Thursday’s bond market has opened in negative territory, giving back some of yesterday’s afternoon rally. The stock markets are mixed with the Dow up 21 points and the Nasdaq down 15 points. The bond market is currently down 11/32 (1.75%), which should push this morning’s mortgage rates higher by approximately .125 of a discount point if comparing to yesterday’s afternoon post-FOMC pricing.
There was only one relevant economic report posted this morning. That was last week’s unemployment numbers at 8:30 AM ET. The release showed that 265,000 new claims for unemployment benefits were filed last week, down considerably from the previous week’s revised 308,000 new claims and well below forecasts of 300,000. It was also the lowest number of weekly filings since April 2000. Because falling claims indicates a strengthening employment sector, this morning’s news was negative for bonds and mortgage rates.
We also have today’s Treasury auctions to watch as they have the potential to influence trading in the broader bond market and possibly affect mortgage rates. The Fed will auction 5-year and 7-year Treasury Notes today. If the sales are met with a strong demand from investors, bonds may improve during afternoon hours. If they draw a lackluster interest, they could lead to bond selling and higher mortgage rates. The 5-year auction results will be posted at 11:30 AM while the 7-year will come at 1:00 PM ET, so any reaction will come during late morning and/or early afternoon hours.
Tomorrow also has three economic reports set for release, 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 posting is the first of three 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 3.2%. A noticeably weaker reading would be great news for the bond market, questioning the pace of economic growth. That would likely fuel stock selling and a rally in bonds that should push mortgage rates lower tomorrow. 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 effect on the bond market than the stock markets. Current forecasts are showing an increase of 0.5%. A lower than expected reading would be favorable to bonds and mortgage rates, 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 tomorrow. This index is a measurement of consumer confidence that is thought to indicate consumer willingness to spend. If consumers are feeling more confident in their financial and employment situations, they are more apt to spend more, fueling economic growth. I don’t see this data having much of an impact on the markets or mortgage rates unless we see a large revision from the preliminary reading of 98.2.