Thursday’s bond market has opened flat again as investors seem to be unmoved by recent economic data. The stock markets are showing losses with the Dow down 30 points and the Nasdaq down 19 points. The bond market is currently down 5/32, but I am not expecting to see much of a change in this morning’s mortgage rates.

Today’s release of the 2nd Quarter Gross Domestic Product (GDP) revision revealed no change to the previous estimate of down 1.0%. Analysts were expecting to see a downward revision to a decline of 1.4%, meaning that the economy was not as weak as some had thought. While this is considered negative news for bonds since it was thought the economy had slowed at a quicker pace than it actually did, the data has not influenced mortgage rates this morning. It could be that this is relatively old news at this point. There is a final revision being released next month, but it often has little impact on bond trading or mortgage rates.

The Labor Department said that 570,000 new claims for unemployment benefits were filed last week. This was close to forecasts and has also had little impact on bond trading or mortgage rates this morning.

Yesterday’s 5-year Treasury Note auction went okay. It was met with an average demand from investors and the other measurements of success were indicated the same. It was not an overly strong auction, but it also didn’t qualify as a poor sale either. Today’s 7-year Note sale is also of interest to mortgage shoppers. The results of it will be posted at 1:00 PM ET. If it was met with a good demand from investors, we could see bond prices rise and mortgage rates drop during afternoon trading. However, a lackluster interest in the sale could lead to bond selling and upward revisions to mortgage rates later today.

Tomorrow brings us the release of two relevant economic reports. The first is July’s Personal Income and Outlays report that measures consumer ability to spend and current spending habits. It is expected to show an increase of 0.1% in income and a 0.2% increase in spending. Weaker than expected numbers would be good news for the bond market and mortgage rates.

August’s revision to the University of Michigan’s Index of Consumer Sentiment is also due tomorrow morning. It gives us a measurement of consumer willingness to spend. It is expected to show a reading of 64.8. If it revises lower, consumers were less confident about their personal financial situations than previously thought. This would be good news for the bond market and mortgage rates.
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Tuesday’s bond market has opened in negative territory after this morning’s economic news showed a higher level of consumer confidence than was expected. The stock markets are showing gains with the Dow is currently up 70 points the Nasdaq up14 points. The bond market is currently down 7/32, but we will see an improvement in this morning’s mortgage rates of approximately .375 of a discount point due to strength late yesterday.

The Conference Board said late this morning that their Consumer Confidence Index for August stood at 54.1. This exceeded forecasts of a 46.6 reading, meaning that consumers were more optimistic about their own financial situations than many had thought. That is considered bad news for bonds and mortgage rates because rising confidence usually means that consumers are more likely to make large purchases in the near future. Since consumer spending makes up two-thirds of the U.S. economy, weaker levels of spending makes bonds more attractive to investors.

The Commerce Department will post July’s Durable Goods Orders tomorrow morning, giving us an important measure of manufacturing sector strength. This data tracks orders at U.S. factories for big-ticket items, or products that are expected to last three or more years. A much weaker reading than the expected 3.2% rise that is expected would indicate that the manufacturing sector is not as strong as thought. This would be good news for bonds and should lead to lower mortgage rates.

Also scheduled for release tomorrow morning is July’s New Home Sales data. This report is the least important release of the week. It will give us an indication of housing sector strength and mortgage credit demand, but only tracks approximately 15% of all home sales. It usually doesn’t have a major impact on bond prices or mortgage rates unless it varies greatly from forecasts.

Also worth noting is tomorrow’s 5-year Treasury Note auction. Results of the sale will be posted at 1:00 PM ET tomorrow. If it was met with a good demand from investors, we could see bond prices rise and mortgage rates drop during afternoon trading. However, a lackluster interest in the sale could lead to bond selling and upward revisions to mortgage rates.
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Stocks ended today at 2009 highs. This in turn has put pressure on mortgage backed securities today and has pricing a little higher today versus yesterday. The NAR reported that home sales rose 7.2% in July and this was triple what was expected. Good news for homeowners and bad news for treasuries and mortgage rates.
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Mortgage rates moved up a little today after the stock market showed gains late yesterday. The Mortgage Bannker's Association Application Index showed an increase in purchase applications which is positive of seeing a housing rebound in the coming months. Refinanace applications were up as well.
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A downturn in housing starts and building permits wasn’t what markets were expecting, but given how well the index had performed in the prior two months, the general trend continues to improve.

