Market Comment
Mortgage bond prices finished the week higher which put downward pressure on rates. We started the week on a positive note, continued that pattern mid-week, and then saw some selling pressure to end the week. Producer prices rose 0.5% vs 0.3%. The core, which excludes volatile food and energy prices, rose 0.5% vs 0.2%. Consumer prices rose 0.3% vs 0.4%. The core rose 0.3% as expected. NAHB housing was 45 vs the expected 51 reading. Retail sales were unchanged vs up 0.4%. Weekly jobless claims were relatively in line with estimates coming in at 222K vs 220K. Housing starts were 1.36M vs 1.42M. The Philadelphia Fed index was 4.5 vs 5. Mortgage interest rates finished the week better by approximately 3/8 of a discount point.
Looking Ahead
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
|---|---|---|---|
| Existing Home Sales | Wednesday, May 22, 10:00 am, et | 4.18M | Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| 20-year Treasury Bond Auction | Wednesday, May 22, 1:15 pm, et | None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Fed Minutes | Wednesday, May 22, 2:00 pm, et | None | Important. Details of the last Fed meeting will be thoroughly analyzed. |
| Weekly Jobless Claims | Thursday, May 23, 8:30 am, et | 220K | Important. An indication of employment. Higher claims may result in lower rates. |
| New Home Sales | Thursday, May 23, 10:00 am, et | 680K | Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
| 10-year Treasury TIPS Auction | Thursday, May 23, 1:15 pm, et | None | Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates. |
| Durable Goods Orders | Friday, May 24, 8:30 am, et | Up 0.5% | Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| U of Michigan Consumer Sentiment | Friday, May 24, 10:00 am, et | 67.4 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Auctions
US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction, but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
Despite the overwhelming size of the US economy, foreign investors can still influence domestic financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying is a factor that has historically helped mortgage interest rates push lower. There is a real threat that large US fiscal deficits could result in global economic instability. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. Demand has been generally good as of late, but auctions of different durations often vary in their results. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher. The inverse is also true. Be cautious heading into the auctions.
