This Week’s Market Commentary

This Week’s Market Commentary

September 30, 2013

This week brings us the release of only three monthly economic reports that are likely to influence mortgage rates. However, two of those three releases are extremely important to the financial and mortgage markets and can cause significant movement in mortgage rates if they show surprises. We also have the pending government shutdown early this week that will influence trading and could affect two of those scheduled economic releases.

There is nothing of importance scheduled for release Monday in terms of economic data. However, it will still be an interesting day because it appears that a deal in Washington D.C. to avoid a government shutdown is not going to happen. This means that many government operations will come to a halt at midnight ET Monday evening. While that is a problem outside the mortgage world, it also should be noted that there are some specific problems to mortgage shoppers. As of Tuesday, most government mortgage loans (FHA/USDA) would come to a standstill but VA loans should not be affected unless the shutdown turns into an extended period. All conventional loans should proceed without issue. And it is my understanding that the National Flood Insurance Program will not be affected by a temporary shutdown either.

Still, the impact on the financial and mortgage markets could be significant. It is widely believed that a shutdown cannot be avoided at this point, so we can expect to see the markets open Monday reflecting that result. Also complicating matters is the fact that a shutdown means we will not get the economic reports that are compiled and posted by government agencies this week, one of which is extremely important to the markets. That would be Friday’s monthly employment report from the Labor Department.

Tuesday has the first report of the week when the Institute for Supply Management (ISM) posts their manufacturing index for September at 10:00 AM ET. The ISM is not a governmental agency, so the shutdown will not impact this release. The index measures manufacturer sentiment and it can be highly influential on the markets and mortgage rates. Analysts are expecting to see a small decline from August’s 55.7 reading, meaning surveyed manufacturers felt business conditions worsened from the previous month. The 50.0 benchmark is extremely important since a reading below that level means more surveyed executives felt business worsened in the month than those who said it had improved. This data is important not only because it measures manufacturer sentiment, but it is also very recent data. Some economic releases track data that is 30-60 days old, but the ISM index is only a few weeks old. Actually, it is the first report that we see each month. If it reveals a reading below 55.1, meaning sentiment fell short of expectations, we should by theory see the bond market move higher and mortgage rates fall Tuesday.

Wednesday’s monthly economic data will come from the Commerce Department, who are set to post August’s Factory Orders data at 10:00 AM ET. This manufacturing sector report is similar to last week’s Durable Goods Orders release, but also includes orders for non-durable goods. It can impact the bond market enough to slightly change mortgage rates if it varies from forecasts by a wide margin. Analysts are forecasting a 0.3% increase in new orders, meaning manufacturing activity grew slightly in August. Good news for the bond market and mortgage pricing would be a sizable decline in orders.

The Labor Department is scheduled to post September’s Employment report early Friday morning. This report will reveal the U.S. unemployment rate, number of new payrolls added or lost during the month and average hourly earnings. These are considered to be very important readings of the employment sector and can have a huge impact on the financial markets. The ideal scenario for the bond market is rising unemployment, falling payrolls and a drop in earnings.

If we do see this report and it gives us weaker than expected readings, bond prices should move higher and mortgage rates should move lower Friday. However, stronger than forecasted readings could cause a sizable spike in mortgage pricing and erase the improvement in rates since the Fed opted to delay tapering their bond purchases. Analysts are expecting to see the unemployment rate remain at 7.3%, an increase of 183,000 new jobs from August’s level and a 0.2% increase in earnings.

Overall, I am expecting to see a good amount of volatility in the markets and mortgage rates this week. Based on an economic calendar, Tuesday and Friday are the key days but the impasse in Washington puts into question whether we will even see some of that data let alone if it will be the biggest influence on this week’s trading. Monday is likely to be an extremely active day barring a last minute trick during early trading to avoid the shutdown Monday night. Tuesday will also be a key day with the ISM index, regardless of the outcome in Washington. The rest of the week’s data is in limbo, so it is difficult to make a prediction beyond that point. Accordingly, it would be prudent to maintain fairly constant contact with your mortgage professional this week if still floating an interest rate as we may see significant moves multiple days.

