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Mortgage Market in Review – June 2, 2014

Market Comment

Mortgage bond prices finished the week near unchanged which held rates in check. The shortened trading week was full of large market swings. Durable goods orders rose 0.8% versus the expected 1% decline which started us off on the wrong foot. We bounced back Wednesday with some flight to quality buying of mortgage bonds in response to remarks from a European Central Bank member that hinted at a rate cut at their meeting next week. MBS prices sold off Thursday afternoon in response to weaker than expected foreign demand from the 7Y auction. The weakness continued Friday morning. Personal Income rose 0.3% as expected. Spending fell 0.1% versus the expected 0.2% increase. PCE core inflation rose 0.2% as expected. Mortgage interest rates fell by about 1/8 a discount point for the trading week despite the continued volatility.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
ISM Index Monday, June 2,
10:00 am, et
55.1 Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending Monday, June 2,
10:00 am, et
Up 0.8% Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
Factory Orders Tuesday, June 3,
10:00 am, et
Up 0.8% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment Wednesday, June 4,
8:30 am, et
224k Important. An indication of employment. Weakness may bring lower rates.
Revised Q1 Productivity Wednesday, June 4,
8:30 am, et
Up 0.2% Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
Trade Data Wednesday, June 4,
8:30 am, et
$41.2b deficit Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
Fed “Beige Book” Wednesday, June 4,
2:00 pm, et
None Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
Weekly Jobless Claims Thursday, June 5,
8:30 am, et
305k Important. An indication of employment. Higher claims may result in lower rates.
Employment Friday, June 6,
8:30 am, et
6.3%,
Payrolls +295k
Very important. An increase in unemployment or weakness in payrolls may bring lower rates.

Fed “Beige Book”

The Fed “Beige Book” is a summary of economic conditions from each of the 12 Federal Reserve regional districts. The release takes place eight times a year approximately two weeks ahead of each of the Federal Open Market Committee meetings. The report is used at the FOMC meetings, which tends to be one of the most influential events in the market.

Market participants are continually attempting to determine what FOMC interest rate policy will be ahead of the next meeting. Any deviation from expectations usually results in extreme short-term market volatility. The timing of the “Beige Book” provides analysts a valuable look at one of the many factors the FOMC considers in setting interest rate policy. If the “Beige Book” shows signs of inflationary pressures, the Fed’s ability to keep rates lower may be somewhat restricted. However, if the report shows signs of difficulties, the Fed may keep rates low to stimulate the economy. Be cautious heading into this release.


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