Tuesday’s bond market has opened well in negative territory, extending yesterday afternoon’s sell-off. The stock markets are pretty calm with the Down down 21 points and the Nasdaq down 9 points. The bond market is currently down 21/32 (2.25%), which should push this morning’s mortgage rates higher by approximately .375 of a discount point if comparing to yesterday’s early pricing.
The Commerce Department released April’s Factory Orders report at 10:00 AM ET this morning, revealing a 0.4% decline in new orders. That was weaker than the no change that analysts were expecting to see, hinting at a softening manufacturing sector. We can consider the data favorable for bonds and rates, but the report is nowhere nearly important enough to offset the negative momentum this morning.
This morning’s bond selling actually started yesterday afternoon and continued into early trading, before the Factory Orders report was released. After hovering below 2.15% for a couple days, the benchmark 10-year Treasury Note yield spiked back above yesterday and has moved farther away this morning. Unfortunately, that is not a good sign for the direction of mortgage rates. If we do not fall and remain below that level, then 2.30 – 2.35% becomes a very realistic possibility. Since mortgage rates tend to follow bond yields, that would be bad news for mortgage shoppers. We do have a very important event Friday (May’s Employment report) that certainly carries enough importance to fuel a rally that drives yields significantly lower. The other side of that point is that an overly strong report could push yields up to that upper range immediately following its release.
Tomorrow has two reports to watch. May’s ADP Employment report is first, set for release before the markets open. It has the potential to cause some movement in the markets if it shows much stronger or weaker numbers than expected. This report tracks changes in private-sector jobs of ADP’s clients that use them for payroll processing. While it does draw attention, it is my opinion that it is overrated and is not a true reflection of the broader employment picture. It also is not accurate in predicting results of the monthly government report that follows a couple days later. Still, because we sometimes see a reaction to the report, we should be watching it. Analysts are expecting it to show that 200,000 new payrolls were added. The lower the number of jobs, the better the news it is for mortgage rates.
Tomorrow’s other relevant report is the Federal Reserve’s Beige Book, which is named simply after the color of its cover. This report details economic conditions throughout the U.S. by Federal Reserve region. It is relied upon heavily by the Fed to determine monetary policy during their FOMC meetings. If it shows surprisingly softer economic activity since the last report, the bond market may thrive and mortgage rates could drop shortly after the 2:00 PM ET release. If it reveals signs of inflation growing or rapidly expanding economic activity in many regions, we could see mortgage rates revise higher this afternoon.