This Week’s Market Commentary

September 23, 2013

This week brings us the release of six relevant economic reports for the bond market to digest in addition to two potentially influential Treasury auctions. Most of the reports are considered to be of moderate to fairly high importance to the markets, so they do have the potential to affect mortgage rates although I am expecting to see less volatility in the financial and mortgage markets than we saw last week.

The first release of the week is September’s Consumer Confidence Index (CCI) late Tuesday morning. This Conference Board index will be posted at 10:00 AM ET and gives us a measurement of consumer willingness to spend. It is expected to show a decline in confidence from last month’s reading, indicating that consumers were less optimistic about their own financial situations than last month, therefore, less likely to make a large purchase in the near future. This is good news for the bond market and mortgage rates because consumer spending fuels economic growth. Analysts are calling for a reading of approximately 80.0, down from August’s 81.5 reading. The smaller the reading, the better the news it is for the bond market and mortgage rates.

August’s Durable Goods Orders is the week’s most important data and will be posted early Wednesday morning. This report gives us an indication of manufacturing sector strength by tracking orders for big-ticket items at U.S. factories. Big-ticket products are items that are expected to last three or more years such as electronics and appliances. Analysts are expecting to see a small increase of 0.4% in new orders, indicating minor growth in the manufacturing sector. A sizable decline could help boost bond prices and cause mortgage rates to drop Wednesday because signs of economic weakness make longer-term securities more appealing to investors. However, a sizable increase would indicate a stronger than expected manufacturing sector and would likely help push mortgage rates higher. It is worth noting that this data is known to be quite volatile from month-to-month, so a slight or moderate change may not affect mortgage pricing.

August’s New Home Sales will be released late Wednesday morning. The Commerce Department is expected to say that sales of newly constructed homes rose last month, indicating housing sector strength. This report will likely not have a noticeable impact on mortgage rates unless its readings differ greatly from forecasts. This is the week’s least important report in terms of potential impact on mortgage rates, partly because it covers only the small portion of all homes sales that last week’s Existing Home Sales report did not.

The Treasury will sell 5-year Notes Wednesday and 7-year Notes Thursday, which will tell us if there is an appetite for medium-term securities. If investor demand in these sales is strong, particularly from international buyers, the broader bond market should move higher, pushing mortgage rates lower. But a lackluster interest from investors could lead to bond selling and higher mortgage pricing. The results of the sales will be announced at 1:00 PM ET each day, so any reaction to the results will come during afternoon trading Wednesday and Thursday.

Thursday morning has the final revision to the 2nd Quarter Gross Domestic Product (GDP). Since this data is aged now and the preliminary reading of the 3rd Quarter GDP will be released next month, I don’t see this revision having much of an impact on the financial markets or mortgage pricing. The GDP is important because it is the total sum of all goods and services produced within the U.S. and is considered the best measurement of economic activity. It is expected to show no change from the previous estimate of a 2.5% increase in the GDP. It will take a fairly large revision for this data to move mortgage rates Thursday.

Friday has two reports scheduled that may influence mortgage rates. The first is August’s Personal Income and Outlays early Friday morning. It gives us an indication of consumer ability to spend and current spending habits. This is relevant to the markets because consumer spending makes up over two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is negative news for the bond market and mortgage rates because it raises inflation and economic growth concerns, making long-term securities such as mortgage-related bonds less attractive to investors. It is expected to show an increase of 0.4% in income and a 0.2% increase in spending. If we see weaker than expected readings, the bond market should react positively, leading to lower rates Friday.

The second report of the day is the University of Michigan’s revised Index of Consumer Sentiment for September. The preliminary reading that was released earlier this month showed a 76.8 reading. Analysts are expecting to see a small upward revision, meaning consumer confidence was slightly stronger than previously thought. As with Tuesday’s CCI release, a lower than expected reading would be good news for bonds and should help improve mortgage rates.

