Mortgage Market Update

Wednesday’s bond market opened in negative territory, despite weaker than expected housing news. The major stock indexes fluctuated in early trading, but the Dow and Nasdaq are both currently showing a loss of approximately 10 points. The bond market is currently down 12/32, but we will still likely see a slight improvement in this morning’s mortgage pricing due to strength in bonds late yesterday.

The National Association of Realtors said late this morning that home resales fell 0.8% last month, indicating further housing sector weakness. Analysts were expecting an increase in sales, making this good news for the bond market and mortgage rates. Unfortunately, it appears that bond traders aren’t too impressed by the data.

Tomorrow has two economic reports scheduled for release, neither of which is considered to be highly important. The first will come at 8:30 AM ET when the Labor Department gives us last week’s unemployment figures. They are expected to announce that 411,000 new claims for unemployment benefits were filed last week. This would be an increase from the previous week, making it favorable news for the bond market and mortgage rates. The higher the number of new claims, the better the news for mortgage pricing. However, since this report tracks only a single week’s worth of initial claims, it likely will not heavily influence the markets or mortgage rates unless it shows a sizable drop or spike in new claims.

June's Leading Economic Indicators (LEI) will be posted at 10:00 AM tomorrow morning. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of moderate importance to the bond market. It is expected to show a 0.3% increase, meaning that we may see a gain in economic activity over the next few months. A smaller rise in the index, or better yet a decline, would be good news for the bond and mortgage markets.

Mortgage Market Update

Tuesday’s bond market has opened in positive territory again as weakness in overseas markets continues to lead to finds being moved into the safety of bonds. The stock markets are showing weakness, but are much better than yesterday.

May's Goods and Services Trade Balance report was posted this morning, revealing a $50.2 billion trade deficit. This was its highest level since October 2008 and well above forecasts of $44.0 billion. A good portion of the increase is being attributed to higher oil prices in May, but the data can still be considered favorable for the bond market. However, this data is a little aged now and does not carry the importance that many of the other reports we see each month. Therefore, it has had little impact on today’s mortgage pricing.

Later today, we will get to take a peek at the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following their 2:00 PM ET release, especially if they show any surprises or hints of a move by the Fed anytime soon. Many analysts use these minutes to help them form their own predictions of when the Fed will do something to help boost or contract economic activity. They often show no surprises and accordingly, have little influence on afternoon trading and mortgage rates.

Yesterday afternoon’s earnings release by Dow-component Alcoa showed better than expected results. It is only one of many companies to release earnings in the coming weeks, but if the majority of them also show strong earnings despite the economy slowing, we could see stock prices move higher and bonds prices drop lower. That could lead to higher mortgage rates as the flight-to-safety gains in bonds of the past couple days could be quickly erased again.

There is no relevant economic data scheduled for release tomorrow, but Fed Chairman Bernanke will present his semi-annual update about the economy and monetary policy before Congress. He will speak before the House Financial Services Committee tomorrow and the Senate Banking Committee Thursday, each at 10:00am ET. His testimony will be broadcast and watched very closely. Analysts and traders will be looking for the status of the economy and his expectations of future growth, particularly inflation and unemployment concerns that will lead to changes in key short-term interest rates. This should create a great deal of volatility in the markets during the prepared testimony and the question and answer session that follows. If he indicates that inflation may become a point of concern or anything that hints at rapid economic growth, we can expect to see the bond market fall and mortgage rates rise Wednesday.

We usually see the most movement in the markets and mortgage rates during the first day of this testimony as the Chairman's prepared words for both appearances are quite similar to each other, meaning that the second day of testimony rarely gives us anything we did not hear during the first day. The general exception is something asked or answered during the Q&A portion of the second day's appearance.

Tomorrow also has the first of the two important Treasury auctions when 10-year Notes will be sold. That sale will be followed by a 30-year Bond auction Thursday. These sales can influence market trading in bonds and possibly affect mortgage rates. If the sales are met with a strong demand from investors, particularly tomorrow's sale, we should see afternoon improvements in bonds that could lead to downward revisions to mortgage rates.