Princeton Capital Blog

This week’s market commentary

September 24th, 2012

This week brings us the release of six relevant economic reports for the bond market to digest in addition to two potentially influential Treasury auctions. Most of the reports are considered to be of moderate to fairly high importance to the markets, so they do have the potential to affect mortgage rates. We also have to consider stock market swings as they also can have a direct impact on bond trading and mortgage pricing, as we have seen over the past few weeks. Generally speaking, stock market strength makes bonds less appealing to investors and leads to higher mortgage pricing. On the other hand, stock weakness often leads to safe-haven investing where investors move funds away from stocks and into bonds to escape the volatility. That translates into higher bond prices and lower mortgage rates.


The first release of the week is September’s Consumer Confidence Index (CCI) late Tuesday morning. This Conference Board index will be posted at 10:00 AM ET and gives us a measurement of consumer willingness to spend. It is expected to show an increase in confidence from last month’s reading, indicating that consumers were more optimistic about their own financial situations than last month, therefore, more likely to make a large purchase in the near future. This is bad news for the bond market and mortgage rates because consumer spending fuels economic growth. Analysts are calling for a reading of approximately 63.0, up from August’s 60.6 reading. The smaller the reading, the better the news for the bond market and mortgage rates.


August’s New Home Sales will be released late Wednesday morning. The Commerce Department is expected to say that sales of newly constructed homes rose last month, indicating housing sector strength. This report will likely not have a noticeable impact on mortgage rates unless its readings differ greatly from forecasts. This is the week’s least important report in terms of potential impact on mortgage rates, partly because it covers the small portion of all homes sales that last week’s Existing Home Sales report did not.


The Treasury will sell 5-year Notes Wednesday and 7-year Notes Thursday, which will tell us if there is an appetite for medium-term securities. If investor demand in these sales is strong, particularly from international buyers, the broader bond market should move higher, pushing mortgage rates lower. But a lackluster interest from investors could lead to bond selling and higher mortgage pricing. The results of the sales will be announced at 1:00 PM ET each day, so any reaction to the results will come during afternoon trading Wednesday and Thursday. Recent sales in these securities have not shown high levels of investor interest, so I do not have high expectations for this week’s auctions.


August’s Durable Goods Orders is the week’s most important data and will be posted early Thursday morning. This report gives us an indication of manufacturing sector strength by tracking orders for big-ticket items at U.S. factories. Big-ticket products are items that are expected to last three or more years. Analysts are expecting to see a sizable drop of 5.1% in new orders, indicating softening conditions in the manufacturing sector. That could help boost bond prices and cause mortgage rates to drop Thursday because signs of economic weakness make longer-term securities more appealing to investors. However, a sizable increase would indicate a stronger than expected manufacturing sector and would likely help push mortgage rates higher. It is worth noting that this data is known to be quite volatile from month-to-month, so a slight or moderate change may not affect mortgage pricing.


Also Thursday morning is the final revision to the 2nd Quarter Gross Domestic Product (GDP). Since this data is aged now and the preliminary reading of the 3rd Quarter GDP will be released next month, I don’t see this revision having much of an impact on the financial markets or mortgage pricing. The GDP is important because it is the total sum of all goods and services produced within the U.S. and is considered the best measurement of economic activity. It is expected to show no change from the previous estimate of a 1.7% increase in the GDP. It will take a fairly large revision for this data to move mortgage rates Thursday.


Friday has two reports scheduled that may influence mortgage rates. The first is August’s Personal Income and Outlays early Friday morning. It gives us an indication of consumer ability to spend and current spending habits. This is relevant to the markets because consumer spending makes up over two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is negative news for the bond market and mortgage rates because it raises inflation and economic growth concerns, making long-term securities such as mortgage-related bonds less attractive to investors. It is expected to show an increase of 0.2% in income and a 0.5% increase in spending. If we see weaker than expected readings, the bond market should react positively, leading to lower rates Friday.


The second report is the University of Michigan’s revised Index of Consumer Sentiment for September. The preliminary reading that was released earlier this month showed a 79.2 reading. Analysts are expecting to see a small downward revision, meaning consumer confidence was slightly weaker than previously thought. As with Tuesday’s CCI release, a lower than expected reading would be good news for bonds and should help improve mortgage rates.


Overall, it is likely going to be a fairly active week in the markets and mortgage rates again. The most important day will likely be Tuesday or Thursday, but Friday’s data can also influence mortgage rates. The best candidate for the calmest day of the week appears to be Monday with no relevant data being released and an improvement in mortgage rates waiting for borrowers due to strength late Friday. I am still looking for stocks to move lower before they move much higher, which would push investor funds into bonds and drive mortgage rates lower. Therefore, I remain optimistic towards mortgage rates, both short and long-term, but still recommend maintaining fairly regular contact with your mortgage professional if still floating an interest rate.

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