Wednesday’s bond market has opened well in negative territory following much stronger than expected economic news. The stock markets weren’t swayed as much as bonds though as the major indexes are mixed. The Dow is currently down 7 points while the Nasdaq has gained 20 points. The bond market is currently down 15/32 (2.51%), which should push this morning’s mortgage rates higher by approximately .250 of a discount point.
The first round of today’s key events was not exactly favorable to the bond market or mortgage rates. We first got the ADP Employment report 8:15 AM ET that showed an increase of 218,000 private-sector payrolls for the company. That was very close to forecasts, but even though it was not a surprise number it still is a decent increase. I personally don’t put much weight into the data, however, it does draw attention in the markets until we get to the monthly government report Friday. Therefore, we should consider the news neutral to slightly negative for mortgage rates, at least until Friday morning when this number will be forgotten.
Today’s major news was the initial reading to the 2nd Quarter Gross Domestic Product (GDP) at 8:30 AM ET. This index is considered to be the benchmark indicator of economic growth or weakness. Today’s release revealed the economy grew at an annual rate of 4.0%, well above the 3.1% that was expected and a significant rebound from the revised 1st Quarter decline of 2.1%. This means that the economy was stronger than many had thought and was clearly negative news for the bond market and mortgage rates.
It is the total of all goods and services that are produced in the U.S. and usually has a great deal of influence on the financial markets. This reading is arguably the single most important report we get regularly. Current forecasts are estimating that the economy grew at a 3.1% annual rate during the second quarter, rebounding significantly from the first quarter’s 2.9% decline. A faster rate of growth should hurt bond prices, leading to higher mortgage rates. But a smaller than expected reading will likely fuel a bond market rally and push mortgage pricing lower since it would indicate the economy was not as strong as many had thought.
Today also has the second of this week’s two Treasury auctions today that may affect mortgage rates. 7-year Treasury Notes are being sold today, following yesterday’s 50year Note auction. Results will be posted at 1:00 PM ET. Yesterday’s auction went pretty well with several indicators points towards a decent level of investor demand. If we get similar results again today, we may see bond prices improve again immediately after. However, it would likely be short-lived because of what is happening an hour later.
The FOMC meeting that started yesterday will adjourn at 2:00 PM ET today. This is not a meeting that will be followed by a press conference with Fed Chair Yellen nor is it expected to yield a change to key interest rates. Theoretically, we would like to hear something in the post-meeting statement that indicates the Fed is not going to raise rates until late next year or 2016. There is a decent chance that this meeting and statement will yield no surprise and have little impact on the markets. However, it is such a key event that draws so much focus from analysts and market participants that just a slight variation in the verbiage can cause a noticeable reaction in the financial and mortgage markets. Look for an update to this report shortly after the markets have an opportunity to react to the statement.
There is some economic data set for release tomorrow, but it is not considered key and will be addressed in this afternoon’s post-FOMC revision.