MARKET COMMENT Mortgage bond prices finished near unchanged last week but whipsawed up and down throughout the middle of the week. Rates started off on a bad note Monday in reaction to stronger than expected data. Housing starts, industrial production, and capacity use data all surprised to the upside. European debt worries resulted in flight to quality buying Wednesday and rates improved considerably that morning. Unfortunately those gains were erased Thursday afternoon following higher than expected headline consumer inflation data and selling pressure tied to the recent run up in prices. Despite the extreme volatility, mortgage bonds ended the week near unchanged.
Foreign demand for the Treasury auctions will be carefully monitored this week.
• New Home Sales; Aug. 23; Consensus Estimate Up 1.9%; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
• 2-year Treasury Note Auction; Aug. 23; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Durable Goods Orders; Aug. 24; Consensus Estimate Down 0.8%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
• 5-year Treasury Note Auction; Aug. 24; None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Weekly Jobless Claims; Aug. 25; Consensus Estimate 415k; Important. An indication of employment. Higher claims may result in lower rates.
• 7-year Treasury Note Auction; Aug. 25; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Q2 GDP Second Estimate; Aug. 26; Consensus Estimate Up 1.2%; Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
• U of Michigan Consumer Sentiment; Aug. 26; Consensus Estimate 54.9; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
DURABLE GOODS ORDERS Durable goods orders are generally believed to be a precursor of activity in the manufacturing sector because manufacturing must have an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to be scaled back; otherwise the manufacturer accumulates inventories, which must be financed.
Unfortunately, durable goods orders data has many drawbacks. The first problem with the orders data is that they are extremely volatile. The volatility of the data usually is attributed to the civilian aircraft and defense components of the figure. For example, if Boeing has a big order for one of its jumbo jets, the civilian aircraft category can change by $3-4 billion. The same scenario is evident when an aircraft carrier is ordered, surges in the defense category result. The second problem with the data is that orders are continuously being revised. There are many times in the past when the advance report on durables showed an increase while a revision a week later showed a decrease. The revised data is found in the report on manufacturing orders, shipments, and inventories.
Since the data is very volatile and difficult to forecast, there is quite often a huge disparity between the actual release and the initial projections. Be cautious heading into data.
Source: Todd Kabel, F&M Mortgage; Blog distribution provided by Kenneth Bargers and Bargers Solutions, a proud member of Pilkerton Realtors, residential real estate services located in Nashville, Tennessee