Overall, I don’t see an obvious choice for most important day of the week but Wednesday does have two economic reports scheduled including the most important of the six. So, let’s label it as likely to be most active although Friday does have two reports scheduled also. The least important day will probably be Monday with nothing of relevance scheduled. I suspect we will see changes in mortgage rates multiple days this week, but in small increments rather than sizable moves.

Daily Commentary for 09/18/13

WEDNESDAY AFTERNOON UPDATE:
This week’s FOMC meeting has adjourned with no change to key short-term interest rates, which was widely expected. However, the big surprise came in the announcement that the Fed was not ready to start tapering their bond buying programming, deciding to maintain the current pace of $85 billion a month. That was certainly not expected by the majority of market traders and analysts, who were calling for a reduction of somewhere between $5 billion and $20 billion a month and keeping the timetable of ending the program altogether mid-2014. I can say I am a little surprised at the decision, although I was predicting a small token reduction instead of a big move. But, the basis they are using for not adjusting their purchases is exactly what I used on my prediction….. that while economic conditions did improve over the summer months, it was at a slower pace than the Fed was expecting to see and weaker than what was needed to make a significant downward revision to the amount of bonds being purchased under QE3.

There is so much to address from this afternoon’s events and so little room to post it. To summarize what happened, the Fed decided not to adjust their bond buying schedule and did not set an estimated date for that to happen. Yes, this more or less kicks the can down the road to be dealt with at the next FOMC meeting or the following one. Chairman Bernanke and friends appear to be more concerned about the economy sustaining growth on its own than they did before, so a delay in removing any stimulus is warranted. They also revised lower some economic growth predictions and indicated that 12 of the 17 FOMC members that were at this meeting now feel that key short-term interest rates will remain at current levels until 2015. The news was taken as extremely positive for stocks and bonds. The Dow rose to a new record high, currently up 130 points while the Nasdaq has risen 35 points. The bond market is currently up 37/32, which should cause an intra-day improvement to mortgage rates of approximately .375 - .625 of a discount point.

August's Housing Starts was posted early this morning, revealing a 0.9% increase in new construction starts of housing projects. This was a bit lower than expectations, hinting at a weaker than thought new home portion of the housing sector. However, the variance was not significant considering the report is only moderately important to the markets. That has prevented the data from having much of an impact on today’s bond trading or mortgage pricing.

Tomorrow has three pieces of economic data set for release, but none of them are considered to be highly important so I would not be surprised to see this afternoon’s rally extend into morning trading. The first report will come from the Labor Department at 8:30 AM ET when they will give us last week’s unemployment numbers. They are expected to announce that 340,000 new claims for unemployment benefits were filed last week. This would be a significant jump from the previous week’s 292,000 initial claims, but this much of a move was expected due to complications in last week’s report. The Labor Day holiday affected numbers because government offices were closed and rumors that two states did not get all claims reported due to technical issues lead us to believe we will see a large correction in this week’s release. Because of the uncertainty, tomorrow’s release will likely have even less impact on the markets than it usually does, which often is minimal.

The second and third reports of the day will be released at 10:00 AM ET. The second report is August's Existing Home Sales from the National Association of Realtors. This report will give us an indication of housing sector strength by tracking home resales. It is expected to show a small decline from July's sales, however, this data probably will be neutral towards mortgage pricing unless its results vary greatly from forecasts.

The Conference Board will post its Leading Economic Indicators (LEI) for August at 10:00 AM tomorrow. The LEI index attempts to measure economic activity over the next three to six months. It is expected to show a 0.6% increase, meaning that it is predicting moderate growth in economic activity over the next several months. A larger increase would be considered negative news for bonds and could lead to a minor increase in mortgage rates tomorrow.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Float if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now...

