extremely favorable news for bonds and mortgage rates because it would indicate manufacturing sector weakness and a broader economic recovery is more difficult if manufacturing activity is slipping.

The week’s final piece of data is the University of Michigan’s Index of Consumer Sentiment for March just before 10:00 AM ET Friday. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending levels and economic growth. A drop in confidence will probably hurt the stock markets and boost bond prices, leading to lower mortgage rates, assuming the CPI matches forecasts. Bad news for bonds and mortgage rates would be rising confidence. It is expected to show a reading of 77.8, which would be a very slight increase from February’s final reading 77.6.

Overall, I would label Friday as the most important day of the week, but Wednesday is also likely to be active for mortgage rates. Stocks rallied last week, helping to drive bond yields and mortgage rates higher. The yield on the benchmark 10-year Treasury Note rose above 2.00% again, closing the week at 2.04%. This is troublesome for mortgage rates if it remains above that threshold as it could become a floor of support. Since mortgage rates follow bond yields, it would mean rates are more likely to rise than move much lower in the immediate future. This week will tell us a lot about which direction bond yields and mortgage pricing will be headed in the near future, so please be cautious of still floating an interest rate and closing soon.

Weekly Mortgage Commentary_March 4, 2013

This week has five government-compiled economic reports for the markets to digest. Only one is considered to be highly important, but it is a big one. The rest of the reports are moderately important to the markets, meaning they have the potential to affect mortgage rates but usually don’t cause a noticeable change. The most important data comes late in the week, but sizable moves in stocks can impact bond trading and mortgage rates any day.

The week’s first data comes Wednesday with the release of January’s Factory Orders during late morning hours, which will give us a measurement of manufacturing sector strength. This data is similar to last week’s Durable Goods, except this report covers orders for both durable and non-durable goods. Current forecasts are calling for a drop in new orders of approximately 2.2%. A larger than expected drop would be good news for the bond market and could lead to an improvement in mortgage rates since it would point towards economic weakness.

The Fed Beige Book is the next report scheduled for release and it will be posted Wednesday afternoon. This report details economic activity throughout the country by Federal Reserve region. The Fed relies heavily on this data during their FOMC meetings, so look for a potential reaction during afternoon trading Wednesday. It probably will not cause a major sell off in the stock or bond markets, but it is still worth watching it.

Wednesday also has a couple of private sector employment-related reports due to be posted. The biggest one comes from payroll processor ADP who will announce their change in payrolls processed last month. Since it is not a government agency report, it isn’t considered to be highly important, but as with any employment-related data, it does draw some attention. This is especially true for this report because it is posted just a couple days before monthly employment figures are released by the Labor Department.

Thursday has two reports scheduled for release, but neither is considered to be highly important. The first is the revised Productivity index for the 4th Quarter of last year. The preliminary reading posted last month showed a decline of 2.0% in worker output. Analysts are expecting to see an upward revision of 0.4% to last month’s initial reading. Employee productivity is watched fairly closely because a higher level of output per hour is believed to mean that the economy can expand without inflation concerns. However, since this data is quite aged now, it likely will have little impact on Thursday’s mortgage rates unless it shows a significant change.

January’s Goods and Services Trade Balance report will also be released at 8:30 AM ET Thursday morning, but it will likely draw little interest from market participants. It will give us the size of the U.S. trade deficit, which does not directly impact mortgage rates and is the week’s least important piece of news. Current forecasts are calling for a $43.0 billion trade deficit during January, but we will need to see a large variance from this estimate and little surprise in the productivity figures for this news to influence bond trading enough to affect mortgage pricing. It is highly likely that this report will be a non-factor in Thursday’s pricing.

The biggest news of the week comes early Friday morning when one of the single most important monthly reports we see will be posted. The Labor Department will release February’s Employment report at 8:30 AM ET Friday. Some of the important portions of the report will give us the unemployment rate, number of new jobs added or lost and the average hourly earnings reading. The best combination for the bond market and mortgage rates would be an increase in the unemployment rate, a much smaller increase in payrolls than expected and little or no increase in earnings. Current forecasts are calling for no change in the unemployment rate of 7.9% and approximately 165,000 new jobs added to the economy. Stronger than expected readings will likely fuel a stock market rally and selling in bonds that would cause a sizable upward revision to mortgage rates. On the other hand, disappointing numbers would raise concerns about the economy’s ability to continue to grow that would have an opposite impact on the markets and mortgage pricing.

Overall, look for a fairly active week in the markets and mortgage rates, especially the middle and latter days. I suspect there will be some optimism leading up to Friday’s Employment report, which could lead to support in stocks and pressure in bonds as we get closer to Friday. That day is undoubtedly the biggest of the week, but Wednesday’s events and some central bank news from overseas early Thursday morning could also heavily influence mortgage rates. It appears that either Monday or Tuesday will be the least important days. Please be careful this week if still floating an interest rate, especially the latter part of the week.

Weekly Mortgage Commentary_February 25, 2013

The first piece of data is January’s New Home Sales report at 10:00 AM ET Tuesday morning. This is the least important report of the week, and is the sister report to last week’s Existing Home Sales data. They measure housing sector strength and mortgage credit demand, but usually do not have a significant impact on bond trading or mortgage rates unless they show significant surprises. This report is expected to show an increase in sales, hinting at strength in the new home portion of the housing sector. Ideally, the bond market would prefer to see housing sector weakness because it makes a broader economic recovery more difficult.