Privately-owned housing starts fell 1% to an annual pace of 581,000 in July, against expectations that they would advance 2.3% to 598k. Data from the prior two months was revised downwards slightly.

The report wasn’t just bad news though. The most important component continued on its upward path, as single-family housing starts climbed 1.7% to a rate of 490k ― its highest level since October 2008. So, as with last month, it was multiple-family units that declined, falling 13.3% to 91k in the month after a 26.1% decline in June, putting the index back at April’s level.


“July's level of starts is still 74% below the 2.27 million record ― which was double the rate of household formation ― but is up 21% from April's rain-influenced 479,000 record low,” noted Jennifer Lee from BMO Capital Markets. “In other words, we are heading in the right direction, slowly.”

Since July 2008, the annualized pace of new housing construction as fallen 37.7% from a rate of 933k.

Meanwhile, Building permits fell 1.8% to an annualized pace of 560k in June, which is 39.4% below the July 2008 level. That’s far from good, but the annualized drop in the prior month was -51.4%.

As with housing starts, the losses were in multiple-units. Single-family permits for new houses managed to advance 5.8% in the month to a pace of 458k, but authorizations for multiple-unit residences declined from 137K to 102k.

Taking permits and starts together, Ian Pollick, strategist from TD Securities, said the report could be interpreted in two ways.

“On the optimistic side, it appears that residential construction activity may have stabilized to a degree insofar as the volume of single-family starts is now the highest level since October 2008 combined with the fact that even after the healthy 6.5% M/M gain in June starts only gave back a slight margin,” he said.

“On the other hand, with sales continuing to lag behind the level of building activity by a factor close to 200K (latest data puts the gap at 197K), even though the level of starts declined on the month it does suggest that the inventory of unsold homes could potentially rise higher.”

On the whole, it’s disappointing that starts and permits each fell, but single-family units continue to march forward. Some solace is also provided by the fact that homebuilder sentiment hit a 14-month high in August, as published yesterday by the National Association of Home Builders. The report edged up just one points, but it represents a 23% improvement from last year
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After halting four weekly advances in the stock market on Friday, investors are rapidly extending market losses in pre-session trading Monday morning. Dow futures are trading 185 points lower at 9,136, and S&P 500 futures are 2% down, or 22 points lower at 984. Of course, this is all great news for the fixed income market.

This week could confirm that broad-based stabilization has, in fact, taken hold in the economy, or, some downward surprises could indicate that stocks were too optimistic as the benchmark S&P 500 advanced nearly 50% from early March to last week.

Carl Weinberg, chief economist at HFE, is of the school believing that recovery will be a slow process. “The global economy may have stopped contracting, but the declines in GDP to date have left economies severely depressed,” he said a weekly note. “Higher interest rates will further hinder the recovery from depression, and rising prices will erode consumers’ real incomes.”

Many analysts believe the economy cannot recovery until the housing market, which played the prime mover in the financial crisis, has recovered. Whether that’s the case will become clearer this week, with Housing Starts & Building Permits scheduled for Tuesday, Existing Home Sales slated for Friday, and several minor housing reports scattered throughout the rest of the week.

Real estate and other data are expected to be mostly positive this week. Aside from data, earnings reports from retail stores could also shake markets, as Home Depot, Sears and Target all report for the second quarter this week. 

In the headlines this morning is news that Japan has exited recession after five quarters. Second quarter GDP expanded 0.9%. Though that was actually a bit below the consensus call, it’s far better than the 3.1% contraction in Q1, revised up from a preliminary reading of -3.8%.

Key Releases This Week:

Monday:

8:30 ― The NY Fed’s Empire State survey, this month’s first manufacturing report, is expected to rebound into growth mode after coming in just below that threshold in July. The median forecast looks for +5.0 score, moving up from -0.6 in July and -9.4 in June. Part of the optimism is due to the +5.9 score registered by New Orders last month.

9:00 ― Treasury releases the latest TIC flows report, which tracks the volume of investments flowing in and out of the country. Net long term TIC flows are expected to rebound to $17.5 billion in June, after slumping to $19.8 billion in May.

1:00 ― The first bit of real estate data this week is a minor one. The Housing Market Index is a sentiment-based index tracking builder confidence, which sunk to many new lows in the crisis as rising foreclosures, excess inventory, and falling prices all hurt the prospects for constructing new homes. The nadir was an 8-point reading in January, but in July the report advanced two points to 17. Any continued improvement will be good news for the housing market.

