Mortgage Market in Review – May 5, 2014

May 5, 2014
Market Comment

Mortgage bond prices finished the week higher which pushed rates lower. The data was mixed throughout the week which resulted in continued up and down rate movements. The ADP employment report was stronger than expected and showed an increase of 220k versus the expected 215k increase. Advance Q1 GDP rose 0.1%, weaker than the expected 1% increase which was very rate friendly. Q1 Employment Cost Index rose 0.3% versus the expected 0.5% increase which was also rate friendly. The Fed kept rates unchanged and continued to taper asset purchases by $10 billion. Unemployment came in lower than expected at 6.3%. Non-farm payrolls rose 288k versus the expected 205k increase and the MBS market initially sold off. Fortunately there was some flight to quality buying late Friday morning in reaction to reports of continued tension in Ukraine which helped counter the negative movements associated with the employment report. Mortgage interest rates fell by about 1/4 a discount point for the trading week despite the continued volatility.

LOOKING AHEAD

Economic
Indicator		 Release
Date & Time		 Consensus
Estimate
Analysis
Trade Data Tuesday, May 6,
8:30 am, et		 $43.5b Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
3-year Treasury Note Auction Tuesday, May 6,
1:15 pm, et		 None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Preliminary Q1 Productivity Wednesday, May 7,
8:30 am, et		 Up 1.2% Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
10-year Treasury Note Auction Wednesday, May 7,
1:15 pm, et		 None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Credit Wednesday, May 7,
3:00 pm, et		 $13.56b Low importance. A significantly large increase may lead to lower mortgage interest rates.
Weekly Jobless Claims Thursday, May 8,
8:30 am, et		 339k Important. An indication of employment. Higher claims may result in lower rates.
30-year Treasury Bond Auction Thursday, May 8,
1:15 pm, et		 None Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates.

Trade Data

In the distant past the US economy tended to be viewed as relatively unaffected by economic activity abroad. However, increased trades with other countries and an increased reliance on foreign purchases of US debt have generated a greater awareness of trade-related issues. The exchange rate of the dollar and foreign trade flows are interrelated. One must buy dollars to purchase US exports, and sell dollars to buy imports. Likewise, foreign investment in US debt requires the purchase of US dollars, and is thus affected by exchange rates.

Each month the Commerce Department gathers an enormous amount of detailed data on exports and imports. The data is broken between goods and services trade. The overall trade balance is the dollar difference between US exports and imports on a seasonally adjusted basis. The report highlights trade flows between the US and various partners. Since the mid-1970’s, US imports of consumer and capital goods have exceeded exports, so a merchandise trade deficit has existed. The US has always maintained a service trade surplus, and because this surplus is not enough to offset the merchandise trade deficit, a net export deficit has resulted.

Due to the overwhelming amount of data considered, trade is difficult to forecast, and can present surprises. For a variety of reasons, the financial markets will often be unaffected by surprises in trade data. However, the data still has the ability to cause mortgage interest rate volatility in this jittery environment. 

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