Thursday’s bond market has opened in negative territory, extending yesterday’s sell-off. The stock markets are in heavy selling mode with the Dow down 135 points and the Nasdaq down 46 points. Those losses have helped stem bond weakness but the bond market is still down 9/32 (2.58%), which should push this morning’s mortgage rates higher by another .125 of a discount point. This is in addition to yesterday’s afternoon upward move of .250 – .375 of a discount point.
This morning had two pieces of relatively minor economic data posted. The first was last week’s unemployment figures that showed 302,000 new claims for unemployment benefits were filed last week. This was a sizable increase from the previous week’s revised 279,000 initial claims but a little short of the 310,000 that was expected. That makes the data neutral for the bond market and mortgage rates. The large increase is favorable but falling short of expectations, particularly after the previous week’s big drop, offsets any benefit.
Also at 8:30 AM today was the 2nd Quarter Employment Cost Index (ECI) that tracks employer costs for wages and benefits. It came in with a 0.7% increase that was a larger rise than the 0.4% that forecasted. This means that employer costs rose more than many had thought last quarter. Since that is a sign of wage inflation, we should consider the news negative for bonds and mortgage pricing.
While today is fairly light compared to yesterday’s activities and likely welcomed by market participants, tomorrow gets real interesting again because we have four economic reports coming tomorrow morning, including two major releases. The first is the most important report we see each month when the Labor Department posts their monthly Employment report for July. This report gives us the U.S. unemployment rate, number of jobs added or lost during the month and average hourly earnings for July. The best scenario for the bond market is rising unemployment, a sizable loss of jobs and little change in earnings. It is expected to show that the unemployment rate remained at 6.1% last month while approximately 225,000 jobs were added to the economy. Due to the importance of these readings, we will most likely see quite a bit of volatility in the markets and mortgage pricing immediately following their 8:30 AM ET posting.
June’s Personal Income and Outlays data will also be posted early tomorrow morning. This report helps us measure consumer ability to spend and current spending habits. Current forecasts are calling for an increase of 0.4% in income and a 0.4% rise in spending. A larger than expected increase in income means consumers have more funds to spend, which is not favorable to bonds because consumer spending makes up over two-thirds of the U.S. economy. We would like to see declines in spending and income that would indicate economic weakness, but the smaller the increase in each, the better the news for mortgage rates. It is worth noting though that the Employment report will draw more attention than this data will.
Next is July’s University of Michigan Index of Consumer Sentiment just before 10:00 AM ET that will help us measure consumer optimism about their own financial situations. This data is considered relevant because rising consumer confidence usually translates into higher levels of spending that adds fuel to the economic recovery and is looked at as bad news for bonds. Tomorrow’s release is an update to the preliminary reading we saw two weeks ago, so unless we see a drastic revision to the preliminary estimate of 81.3, I think the markets will probably shrug off this data.
And finally, the Institute for Supply Management’s (ISM) manufacturing index for July will be posted at 10:00 AM ET. This index measures manufacturer sentiment by surveying trade executives about business conditions during the month and is considered to be of high importance to the markets. One reason it draws so much attention is that this report is usually the first released each month that tracks the preceding month’s activity. A reading above 50.0 means more surveyed executives felt that business improved this month than those who said it had worsened. June’s reading came in at 55.3, above that important threshold. Tomorrow’s release is expected to show a reading of 55.9, meaning surveyed executives felt business conditions improved from June to July. Ideally, we would like to see a decline as it would point towards a softening manufacturing sector, especially if it gets close to 50.0.
Be prepared for another active day in the markets tomorrow. Most of the movement will likely come during morning trading, but after such a volatile week I would not be surprised to see some movement in the afternoon also as traders wrap up and digest this week’s activity.