Tuesday:

8:30 ― Housing Starts increased more than 20% between May and June, which would cause some to call for a moderation in July simply on technical reasons. But, in fact, the median forecast looks for another advance in July, which would be the third consecutive gain. The median forecast looks for housing starts to advance 2.7% to an annual pace of 598k in July, while building permits are expected to gain 1.3% to 575k.

Details of the report have been more mixed than the headline would suggest, as single-family starts have been improving rapidly, while multiple-family unit starts have been erratic, dropping 26% last month after surging 66% in May. 

“Builders have pared back on inventory and are starting to build new homes,” said analysts from IHS Global Insight. “We are thus expecting another steady improvement in single-family starts and permits for July. The market for multiple-family homes is still slumping, however, and July's numbers will reflect this fact. This market will not improve until credit conditions in the market for commercial real estate loans improve.”

The economics team at BBVA points out residential construction “remains at extremely low levels with housing starts more than 40% below those of last year,” adding that a quick recovery will be hindered by more foreclosures, which continue to put deflationary pressures on prices. “As a result, we might need to see price stabilization and inventory reduction in the market for existing homes in order for there to be a strong recovery in housing starts,” they wrote in a client note.



8:30 ― The Producer Price Index index is unlikely to gather many followers this week given that the more important consumer price index was released last week. But for all the wonks out there: total PPI is set to fall 0.3% in July after an energy-led 1.8% increase in June. Strip out energy and food prices, and core PPI should gain 0.1% after 0.5% gain in the prior month (driven by auto prices).

“Overall, core producer prices remain more than 3% above those of last year, which could help to offset the effect of declining wages, producers’ primary cost, on consumer prices,” said economists at BBVA in weekly forecasting note.

Thursday:

8:30 ― Jobless Claims have been difficult to read recently due to seasonal issues related to auto-sector layoffs. The 4-week average is currently 565k new claims per week, which is a decent improvement from the 616k average for June, but no improvement has been seen over the past two weeks. In addition, while investors look for signs that the economy is rebounding, it’s hard to be too optimistic when more than two million people are filing for employment benefits each month. 

Analysts at BTMU note that “initial jobless claims below 360K tend to indicate a growing labor market,” a figure that seems a far way off. And even when firings come to a standstill, it’s not clear just how quickly hirings will resume.



10:00 ― The Leading Indicators Index is a composite index that looks for turning points in the economy. Analysts believe it should repeat June’s +0.7% performance in July, providing broad-based confirmation that the recession is at an end, even though the labor market remains dreadful.

“Since April, the LEI has posted three consecutive increases, primarily driven by a rise in investor sentiment, the stock market, consumer expectations, and a pick up at the nation’s manufacturers,” said Ellen Zentner, senior macroeconomist at BTMU. 

Zentner cites positives contributions from “a gain in manufacturing hours, more favorable delivery times at manufacturers, and lower unemployment claims.” But her forecast is just +0.2% overall, as “lower building permits and a drop in consumer expectations will weigh on the LEI in July.”

10:00 ― Unlike the Empire State survey for New York, the Philadelphia Fed’s manufacturing survey declined in July, and while the majority of analysts believe there will be improvement this month, not a single one looks for growth. The median forecast is -1.0, a 6.5-point gain from July. In the larger picture though, that’s a whole lot better than the -41 reading in February.

Expect forecasts to change after the NY Fed’s Empire State survey is released on Monday.

Friday: 

10:00 ― The last bit of data this week will be a big one to the real estate market. The Existing Home Sales survey is set to advance for the fifth straight month, as homebuyers take advantage of reduced prices and the $8,000 government tax credit.

Sales should advance 2.5% in the month, pushing the annualized pace past 5 million for the first time in nine months.

Though overhang has fallen during the summer, more foreclosures will keep inventories high and prices low, note analysts at BBVA. 

10:00 ― Just as the housing data is being published, Federal Reserve chairman Ben Bernanke will speak on ‘the Year of Crisis’ at the Kansas City Fed's annual Jackson Hole conference. 

Sal Guatieri from BMO Capital Markets doesn’t expect any real news from the statement. “He isn’t likely to stray from last week’s policy statement message that the economy is stabilizing though far from a durable recovery, warranting neither more stimulus nor the active withdrawal of the stimulus already in place for some time.”
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