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Morning Rate Advisory-May 16, 2013

Thursday’s bond market has opened in positive territory following a batch of favorable economic reports. The stock markets are mixed but relatively calm during early trading with the Dow down 7 points and the Nasdaq up 3 points. The bond market is currently up 12/32, which should improve this morning’s mortgage rates by approximately .125 of a discount point if comparing to yesterday’s morning pricing. As we saw Tuesday, the bond market weakened during afternoon trading yesterday, causing some lenders to revise rates upward. Those losses are preventing more of an improvement in this morning’s pricing than today’s opening strength would usually create.

April’s Consumer Price Index (CPI) was the most important of today’s three economic reports. The Labor Department announced early this morning that the overall CPI reading fell 0.4% last month while the core reading rose 0.1%. Both readings were weaker than what analysts were expecting (-0.2% and +0.2% respectively), indicating inflationary pressures were softer at the consumer level of the economy than many had thought. That makes both good news for the bond market and mortgage pricing.

They also said that 360,000 new claims for unemployment benefits were filed last week, up considerably from the revised total of 328,000 of the previous week. Since this was a sizable upward move and was much higher than the 330,000 initial claims that was forecasted, we should also consider this good news for mortgage rates as it points toward a weakening employment sector.

The final report of the day was April’s Housing Starts. It revealed a 16.5% drop in new home construction starts last month that was much weaker than analysts were expecting to see. That would indicate weakness in the new home part of the housing sector. However, a secondary reading that tracks new permits for future construction starts showed the highest number since June 2008. This data leads us to believe that April was a bad month for new homes, but May and June will likely be much stronger. The conflicting readings offset each other, leaving the other two reports to drive bond trading and mortgage pricing this morning.

Tomorrow has the remaining two pieces of economic data scheduled for release. They both will come during late morning trading tomorrow and neither is considered to be highly important. The first is May’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment just before 10:00 AM ET. 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 78.5, which would be an increase from April’s final reading of 76.4, indicating consumers are more confident and more likely to spend than they were last month. If it shows a large decline in consumer confidence, bond prices could rise and mortgage rates would likely move slightly lower because waning confidence means consumers are less apt to make a large purchase in the near future.

The week closes with the release of April’s Leading Economic Indicators (LEI) at 10:00 AM ET. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.3% increase from March’s reading, meaning that economic activity is likely to strengthen slightly over the next few months. A decline would be good news for the bond market and mortgage rates, while an increase could cause mortgage rates to inch higher tomorrow.