Thursday’s bond market has opened slightly in positive territory following weaker than expected economic news. Stocks have been active this morning but are currently showing gains of 10 points in the Dow and 3 points in the Nasdaq. The bond market is currently up 3/32 (1.99%), which with the post-FOMC gains yesterday should improve this morning’s mortgage rates by approximately .125 of a discount point if comparing to Wednesday’s morning pricing.
The Commerce Department announced at 8:30 AM ET this morning that new Durable Goods Orders fell 5.1% last month, falling well short of the 0.5% decline that was expected. A secondary reading that tracks new orders excluding more volatile and costly transportation-related products, such as new airplanes, slid 1.2% when analysts were calling for a 0.1% decrease. These are good readings for bonds and mortgage rates because they indicate weaker conditions in the manufacturing sector, at least for big-ticket items. This data is known to be quite volatile from month to month, but this was a wide enough margin to positively affect bond trading and mortgage pricing.
Also posted early this morning was last week’s unemployment figures. They showed that 278,000 new claims for unemployment benefits were made last week, down from the previous week’s revised total of 294,000. Since 285,000 is what was forecasted, we should consider the news negative for bonds as the softer number of initial claims hints that the employment sector was a bit stronger last week than many had thought.
We also have today’s 7-year Treasury Note auction to watch. Yesterday’s 5-year Treasury Note auction did not go very well, preventing us from getting too optimistic about today’s sale. If there is a strong demand in today’s auction, we could see bond prices improve during afternoon trading. Results will be posted at 1:00 PM ET, so any reaction will come during early afternoon hours.
Tomorrow has the remaining three reports, starting with what is arguably the single most important economic report that we see regularly. This would be the initial quarterly Gross Domestic Product (GDP) reading. Tomorrow’s release is the first of three versions we will get for the 4th quarter. This data is so important 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. This initial reading will be followed by two revisions, each released approximately one month apart. Last quarter’s first reading, which usually carries the most significance, is expected to show the economy grew at an annual rate of only 0.9%. A noticeably weaker reading would be great news for the bond market, questioning the strength of our economy. That would likely fuel stock selling and a rally in bonds that should push mortgage rates lower. However, a larger than expected increase, indicating the economy was stronger than thought, will probably fuel bond selling and lead to higher mortgage rates.
The second release of the day will be the 4th Quarter Employment Cost Index (ECI), also at 8:30 AM ET. This index measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. If wages are rising, consumers have more money to spend and businesses usually need to charge more for their products and services. The report is considered moderately important and usually has more of an impact on the bond market than the stock markets. Current forecasts are showing an increase of 0.6%. A lower than expected reading would be favorable to bonds and mortgage rates tomorrow, but unless we see a large variance from forecasts and no surprises in the GDP, I am not expecting this report to have much of an influence on rates.
The final economic report of the week is the revised reading to the University of Michigan’s Index of Consumer Sentiment just before 10:00 AM ET. This index is another measurement of consumer confidence that is thought to indicate consumer willingness to spend. I don’t see this data having much of an influence on the markets or mortgage rates unless we see a large revision from the preliminary reading of 92.6. Currents forecasts are showing a 93.2 reading.