This Week’s Market Commentary

This Week’s Market Commentary

September 9, 2013

This week brings us the release of only three pieces of monthly economic data in addition to two Treasury auctions that have the potential to affect mortgage rates. Despite the low number of reports, we still will likely see a fair amount of movement in the markets and mortgage pricing due to the importance of those economic reports and the likelihood of the Syria issue being in the spotlight with congress coming back into session. The economic data is set for late in the week and the Treasury auctions will take place mid-week. It is hard to say that exactly which day a vote will come in Congress on how to respond to what happened in Syria, but we can expect it to be in the forefront of the news media and on traders’ minds.

There is nothing of relevance scheduled to be posted or announced Monday, Tuesday or Wednesday morning with possible exception to news out of Washington regarding the Congressional proceedings. In the absence of anything on the schedule, look for the stock markets to affect bond trading and mortgage pricing early this week. As long as no major news or events transpire, stock strength will probably lead to bond weakness and higher mortgage rates. If the major stock indexes fall from current levels, bond prices should rise, pushing mortgage rates lower.

There are two Treasury auctions this week that have the potential to influence mortgage rates. The first is Wednesday’s 10-year Treasury Note auction, which will be followed by a 30-year Bond auction Thursday. It is fairly common to see some weakness in bonds before these sales as investors prepare for them. If the sales are met with a decent demand from investors, indicating that interest in longer-term securities such as mortgage-related bonds is strengthening, the earlier losses are usually recovered after the results are announced. The results of each sale will be posted at 1:00 PM ET of auction day. If demand was strong, particularly from international investors, we should see mortgage rates improve during afternoon trading Wednesday and Thursday. However, weak levels of interest could lead to broader selling in the bond market that could push mortgage rates higher.

Friday morning has all three pieces of economic data scheduled with two of them considered to be major releases. Those highly important reports are August’s Retail Sales and Producer Price Index (PPI), both of which will be posted at 8:30 AM Friday. The sales report from the Commerce Department will give us a very important measurement of consumer spending, which is extremely relevant to the markets because it makes up over two-thirds of the U.S. economy. Current forecasts are calling for a 0.4% increase in sales. Analysts are also calling for a 0.3% rise in sales if more volatile auto transactions are excluded. Larger than expected increases would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate economic growth.
The Labor Department will post August’s Producer Price Index (PPI), giving us an important measurement of inflationary pressures at the producer level of the economy. There are two readings that analysts follow in this release. They are the overall index and the core data reading. The core data is the more important of the two since it excludes more volatile food and energy prices. Analysts are predicting a 0.2% increase in the overall index and a rise of 0.1% in the core data. Stronger than expected readings could fuel inflation concerns in the bond market. That would be bad news for bonds and mortgage rates because inflation is the number one nemesis of the bond market as it erodes the value of a bond’s future fixed interest payments. As inflation becomes more of a concern in the markets, bonds become less appealing to investors, leading to falling prices, rising yields and higher mortgage rates.

The last release of the week will be posted by the University of Michigan late Friday morning. Their Index of Consumer Sentiment will give us an indication of consumer confidence, which projects consumer willingness to spend. If a consumer’s confidence in their own financial situation is rising, they are more apt to make large purchases in the near future. But, if they are growing more concerned about their job security or finances, they probably will delay making that large purchase. This influences future consumer spending data and therefore, impacts the financial markets. It is expected to show a reading of 82.0 that would mean confidence was nearly unchanged from August’s level of 82.1. That would be considered slightly favorable news for bonds and mortgage rates. Good news for mortgage shoppers would be a sizable decline in the index.

Overall, Friday is the best candidate to be labeled most important day with all of the week’s economic data scheduled, but we could see noticeable movement in rates multiple days. It is unlikely that we will get a vote in Congress on Syria during business hours Monday, so with nothing else scheduled for release it looks to be the least important day of the week. The Treasury auctions raise the possibility of afternoon volatility in the middle part, although I would not be surprised to see afternoon changes to mortgage pricing other days also. With the FOMC meeting looming next week, any surprises this week will affect theories about what the Fed will do regarding their current bond buying program and lead to noticeable changes in the markets. Therefore, if still floating an interest rate and closing in the near future, I strongly recommend maintaining contact with your mortgage professional the entire week.