Tuesday also brings us the release of February’s Consumer Confidence Index (CCI) during late morning trading. This Conference Board index measures consumer confidence in their personal financial situations, giving us a measurement of consumer willingness to spend. If consumers are feeling good about 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 economy, related data is considered important in terms of gauging economic activity. It is expected to show an increase in confidence from 58.6 in January to 62.0 this month. A lower reading would be considered good news for bonds and mortgage rates since it would indicate consumers are less likely to make a large purchase in the near future.

Fed Chairman Bernanke will deliver the Fed’s semi-annual testimony on the status of the economy late Tuesday and Wednesday mornings. He will be speaking to the Senate Banking Committee Tuesday morning and the House Financial Services Committee Wednesday. Market participants will watch his words very closely. He is required to deliver this testimony twice a year, which is considered to be of extreme importance to the financial markets. We almost always see the markets move as a result of what he says during this testimony. Look for him to address the unemployment and housing sectors along with our budget stalemate and their impact on the overall economy. His testimony begins at 10:00 AM ET with a prepared statement then is followed by Q & A with committee members. I am expecting to see the markets fluctuate greatly Tuesday morning, possibly affecting mortgage rates also. The first day of testimony almost always causes the most volatility because the prepared statement made by the Chairman on the second day usually differs little from that of the first day.

January’s Durable Goods Orders data will be released early Wednesday morning. This report gives us an important measurement of manufacturing sector strength by tracking orders at U.S. factories for items expected to last three or more years. Products such as electronics, refrigerators and autos are examples of these big-ticket items. A larger decline than the 4.0% that is expected would be good news for the bond market and mortgage rates as it would point towards manufacturing sector weakness. This data is known to be quite volatile from month-to-month, so large swings are fairly normal. A small variance from forecasts would not cause much concern or joy in the markets.

The first of two revisions to the 4th Quarter GDP reading is scheduled for release Thursday morning. Analysts’ forecasts currently call for an annual rate of growth of 0.5%, up from the initial estimate of a 0.1% decline that was posted last month. It will be interesting to see where this figure falls and what its impact on the markets will be. Generally speaking, higher levels of activity are bad news for the bond market, while no change or a downward revision would be good news for bonds and could lead to improvements in mortgage pricing Thursday.

Friday has three economic reports scheduled. January’s Personal Income and Outlays data will be released at 8:30 AM ET, which gives us an indication of consumer ability to spend and current spending habits. Current forecasts call for a decline in income of 2.4% while spending is expected to rise 0.2%. The expected sizable decline in income is a result of the 2.6% spike we saw last month in December’s data that was attributed to Fiscal Cliff worries. Many large companies paid dividends and bonuses in December instead of January as they traditionally do in case the Fiscal Cliff issue did not get resolved. This allowed those payments to be taxed at the expected lower rates of 2012 instead of the 2013 rates that would have kicked in had there been no resolution. This means that we will see income fall sharply from December’s inflated level. Lower levels of income men consumers have less money to spend. And weaker levels of consumer spending helps limit overall economic growth, making long-term securities, such as mortgage-related bonds, more attractive to investors.

The University of Michigan’s revision to their Index of Consumer Sentiment for February will be announced just before 10:00 AM ET Friday. Current forecasts show this index unchanged from its preliminary estimate of 76.3. This index is fairly important because it helps us measure consumer confidence that translates into consumer willingness to spend, but is not considered to be a major market mover. This means it will probably not have a significant impact on mortgage rates, especially with other important data being released Friday morning.

The Institute for Supply Management (ISM) will release their manufacturing index for February late Friday morning. This index measures manufacturer sentiment and can have a pretty large impact on the financial and mortgage markets if it varies from forecasts. It is expected to show a small decline from January’s 53.1 to 52.4 this month. This is important because a reading above 50.0 means more surveyed manufacturers felt business improved during the month than those who felt it had worsened, meaning growth is likely in the manufacturing sector. If we see a weaker than expected reading, the bond market could rally. But, a higher than forecasted reading could lead to major selling in bonds, causing mortgage rates to rise Friday morning. One of the reasons this data is considered so important is the fact that it is usually the first monthly report posted that covers the preceding month. Its posting data is the first business day of the month, allowing for a current snapshot of economic conditions.
In addition to this week’s economic reports, there are two relatively important Treasury auctions that may also influence bond trading enough to affect mortgage rates. There will be an auction of 5-year Notes Tuesday and 7-year Notes on Wednesday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. However, strong sales usually make bonds more attractive to investors and bring more funds into bonds. The buying of bonds that follows usually translates into lower mortgage rates.

Overall, I am expecting Tuesday to be the most important day with a couple of economic reports, the first relevant Treasury auction of the week and the first day of Chairman Bernanke’s testimony all scheduled. Friday’s data is considered highly important, so we may see a fair amount of movement in the markets and mortgage pricing that day also. We will also be watching progress on the automatic budget cuts that are scheduled to take effect Friday (March 1st) and the major stock indexes (Dow at 14,000) for direction of mortgage rates. There is little doubt that this will be an extremely active week in the markets and likely mortgage rates too. Therefore, please proceed cautiously if still floating an interest rate and closing in the near future.