Thursday’s bond market has opened in positive territory despite a couple of unfavorable economic reports. The stock markets are showing losses during early trading with the Dow down 45 points and the Nasdaq down 9 points. The bond market is currently up 15/32 (2.30%), but due to severe weakness late yesterday we will likely see little change in this morning’s mortgage rates if comparing to Wednesday’s early pricing. This morning’s gains more or less have erased yesterday’s afternoon weakness.
We saw the recent selling in bonds kick into high gear yesterday afternoon, pushing the benchmark 10-year Treasury Note yield to close at 2.36% and causing widespread upward revisions to mortgage rates along the way. This was not a result of the Fed Beige Book that was released at 2:00 PM yesterday. The selling had accelerated before that time and the contents of the report were actually more favorable for bonds than negative. It showed that one-third of the Fed districts reported slower economic conditions, which was more than the previous update, indicating some concern about growth. Still, the market seemed to ignore the news as bonds continued their downward spiral (upward in yield).
Both of this morning’s economic reports gave us results that are considered bad news for bonds and mortgage rates. Fortunately, neither report is highly important to the markets, preventing much of a reaction. The 1st Quarter Productivity and Costs revision showed that worker productivity fell 3.1% last quarter and that unit labor costs rose 6.7%. The downward revision to productivity was worse than the -2.9% that was expected and is a sizable change from the preliminary 1.9% decline. The labor costs reading was much higher than the previous estimate of 5.0% and forecasts of 5.9%. This means that productivity was weaker and labor costs were higher than previously thought, making the data negative for bonds and mortgage rates.
The second report of the morning was last week’s unemployment numbers. They revealed that 276,000 new claims for unemployment benefits were filed last week, down from the previous week’s revised total of 284,000. Analysts were expecting to see 280,000. The decline in initial claims hints at a strengthening employment sector, so we should consider this news negative for mortgage rates also.
Tomorrow brings us the release of the almighty monthly Employment report. The Labor Department will post May’s Employment data at 8:30 AM ET tomorrow morning, giving us key employment readings such as the U.S. unemployment rate and the number of jobs added or lost during the month. Analysts are expecting to see the unemployment rate stay at 5.4% with approximately 220,000 jobs added to the economy during the month. A higher than expected unemployment rate and a much smaller number than 220,000 would be great news for the bond market. It would probably create a sizable rally in bonds, leading to lower mortgage rates. However, stronger than expected numbers should cause another round of bond selling and a spike in mortgage rates.