MARKET COMMENT
Mortgage bond prices finished the week near unchanged which kept rates in check. Rates started again slightly better through Wednesday evening. The data was mixed. Personal income rose 0.4% and spending rose 0.4%. Both increases were as expected. Core PCE, the Fed’s preferred inflation gauge, rose 0.2% versus a 0.1% expected increase. Consumer confidence was 117.9 versus the expected 119 mark. ADP payrolls printed at 253K versus the expected 177K. Weekly jobless claims printed at 248K. Analyst predicted claims at 239K. According to the Bureau of Labor Statistics (BLS) the economy added 138,000 jobs in May and the unemployment rate stood at 4.3%. Traders expected the creation of 185,000 jobs with an unemployment rate of 4.4%. There were some seesaw discount point changes but we ended the week near neutral.
LOOKING AHEAD
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
| Preliminary Q2 Productivity | Monday, June 5, 8:30 am, et |
Down 0.2% | Important. A measure of output per hour. Improvement may lead to lower mortgage rates. |
| Factory Orders | Monday, June 5, 10:00 am, et |
Up 0.2% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Consumer Credit | Wednesday, June 7, 3:00 pm, et |
$16B | Low importance. A significantly large increase may lead to lower mortgage interest rates. |
| Weekly Jobless Claims | Thursday, June 8, 8:30 am, et |
245K | Important. An indication of employment. Higher claims may result in lower rates. |
CREDIT DEMAND
Inflation is typically the most important focus for the mortgage interest rate market. Most of the recent increases in interest rates have come following stronger stocks. As stocks struggle we often see rates improve. In addition, mortgage bonds have benefited from global economic uncertainty as investors search for safe havens amid economic concerns in the euro zone. This flight to quality buying of mortgage bonds has helped push prices higher and mortgage interest rates lower.
The level of interest rates reflects the balance between the supply of money from investors and the demand for money by borrowers. Rising inflationary expectations and uncertainty about the performance of the bonds cause investors to require higher rates of return on investments. This compensates for the erosion of the principal that eventually is returned to them or the risk of non-performance. Regardless of inflation levels, rising economic activity can increase the demand for investors’ funds, and thereby lead to higher interest rates. Investors pulling money out of bonds and into stocks could pressure mortgage rates. The demand for money diminishes as the economy struggles. The Fed lowers interest rates as an incentive to businesses and consumers to increase their borrowings. The Fed hopes manufacturers will increase their investments in plants, equipment and inventories and that consumers will push housing construction along with consumer spending and with that, consumer debt.
Analysts will monitor this week’s consumer credit levels. There is much debate in the financial community about the future. Economists, market analysts, and traders always seem to have different opinions about the future. One thing most market participants agree on is both the bond and stock markets are going to see additional volatility. Interest rates remain historically favorable. Now is a great time to take advantage of the low rates.
