Thursday’s bond market has opened in negative territory even though today’s only relevant economic data gave us favorable results. The stock markets are mixed but fairly calm with the Dow up 48 points and the Nasdaq down 1 point. The bond market is currently down 5/32 (1.7%), which should keep this morning’s mortgage rates close to Wednesday’s levels.
Yesterday’s 10-year Treasury Note auction went very well. The benchmarks we use to gauge investor demand showed a strong level of investor interest in the securities. That helps us to be optimistic about today’s 30-year Bond auction. Results will be posted at 1:00 PM ET, so any reaction will come during early afternoon trading. Another strong sale should help boost bond prices this afternoon, possibly leading to a slight improvement in rates before the end of the day. However, a weak level of interest could pressure bonds later today.
Last week’s unemployment figures were posted at 8:30 AM ET this morning. They showed that 294,000 new claims for unemployment benefits were field last week, up noticeably from the previous week’s 274,000. Analysts were expecting to see a small decline in initial claims, meaning the employment sector was softer than thought last week. That makes the data good news for bonds and mortgage rates, but since this is only a weekly snapshot its impact on today’s rates has been minimal.
Tomorrow has three pieces of economic data for the markets to digest, two of which are considered to be highly important. The first will be April’s Retail Sales at 8:30 AM ET. This is an extremely important report for the financial markets since it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so this data can have a pretty significant impact on the markets. Current forecasts are calling for a 0.8% increase in sales from March to April. A weaker than expected level of sales should push bond prices higher and mortgage rates lower tomorrow morning as it would signal that economic activity may not be as strong as thought. However, an unexpected increase could fuel concerns of economic growth that would lead to stock buying and bond selling, pushing mortgage rates higher.
April’s Producer Price Index (PPI) will also be released at 8:30 AM ET tomorrow. 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 0.3%, 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 one of the reasons why the bond market tends to thrive in weaker economic conditions with low levels of inflation.
May’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will close out the week’s calendar just before 10:00 AM ET tomorrow. This index measures consumer willingness to spend, which relates to consumer spending. If consumers are more confident in their own financial situations, they are more apt to make large purchases in the near future. This report usually has a moderate impact on the financial markets though, because it is not exactly factual data. It is expected to show a reading of 89.7, which would be an increase from April’s final reading of 89.0, indicating consumers are more confident than last month. If it shows a large decline in consumer confidence, bond prices could rise and mortgage rates would move slightly lower because waning confidence means consumers are less apt to make a large purchase in the near future. I suspect that the earlier reports will draw the most attention and have the bigger impact on mortgage rates.