Updated on May 26, 2023 10:07:37 AM EDT
There wasn’t much in this morning’s economic data for bond traders to be pleased with. Aprils Personal Income and Outlays data showed a 0.4% rise in income and 0.8% jump in spending. The income reading matched forecasts, but the spike in outlays greatly exceeded expectations of a 0.4% increase. Furthermore, the PCE index within this report, that the Fed relies heavily on, came in higher than predicted. Since the PCE index is considered to be an inflation reading, we have to label the data clearly bad news for bonds and mortgage rates. Strong inflation makes long-term securities, such as mortgage bonds, less appealing to investors since it erodes the value of the security’s future fixed interest payments. It also causes the Fed to be more aggressive with their key short-term interest rate hikes.
Another early report this morning pointed to a stronger than thought manufacturing sector. Aprils Durable Goods Orders revealed a 1.1% rise in new orders at U.S. factories for products such as airplanes, appliances and electronics. This data is known to be quite volatile from month to month, but analysts were expecting to see a 1.0% decline in orders. Even though the normal volatility in this report makes the variance between forecasts and the actual number less relevant to the markets, it still hints at strength in the sector that makes it bad news for mortgage rates.
The final piece of data was May’s revised Index of Consumer Sentiment from the University of Michigan at 10:00 AM ET. They announced a 59.2 reading, up from the previous estimate of 57.7 from two weeks ago. Rising confidence means surveyed consumers feel better about their own financial situations and are more likely to spend money. With consumer spending making up over two-thirds of the U.S. economy, good news for bonds would have been a decline. The increase causes us to consider the data bad news for bonds and mortgage pricing.
Also worth noting is an early close for the bond market today. It will close at 2:00 PM ET ahead of the Memorial Day holiday while stocks will trade for a full day. All markets will be closed Monday for the holiday. We sometimes see a bit of volatility in bonds in these situations as traders look to protect themselves over the three plus day weekend.
Next week has several economic reports scheduled that may lead to a change in mortgage rates. The most important reports are the traditional new month releases set for late in the week. There are also a bunch of Fed member speaking engagements to listen to and of course, the pending June 1st debt default date. The calendar begins Tuesday (after the holiday) with another consumer confidence report and headlines from weekend debt ceiling negotiations. Look for details on all of next week’s activities in Sunday evening’s weekly preview.
©Mortgage Commentary 2023