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  • Writer's pictureJenny Phung

Mortgage Market Update

This holiday-shortened week brings us the release of six relevant monthly and quarterly economic reports for the markets to digest in addition to a few Fed speaking engagements. Two of the reports are considered to be key data and are expected to heavily influence the markets. The financial and mortgage markets will be closed tomorrow in observance of the Memorial Day holiday and will reopen for regular trading Tuesday morning.

The Institute for Supply Management's (ISM) manufacturing index will start the week's activities at 10:00 AM ET Tuesday. This release is highly important to the markets because it measures manufacturer sentiment about current business conditions. It is also the first release of the month that covers the previous month, giving us fresh insight into the economy. A reading above 50 means that more surveyed manufacturing executives felt business improved during the month than those who felt it had worsened. Analysts are expecting to see a 61.0 reading in this month's release, meaning that sentiment strengthened modestly during May. A lower reading will be good news for the bond market and mortgage shoppers while a larger increase could contribute to higher rates.

Worth mentioning is a speech by Fed Member Lael Brainard Tuesday at 2:00 PM ET. She will be speaking before the Economic Club of New York via webinar. These types of speeches are common from Fed members, but since the topic of this one is Economic and Monetary Policy Outlook, we can expect her words to be watched very closely. This adds the possibility of seeing afternoon volatility in the markets Tuesday, possibly affecting mortgage rates also.

Wednesday has two reports set for release, starting with May's ADP Employment report before the markets open. It has the potential to cause some movement in the markets if it shows much stronger or weaker numbers than expected. This report tracks changes in private-sector jobs, using ADP's payroll processing clients as a base. While it does draw attention, it is my opinion that it is overrated and is not a true reflection of the broader employment picture. It also is not accurate in predicting results of the monthly government report that follows a couple days later. Still, because we sometimes see a reaction to the report, we will be watching it. Traders are expecting it to show that 650,000 private sector jobs were recovered during the month. The smaller the increase in jobs, the better the news it is for mortgage rates.

Also Wednesday, but during afternoon hours, will be the release of the Federal Reserve's Beige Book. This report, which is named simply after the color of its cover, details economic conditions throughout the U.S. by Federal Reserve region via business contacts. It is relied upon heavily by the Fed to determine monetary policy during their FOMC meetings. Wednesday's update is expected to show economic gains since the last version. It will be posted at 2:00 PM ET, meaning if it is going to affect rates, it will happen during mid-afternoon hours.

Thursday brings us the weekly unemployment update at 8:30 AM ET in addition to revised 1st quarter Productivity and Costs data. The productivity data measures employee output and employer costs for wages and benefits. It is also considered to be moderately important because it helps us measure wage inflation. Many analysts believe that the economy can grow with low inflationary pressures when productivity is high. Last month's preliminary reading revealed a 5.4% rise in productivity and a 0.3% decrease in labor costs. Thursday's update is predicted to show irrelevant revisions. I don't think this piece of data will have much of an impact on the bond market or mortgage pricing unless it varies greatly from expectations.

Friday starts with the monthly Employment report at 8:30 AM ET. This extremely important data will give us key employment readings such as the U.S. unemployment rate, the number of jobs added or lost during the month and average earnings change. Analysts are expecting to see the unemployment rate fall 0.2% to 5.9% for May with approximately 680.000 jobs recovered during the month and 0.2% increase in earnings. A higher than expected unemployment rate and a much smaller increase in payrolls would be favorable news for mortgage rates, especially after April’s report showed surprisingly weaker results in two of the three headline numbers.

Also Friday morning will be the release of April's Factory Orders data that is similar to last week's Durable Goods Orders report. This release also includes orders for non-durable goods such as food and clothing. It can cause some movement in the financial markets if it varies from forecasts by a wide margin, but it isn't expected to cause much of a change in rates. In fact, since it follows the almighty Employment report, it probably will be a non-factor in the markets Friday. Current forecasts are calling for a 0.5% increase in new orders from March's level.

Overall, Friday is the most important day for rates by default since it has the Employment report scheduled. Tuesday may also be noticeably active with the ISM report and an afternoon Fed member speech that will draw plenty of attention. No day stands out as a good candidate for calmest for rates, but Thursday is a good possibility. With so much going on this week, it would be prudent to keep an eye on the markets if still floating an interest rate and closing in the near future.

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