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Weekly Mortgage Market Commentary

June 20th, 2016

Stock market on touchscreen smartphoneThis week brings us the release of five economic reports for the markets to digest in addition to two Treasury auctions that have the potential to come into play. The week's calendar begins Tuesday morning though when Fed Chair Janet Yellen will start her semi-annual update about the economy and monetary policy before Congress. She will speak before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday, each at 10:00am ET. Her testimony will be broadcast and watched very closely. Analysts and traders will be looking for the Fed’s opinion on the status of the economy and their expectations of future growth, inflation and unemployment concerns that will lead to the Fed’s next monetary policy move. These topics should create a great deal of volatility in the markets during the prepared testimony and the question and answer session that follows. If she indicates that inflation may become a point of concern or anything that hints at rapid economic growth, we can expect to see the bond market fall and mortgage rates rise Tuesday.

We usually see the most movement in the markets and mortgage rates during the first day of this testimony as the speaker’s prepared words for both appearances are quite similar to each other, meaning that the second day of testimony rarely gives us anything we did not hear during the first day. The general exception is something asked or answered during the Q&A portion of the second day’s appearance.

Also worth noting about Tuesday is the Fed will be selling debt this week that could affect mortgage rates. These sales may influence broader bond trading enough to affect mortgage rates if they show strong or weak investor demand. There are sales several days but the two most likely to have an impact on rates areTuesday’s 5-year Note sale and Wednesday’s 7-year Note auction. If they are met with a strong demand, we could see bond prices rise during afternoon trading. This could lead to afternoon improvements to mortgage rates also. On the other hand, if the sales draw a lackluster interest from investors, mortgage rates may move slightly higher during afternoon trading those days.

The first of this week’s economic reports comes late Wednesday morning when the National Association of Realtors posts May’s Existing Home Sales. This report 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 small increase in sales, pointing towards a slightly strengthening housing sector. That would be bad news for the bond market and mortgage rates. A weaker housing sector makes overall economic growth more difficult, so a sizable decline would be ideal for the bond market and mortgage shoppers.

Thursday has two monthly reports scheduled to be posted at 10:00 AM ET. May’s New Home Sales report is the first. It helps us measure housing sector strength by tracking sales of newly constructed homes. This report is similar to Wednesday’s Existing Home Sales report, but covers a much smaller portion of sales than that report does. It is expected to show a relatively large drop in sales, but will likely not have much of an impact on mortgage rates because this data gives such a small snapshot of the housing sector. I believe it will take a large rise in sales or a sizable decline for this data to influence mortgage rates.

Also late Thursday morning will be the release of May’s Leading Economic Indicators (LEI). The Conference Board, who is a New York-based business research group, produces this data. The LEI attempts to predict economic activity over the next three to six months. Good news for mortgage rates would be a decline in this index, but it is expected to show a 0.2% increase from April’s reading. This means it is predicting a minor increase in economic growth over the next several months. Since this report is not considered to be of high importance, I don’t see it causing too much movement in rates regardless if it shows a particularly strong or weak reading.

Friday has the two remaining releases, one of which is the most important report of the week. This would be May’s Durable Goods Orders from the Commerce Department early morning, giving 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 decline of 0.6% in new orders from April to May. A large decline would be the ideal scenario for the bond market and would hopefully lead to an improvement in mortgage pricing as it would indicate manufacturing sector weakness.

The University of Michigan will close out this week’s data when they update their Index of Consumer Sentiment for May late Friday morning. This index measures consumer willingness to spend. If consumers are more comfortable with their own financial and employment situations, they are more apt to make large purchases in the near future, fueling economic growth. Accordingly, any consumer spending related data has the potential to affect bond trading and mortgage rates. 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 94.3.

Overall, I see Tuesday as the most important day of the week solely because of the semi-annual Fed testimony. Friday may also be pretty active also with the most important economic data of the week. Monday could end up being the calmest day for rates, assuming nothing unexpected happens. We are likely to see a fair amount of movement in the financial and mortgage markets this week. Therefore, it would be prudent to maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.

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