Mortgage Market Update
This week brings us the release of six monthly and quarterly economic reports that may influence mortgage rates in addition to a couple of Treasury auctions and a Fed congressional appearance. There is something scheduled each day of the week that could move mortgage pricing except tomorrow, meaning we may see a fairly active week for rates.
The activities start late Tuesday morning with the National Association of Realtor's Existing Home Sales report for May. This release tracks resales of existing homes, giving us a measurement of housing sector strength. It is considered to be moderately important to the markets but can influence mortgage rates if it shows a sizable difference between forecasts and actual results. Analysts are currently expecting to see a decline in sales. As with most economic reports we get, weaker than expected numbers would be favorable to mortgage rates.
Also Tuesday is Fed Chairman Powell’s appearance before a House of Representatives subcommittee as part of the Coronavirus Aid package. He will update Congress on the status of the economic recovery from the pandemic and what the Fed is doing to assist. There is a good possibility of seeing the markets react to his words, possibly leading to a change in mortgage rates. He will be speaking at 2:00 PM ET, meaning this will be an afternoon event for rates.
May's New Home Sales report is set for release at 10:00 AM ET Wednesday. This report also helps us measure housing sector strength by tracking sales of newly constructed homes. It is the sister release to Tuesday's Existing Home Sales report but covers a much smaller portion of sales than that report does. Wednesday's release is also expected to show a decline in sales, although it will likely not have much of an impact on mortgage rates because this data gives such a small snapshot of the housing sector.
Wednesday also has the first of this week’s two Treasury auctions that we will be watching. They both have the potential to affect bond trading enough to alter rates slightly. The key is how strong investor interest is in the securities. 5-year Notes will be sold Wednesday while 7-year Notes go Thursday. If they are met with a strong demand from investors, we could see bond prices rise and mortgage rates improve slightly during afternoon trading. On the other hand, if the sales draw a lackluster interest from investors, mortgage rates may move slightly higher during afternoon trading those days.
Thursday has a couple of reports scheduled in addition to the weekly unemployment update. The monthly report is much more important than the other. That would be May's Durable Goods Orders at 8:30 AM ET. This Commerce Department report will give us an indication of manufacturing sector strength. It tracks orders at U.S. factories for big-ticket items, or products that are expected to last three or more years such as electronics, appliances and airplanes. This data is known to be quite volatile from month to month and is expected to show a 2.4% increase in May's new orders. The smaller the increase in orders, the better the news it is for mortgage pricing.
Also set for release early Thursday is the second revision to the 1st Quarter Gross Domestic Product (GDP) reading. The GDP is the sum of all products and services produced in the U.S. and is considered to be the best measurement of economic growth or contraction. However, this particular data is quite aged now (covers January through March) and will likely have little impact on the bond market or mortgage pricing unless it varies greatly from previous readings. Market participants are looking more towards next month's release of the current quarter's initial GDP reading. Last month's first revision showed a 6.4% annual rate of growth. Thursday's update is expected to show the same. A large upward revision in the GDP would be considered negative for rates as it means the economy was stronger than thought.
Friday has the final two reports. May's Personal Income and Outlays data is scheduled for release at 8:30 AM ET that gives us an indication of consumer ability to spend and current spending activity. They are important because consumer spending makes up over two-thirds of the U.S. economy. If consumer income is rising, they have more money to spend each month. Analysts are expecting to see a 2.5% decline in income while spending rose 0.3% during the month. This report also includes an important inflation reading that the Fed relies on during their FOMC meetings (PCE). It is expected to show a 0.5% increase, indicating inflation is rising. Since rising inflation erodes the value of a bond's future fixed interest payments, unexpected increases in the PCE make bonds less appealing to investors and usually pushes mortgage rates higher.
The University of Michigan will close out this week's data when they update their Index of Consumer Sentiment for June late Friday morning. This index is a measure of consumer willingness to spend. A downward revision would be considered good news for bonds and rates. Forecasts are calling for little change from this month's preliminary reading of 86.4.
Overall, the single most important economic release is Friday’s Personal Income and Outlays with Thursday’s Durable Goods Orders not far behind. Tuesday is the best candidate for most important day though, due to the potential reaction from Chairman Powell’s testimony. The calmest day may end up being Wednesday. Overnight trading in bonds and stock futures gives the impression we may see an improvement in rates tomorrow, even though there is nothing scheduled for release.