Princeton Capital Blog

This Week’s Market Commentary

July 25th, 2016

Mortgage Market CommentaryThis week brings us the release of six economic reports that may impact mortgage rates, one of which is considered to be highly influential. In addition to the economic data, there is also another FOMC meeting that certainly has the potential to cause chaos in the markets and a couple of Treasury auctions mid-week. There is at least one event set for every day except Monday, so there is a strong likelihood of seeing noticeable mortgage rate movement and possibly multiple intra-day revisions this week.

June’s New Home Sales report will kick off this week's calendar at 10:00 AM ET Tuesday. This Commerce Department report gives us another measurement of housing sector strength. Analysts are expecting it to show an increase in sales of newly constructed homes, indicating that the new home portion of the housing sector strengthened a little 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. Last week's Existing Home Sales report covers most of the home sales in the U.S.

Late Tuesday morning the Conference Board will release their Consumer Confidence Index (CCI) for July. This index measures consumer sentiment, giving us an idea of consumer willingness to spend. If consumers are more confident in their own financial and employment situations, they are apt to make large purchases in the near future. This is important because consumer spending makes up such a large portion of our economy. If the CCI reading is weaker than expected, meaning that consumers were less confident than thought and likely will delay making a large personal purchase, we may see bond prices rise and mortgage rates dropTuesday morning. Current forecasts are calling for a reading of 96.0 which would be a weaker reading than June’s 98.0 and indicate consumers are a little less comfortable with their finances than they were last month.

The Commerce Department will post June’s Durable Goods Orders at 8:30 AM ET Wednesday. Current forecasts are calling for a decline 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 Wednesday morning because it would point towards economic strength. If it reveals a considerably larger decline in new orders, mortgage rates should move lower. 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.

Wednesday afternoon has the adjournment of the FOMC meeting that begins Tuesday. This is not a meeting that will be followed by a press conference with Fed Chair Yellen nor is it expected to yield a change to key interest rates. Many analysts believe the Fed will make their next increase to key short-term interest rates late this year, not this week. Anything in the post-meeting statement that either confirms or contradicts that theory will cause volatility in the markets. The meeting will adjourn at 2:00 PM ET, so any reaction will come during mid-afternoon hours.

There are also two Treasury auctions that are worth watching this week. 5-year Notes will be sold Tuesday and 7-year Notes on Thursday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. On the other hand, strong sales usually make bonds more attractive to investors, bringing more funds into the bond market. The buying of bonds that follows translates into lower mortgage rates. Results of the sales will be posted at 1:00 PM ET each auction day, so look for any reaction to come during afternoon hours Wednesday and Thursday.

Friday starts with the key data of the week, the preliminary reading of the 2nd Quarter Gross Domestic Product (GDP) at 8:30 AM ET. This index is considered to be the benchmark indicator of economic growth or weakness. It is the total of all goods and services that are 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 report we get regularly. Current forecasts are estimating that the economy grew at a 2.6% annual rate during the second quarter, rebounding from the first quarter’s 1.1% annual rate. A stronger rate of growth should hurt bond prices, leading to higher mortgage rates Friday. But a much smaller than expected reading will likely fuel a bond market rally and push mortgage pricing lower since it would indicate the economy was not as strong as many had thought.

Also at 8:30 AM will be the 2nd Quarter Employment Cost Index (ECI) that tracks employer costs for wages and benefits. This release will give us a measurement of wage-inflation. If it shows a large increase, we may see wage inflation concerns rise as employers will need to pass those increases into the pricing of their products and services. That would be bad news for bonds and mortgage shoppers. A smaller than expected increase would be good news for the bond market and mortgage pricing. Current forecasts are showing a rise of 0.6%.

The week's calendar closes with July’s University of Michigan Index of Consumer Sentiment just before 10:00 AM ET 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 that adds fuel to economic growth 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 89.5, I think the markets will probably shrug off this news.

Overall, I am expecting to see a very active week in the financial and mortgage markets. The calmest day for rates may be Monday. The most active will probably be Wednesday due to the Durable Goods report and FOMC meeting, but it is worth noting that Friday's GDP report can also cause plenty of volatility in the markets itself. There is little doubt that this is going to be an important week for mortgage rates, so it would be prudent to maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.

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