Mortgage Market Update

Monday’s bond market has opened in negative territory again, extending Friday’s sell-off. The stock markets are mixed with the Dow down 16 points and the Nasdaq up 5 points. The bond market is currently down 11/32, pushing the yield on the benchmark 10-year Treasury Note to 1.99%. This will cause another increase in mortgage rates, raising the increase since Friday’s morning pricing.

December's Durable Goods Orders report was posted by the Commerce Department at 8:30 AM this morning. It showed a much larger than expected increase in new orders for big-ticket products with a 4.6% jump that was nearly triple forecasts. Even the secondary reading that excludes more volatile transportation-related orders such as new airplanes showed a 1.3% increase when it was expected to remain flat from November’s orders. This indicates a stronger and growing manufacturing sector, making the data negative for the bond market and mortgage rates.

The rest of the week is packed with economic reports and other events that are relevant to bond trading and mortgage rates. There are seven more pieces of monthly or quarterly economic data scheduled with at least one being posted each day. In addition to those reports, there is also a two-day FOMC meeting and a couple of Treasury auctions that have the potential to affect bond trading enough to slightly move rates.

Tomorrow’s only relevant economic data is January's Consumer Confidence Index (CCI) at 10:00 AM ET. This report is considered to be of moderate to high importance to the bond market and therefore can move mortgage rates if it shows any surprises. It is an indicator of consumer sentiment, which is important because waning confidence in their own financial situations usually means that consumers are less willing to make large purchases in the near future. Because consumer spending makes up over two-thirds of the U.S. economy, market participants are very attentive to related data. Analysts are expecting to see little change from December's reading, indicating consumer confidence was flat. A reading much smaller than the expected 65.1 would be ideal for the bond market and mortgage rates. A higher reading than forecasts would hint that consumers are more likely to spend in the immediate future, fueling economic growth and possibly pushing mortgage pricing higher tomorrow.

Also, the Fed will auction 5-year Treasury Notes tomorrow, followed by 7-year Notes on Wednesday. If the sale was met with a strong demand from investors, the broader bond market may improve during afternoon hours tomorrow. If it drew a lackluster interest, we could see more bond selling and higher mortgage rates after the results are posted at 1:00 PM ET tomorrow.

Overall, this is a highly active week that will likely bring plenty of volatility to the markets and mortgage rates. It is difficult to say exactly which day will probably have the most movement in mortgage rates, but Wednesday and Friday are certainly the best candidates. Wednesday has the GDP and FOMC meeting while Friday’s agenda includes two highly important releases in the Employment and ISM reports. The remaining days are all equally important for mortgage rates.

Mortgage Market Update

This week brings us the release of only three pieces of monthly economic data for the markets to digest, but none of them are considered to be highly important for mortgage rates. It is a shortened trading week with the stock and bond markets closed today in observance of the Martin Luther King Jr. holiday. The financial and mortgage markets will reopen Tuesday morning for regular trading hours. 

The week’s first relevant economic report comes late Tuesday morning when the National Association of Realtors posts December's Existing Home Sales. This data will give us a measurement of housing sector strength and mortgage demand by tracking home resales. It is expected to show an increase in sales of approximately 1.0%, meaning the housing sector strengthened a little last month. That would be considered negative news for the bond market and mortgage rates because a strengthening housing sector makes a broader economic recovery more likely. However, as long we don’t see a significant surprise in its results, it shouldn’t have a noticeable impact on Tuesday’s mortgage rates.

December’s Leading Economic Indicators (LEI) is the next report scheduled for release. It will be posted at 10:00 AM ET Thursday morning by the Conference Board, who is a New York-based business research group. It attempts to predict economic activity over the next several months, but since it is compiled and posted by a non-governmental agency, it is not considered to be of high importance to the financial and mortgage markets. Thursday’s release is expected to show a 0.5% increase, meaning the indicators are predicting a moderate increase in economic activity this spring. Theoretically, that would be bad news for mortgage rates because long-term securities such as mortgage-related bonds tend to do better in weaker economic conditions. However, as long as we don’t see a much stronger than predicted increase, I don’t think this data will have much of an influence on mortgage pricing.

The third and final relevant report of the week is December's New Home Sales report late Friday morning. It is considered to be the sister release to last week's Existing Home Sales, giving us a small snapshot of housing sector strength. It tracks a much smaller portion of home sales than last week's report did and is forecasted to show an increase in sales of newly constructed homes. However, this data is not important enough to heavily influence mortgage pricing unless it varies greatly from forecasts.

Overall, it appears that we may have a fairly quiet week ahead of us in the mortgage market. That is unless we see something drastic happen in stocks. The major stock indexes closed last week at their highest levels in 5 years, which leads me to believe they may be ready for another pullback. We have some major corporate earnings news this week from companies such as Apple, IBM and Google to name a few that could heavily sway stock trading. Weaker than expected earnings and/or outlooks in some of the key earnings reports should cause stocks to drop and investor funds to move into bonds, leading to lower mortgage rates. On the other hand, good news in those earnings releases could extend the recent stock rally, drawing funds away from bonds. The latter would likely cause mortgage rates to move higher this week. I am holding the short and mid-term lock recommendations for the time being, but am prepared to shift to a less conservative position if the major stocks indexes start to move lower.

Mortgage Market Update

Monday’s bond market has opened in positive territory with nothing significantly newsworthy to drive trading and stocks opening in negative ground. The Dow is currently down 6 points while the Nasdaq has lost 13 points. The bond market is currently up 7/32, which in addition to strength late Friday should improve this morning’s mortgage rates by approximately .250 of a discount point over Friday’s morning pricing.

There is nothing of relevance to mortgage rates scheduled for release today. However, Fed Chairman Bernanke will speak at the University of Michigan at 4:30 PM ET today. The topic will be the economy and monetary policy, so there is a decent possibility of his words affecting the markets. But since the event is taking place after regular trading hours, we won’t be able to see how the markets react to whatever is said until tomorrow morning.

The rest of the week beings us the release of seven economic reports that are relevant to mortgage rates, with some of the data considered to be highly important. The first of them will be posted early tomorrow morning. The Commerce Department will release December's Retail Sales data at 8:30 AM ET. This Commerce Department report measures consumer spending by tracking sales at retail level establishments in the U.S. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched closely. Current forecasts are calling for an increase in sales of approximately 0.2%. A smaller than expected increase in sales would be good news for bonds and mortgage rates because it would hint at weaker than thought economic growth.

Tomorrow’s second report is the Labor Department's Producer Price Index (PPI), also at 8:30 AM ET. The PPI is important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. Analysts are expecting to see no change in the overall reading and a 0.2% increase in the more important core reading that excludes volatile food and energy prices. A larger than expected increase in the core reading could mean higher mortgage rates tomorrow since inflation is the number one nemesis of the bond market. It erodes the value of a bond's future fixed interest payments, making them less attractive to investors. Accordingly, they are sold at a discount to offset the drop in value, which drives their yields higher. And since mortgage rates follow bond yields, rising inflation usually translates into higher interest rates for borrowers.

Overall, tomorrow or Wednesday will probably be the most active day for mortgage rates with some key economic data being posted both days. The least active day will probably be today or Thursday.