Thursday’s bond market has opened in positive territory even though this morning’s key economic data showed stronger than expected results in its headline reading. The stock markets are mixed with the Dow up 92 points and the Nasdaq down 14 points. The bond market is currently up 10/32 (2.28%), but due to some afternoon weakness yesterday we should see this morning’s mortgage rates at or very close to yesterday’s morning pricing.
The big news of the morning was the preliminary reading of the 3rd Quarter Gross Domestic Product (GDP) at 8:30 AM ET. It revealed that the economy grew at an annual rate of 3.5% from July through September, exceeding forecasts of a 3.0% rate of growth. This means that the economy was stronger than many had thought during the 3rd quarter, but weaker than it was in the 2nd quarter of the year. That makes the headline reading bad news for bonds and mortgage rates. However, a weaker inflation reading and a couple of smaller components within the data were favorable and helped prevent a negative move in bonds.
The second report of the morning was last week’s unemployment figures that showed 287,000 new claims for unemployment benefits were filed. This was an increase from the previous week’s total of 284,000 initial claims, indicating the employment sector softened slightly last week. Because weaker economic conditions make bonds more attractive, we can consider this data slightly positive for mortgage rates.
We also have today’s 7-year Treasury Note auction to watch. Yesterday’s 5-year Note sale was met with poor interest from investors, so we don’t have too much to be overly optimistic about in today’s auction. Another lackluster sale could lead to afternoon weakness in the broader bond market today, possibly causing a slight upward revision to mortgage rates this afternoon. Results will be posted at 1:00 PM ET, so any reaction will come during early afternoon hours.
Tomorrow morning has three reports scheduled that may affect mortgage rates. The first is the 3rd Quarter Employment Cost Index (ECI) at 8:30 AM ET. It is the least important of the day’s three reports. This data tracks employer costs for salaries and benefits, giving us an indication of wage inflation pressures. Rapidly rising costs raises wage inflation concerns and may hurt bond prices. It is expected to show an increase in costs of 0.5%. A smaller than expected increase would be good news for mortgage rates, but this is not one of the more important reports of the week. Accordingly, it will likely take a large variance from forecasts for this report of have a noticeable influence on mortgage pricing.
September’s Personal Income and Outlays report will also be posted early tomorrow morning. This data gives us an indication of consumer ability to spend and current spending habits. It is important 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 bad news for the bond market and mortgage rates because it raises inflation concerns, making long-term securities such as mortgage related bonds less attractive to investors. Analysts are expecting to see a 0.3% increase in income and a 0.1% rise in spending. Smaller than expected increases in both readings would be good news for the bond market and mortgage pricing.
The week’s last report comes just before 10:00 AM ET tomorrow when the University of Michigan updates their Index of Consumer Sentiment for this month. This report is moderately important because it helps us measure consumer confidence, which is believed to indicate consumers’ willingness to spend. Current forecasts show this index remaining at its preliminary reading of 86.4. Good news for mortgage rates would be a sizable decline in the index.