First Mortgage Blog

Thursday’s bond market has opened in positive territory, extending yesterday’s late rally.

The stock markets are following suit with gains of their own. The Dow is currently up 62 points while the Nasdaq has gained 12 points. The bond market is currently 11/32, which should improve this morning’s mortgage rates by another .250 of a discount point. Overall, between yesterday afternoon’s and this morning’s improvements, we should see today’s rates approximately .500 - .625 of a discount lower than yesterday’s morning pricing.

The bond rally since yesterday afternoon is what we have been waiting for. I still believe that the stock markets are due for a pullback sooner than later and that could bring more funds into the bond market. The question is when exactly that pullback will come. Ideally, we would see it in the immediate future, such as tomorrow or early next week. If it does happen, I see a lot of money being shifted into bonds as a safe-haven. That would likely lead to another downward move for mortgage rates. However, we should proceed cautiously in the meantime if still floating an interest rate.

We had four economic reports posted this morning. The first was December's Durable Goods Orders at 8:30 AM ET that revealed a 3.0% jump in new orders for big-ticket products at U.S. manufacturing facilities. This was a larger increase than was forecasted, meaning a stronger manufacturing sector. That would make the news negative for bonds and mortgage rates, but it is apparent that the markets weren’t too concerned about the news.

The Labor Department said early this morning that 377,000 new claims for unemployment benefits were filed last week, up from the previous week’s revised total of 356,000. This is favorable news for the bond market because it indicates a weakening employment sector. However, forecasts were calling for 375,000 new claims, so today’s bond strength is not a result of this data.

December's New Home Sales report was posted at 10:00 AM ET. The Commerce Department reported that sales of newly constructed homes fell 2.2% last month when analysts were expecting to see an increase by the same margin. This shows that the new home portion of the housing sector remains weak. This is generally good news for the bond market, but this data tracks such a small portion of all home sales that it usually does not draw much attention unless it its results vary greatly from forecasts.

The last report of the day was December’s Leading Economic Indicators (LEI) at 10:00 AM ET. The Conference Board announced a 0.4% increase, meaning that they are expecting the economy to expand moderately over the next three to six months. But since analysts were expecting to see a 0.7% rise, we can consider this data favorable for bonds and mortgage rates. Unfortunately, it is not considered to be one of the more important reports we see each month.

There is also today’s 7-year Note auction that we should watch for. Yesterday’s 5-year Note sale was met with a pretty strong demand from investors. If today’s auction has similar results, we could see bond prices rise slightly this afternoon. I don’t believe this, by itself, will lead to a sizable improvement in rates. But it a strong demand for the securities should help boost the broader bond market after the results are posted at 1:00 PM ET.

That is not the case for one of tomorrow’s economic reports. The first of two reports being released tomorrow morning is the initial reading of the 4th Quarter Gross Domestic Product (GDP). This data is extremely important to the markets because it is considered to be the best measurement of economic activity. The GDP itself is the total sum of all goods and services produced in the United States. Its results usually have a major impact on the financial markets and can cause significant changes in mortgage rates. There are three readings to each quarter's activity, each released approximately one month apart. The first reading, which usually carries the most significance, is expected to show that the economy grew at an annual rate of 3.2%. A noticeably weaker reading would be great news for the bond market, questioning the pace of the economic recovery. That would likely fuel stock selling and a rally in bonds that would push mortgage rates lower tomorrow morning. However, a stronger than expected reading should fuel bond selling and higher mortgage rates.

The last report of the week is the revised reading to the University of Michigan's Index of Consumer Sentiment. This index is a measurement of consumer confidence that is thought to indicate consumer willingness to spend. If confidence is rising, consumers are more apt to make large purchases in the near future. Since consumer spending makes up two thirds of the U.S. economy, any related data is watched closely. I don't see this data having much of an impact on the markets or mortgage rates due to the importance of the GDP reading. Forecasts are calling for a reading of 74.2, up slightly from January’s preliminary reading of 74.0.

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