Princeton Capital Blog

This Week’s Market Commentary

July 22nd, 2012

This week brings us only four pieces of economic data that have the potential to influence mortgage rates in addition to two Treasury auctions. We are also still in earnings season, so any surprises in the corporate releases could affect stock and bond trading, leading to changes in mortgage rates.

There is nothing of significance in terms of economic releases due out Monday or Tuesday except for a couple of regional manufacturing reports that usually don’t have an impact on mortgage pricing. Look for stocks to be the biggest influence on bond trading and mortgage rates those days. Stock strength will likely translate into bond weakness and slightly higher mortgage rates. On the other hand, if the week starts off with stocks in selling mode, we could see mortgage rates move lower early this week.

June’s New Home Sales starts the week’s economic releases late Wednesday morning. This Commerce Department report gives us a measurement of housing sector strength and mortgage credit demand. Analysts are expecting it to show a small increase in sales of newly constructed homes, indicating that the new home portion of the housing sector gained some strength last month. That would be considered negative news for bonds, but since this data tracks only a small percentage of all home sales it usually has little impact on the bond market and mortgage rates unless it varies greatly from forecasts.

The Commerce Department will post June’s Durable Goods Orders at 8:30 AM ET Thursday. Current forecasts are currently calling for an increase in new orders of 1.0% from May to June. This data gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket items, or products that are expected to last three or more years. A much stronger than expected number may lead to higher mortgage rates Thursday morning because it would hint at economic strength. If it reveals a large decline in new orders, mortgage rates should drop Thursday morning. It should be noted though that this data is known to be extremely volatile from month to month, so a minor difference between forecasts and the actual reading may not move the markets or mortgage rates.

There are two economic releases scheduled to be posted Friday morning. The first is the preliminary reading of the 2nd Quarter Gross Domestic Product (GDP), which is considered to be the best indicator of economic growth or weakness. It is the sum of all goods and services produced in the U.S. and usually has a great deal of influence on the financial markets. This reading is arguably the single most important we get regularly. Current forecasts are estimating that the economy grew at a 1.2% annual rate during the second quarter. A faster pace will probably hurt bond prices, leading to higher mortgage rates Friday. But a smaller than expected reading would likely fuel a bond market rally and lead to lower mortgage pricing.

The week’s final piece of data is the revised reading to July’s University of Michigan Index of Consumer Sentiment that will help us measure consumer optimism about their own financial situations. This data is considered relevant because rising consumer confidence usually translates into higher levels of spending. This adds fuel to the economic recovery and is looked at as bad news for bonds. Friday’s release is an update to the preliminary reading we saw two weeks ago, so unless we see a drastic revision to the preliminary estimate of 72.0, I think the markets will probably shrug this news off.

Also worth mentioning are a couple of Treasury auctions that may affect bond trading and mortgage rates this week. The two most important are Wednesday’s 5-year Note and Thursday’s 7-year Note sales. Results of this week’s auctions will be posted 1:00 PM ET each day. If investor interest is strong, we can expect the broader bond market to rally and mortgage rates to move lower. However, lackluster demand could lead to bond selling and higher mortgage rates Wednesday and Thursday afternoons.

Overall, I am expecting a relatively active week in the financial and mortgage markets. We will likely see the most movement in mortgage rates the latter part of the week. The most important report of the week is Friday’s preliminary GDP reading, making it the most important day. We could see movement in rates several days, but I believe Friday will be the key day in determining if rates move higher or lower on the week.

 

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