MARKET COMMENT Mortgage bond prices closed sharply lower last week driving mortgage rates higher again. We started the week with some flight to quality buying following word that Ireland received a bailout from the EU and the IMF. This spread fears of additional bailouts with talk of Portugal and Spain possibly being next. However, rates shot higher later in the week following two Treasury auctions. Indirect bidders, an indication of foreign demand for US debt, were below average escalating fears that foreign banks might be cooling to our debt. Trading was cut short with the Thanksgiving holiday. Thin conditions Wednesday coupled with numerous data releases resulted in some wild market swings. Overall, the data this week was mixed. For the week, interest rates were worse by about 1/2 of a discount point.
Look for the employment data to be released this week to result in mortgage interest rate volatility.
- Consumer Confidence; Nov. 30; Consensus Estimate 52.00; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
- ADP Employment; Dec. 1; Consensus Estimate 25k; Important. An indication of employment. Weakness may bring lower rates.
- Revised Q3 Productivity; Dec. 1; Consensus Estimate Up 2.2%; Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
- ISM Index; Dec. 1; Consensus Estimate 56.00; Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
- Fed “Beige Book”; Dec. 1; Important. Details current economic conditions across the US. Signs of weakness may lead to lower rates.
- Employment; Dec. 3; Consensus Estimate Jobs +150K, Unemp @ 9.7%; Very important. An increase in unemployment or weakness in payrolls may bring lower rates.
- Factory Orders; Dec. 3; Consensus Estimate -2.0%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
FACTORY ORDERS Factory orders data is a monthly report released by the US Census Bureau. The release is officially referred to as The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders.
The manufacturing sector is a major component of the economy. Investors use the factory orders report to attempt to determine the direction of the economy in the future. Orders are generally believed to be a precursor to activity in the manufacturing sector because manufacturing typically has an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to scale back; otherwise, the manufacturer accumulates inventories, which must be financed.
Total factory orders break down to approximately 55% durable and 45% non-durable. Durable goods are items such as refrigerators, cars, and aircraft. Non-durables are items such as cigarettes, candy, and soap. The report is often dismissed due to the timing of the release. Durable goods orders are typically reported a week earlier making a portion of the factory orders data “old news.” While some analysts dismiss the value of the factory orders data others point out the fact that the report provides a more complete picture than the initial durable goods release. Revisions to initial data along with non-durable figures are factored in providing a more accurate look at the condition of the manufacturing sector.
If the factory orders data shows a significant increase mortgage interest rates could be pressured higher. However, weakness in the data could help rates improve.