Wednesday’s bond market has opened in positive territory following weaker than expected economic news. The stock markets are showing moderate improvements with the Dow up 47 points and the Nasdaq up 29 points. The bond market is currently up 4/32 (2.23%), which should improve this morning’s mortgage rates by approximately .125 of a discount point.
There was one very important report posted this morning. The Commerce Department gave us April’s Retail Sales report at 8:30 AM ET, announcing no change in overall sales and a 0.1% increase if more volatile auto-transactions are excluded. Both readings were weaker than forecasts of increases of 0.2% and 0.4% respectively. This means consumers spent less last month than many had thought, making the data good news for bonds and mortgage rates because consumer spending makes up a significant portion of our economy.
Later today we have the first of this week’s two Treasury auctions that are likely to affect bond trading and mortgage rates. The Treasury is selling 10-year Notes today and 30 year Bonds tomorrow. Results of the auctions will be posted at 1:00 PM ET each day, so any reaction will come during early afternoon trading. If they are met with a strong demand from investors, we could see bond prices rise enough to cause downward revisions to mortgage rates. However, lackluster bidding in the sales, meaning longer-term securities are losing their appeal, could lead to higher mortgage pricing.
Tomorrow has two pieces of data set for release with one being much more important to mortgage rates than the other. The more important one is April’s Producer Price Index (PPI) at 8:30 AM ET. It helps us track inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, indicating inflation is not a concern at the manufacturing level, we should see the bond market improve. The overall index is expected to rise 0.2%, while the core data that excludes more volatile food and energy prices has been forecasted to rise 0.1%. A decline in the core data will be ideal for mortgage shoppers because inflation is the number one nemesis for long-term securities such as mortgage-related bonds. As inflation rises, longer-term securities become less appealing to investors since inflation erodes the value of those securities’ future fixed interest payments. That is why the bond market tends to thrive in weaker economic conditions with low levels of inflation.
Also at 8:30 AM will be last week’s unemployment update. This is when we will get last week’s new unemployment filings. It is expected to show that 275,000 new claims for benefits were filed last week, up from the previous week’s 265,000 initial claims. Rising claims are an indication of a softening employment sector, so the higher the number of new claims the better the news it is for mortgage rates.