Thursday, May 28, 2020
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Updated on May 28, 2020 10:14:26 AM EDT

Yesterday’s 5-year Treasury Note auction drew a relatively lackluster interest from investors with the benchmarks showing an average or below average demand for the securities. The results were posted at 1:00 PM ET but the broader bond market had little reaction to them. Those results cause us to be a bit pessimistic about today’s 7-year Note sale. That does not mean the sale is likely to be detrimental to rates later today. It is more of a situation where we should not expect to see an improvement in rates this afternoon, at least not due to this auction.

Also posted late yesterday was the Federal Reserves Beige Book report. As expected, it showed that economic activity slowed in all Fed regions since the previous update. Some regions reported a drastic slowdown. The consensus from the business contacts that contributed to the report was concern about the pace of the rebound even though states are starting to reopen. There are worries about what will happen when the PPP loans that are part of the government’s stimulus package run out. After opening in negative territory yesterday, bonds rallied into positive ground before the afternoon’s events took place. They gave back some of those gains near the end of the day, but it is hard to pin the reason as the Beige Book report since it contained content that was mostly favorable to bonds and mortgage rates.

The first of this morning’s three 8:30 AM ET economic releases was last week’s unemployment figures. They revealed that 2.12 million new claims for unemployment benefits were filed last week, slightly exceeding forecasts. Last week’s total pushes the number of new filings over the past 10 weeks to above 40 million. Because a high number of unemployment claims is a sign of employment sector weakness, this was good news for bonds and mortgage pricing.

Next up was Aprils Durable Goods Orders report that showed a 17.2% decline in new orders at U.S. factories for big-ticket items such as airplanes, appliances and electronics. That number fell into the lower range of forecasts, but this data is known to be extremely volatile month-to-month. Therefore, a moderately sized variance in this data does not carry the same importance as it would in others. The data shows that the manufacturing sector was hit hard in the midst of the pandemic and shutdown, which does not come as a surprise. While the large decline is favorable news for bonds, it has not had much of an impact on today’s trading or mortgage rates.

Of this morning’s three reports, the biggest surprise came in the one that was expected to draw the least attention. The first revision to the 1st quarter Gross Domestic Product (GDP) showed that the economy shrank at an annual rate of 5.0% during the first three months of the year. Analysts were expecting it to be unchanged from the initial estimate of down 4.8%. This means the economy was in a little worse shape during the first quarter than previously thought. We have not seen a noticeable reaction to the news because this data is a bit aged now, but it does support the theory that the pandemic is putting the economy in a worse position than some people are willing to acknowledge. That could lead to a longer recovery time than current estimates are predicting.

Tomorrow brings us the release of two economic reports that may affect mortgage rates in addition to a webcast with Fed Chairman Powell late morning. The calendar starts with Aprils Personal Income and Outlays data at 8:30 AM ET. This Commerce Department report gives us an indication of consumer ability to spend and current spending habits. A decline in income means that consumers have less money available to spend. Since consumer spending makes up over two-thirds of our economy, this data can cause movement in the financial markets and mortgage rates. Current forecasts are showing a 6.0% decline in income and a 13% drop in spending due to the shutdown. Larger declines would be considered good news for bonds and mortgage rates.

The last mortgage-related data of the week will come from the University of Michigan at 10:00 AM tomorrow morning when they update their Index of Consumer Sentiment for May. This type of data is watched fairly closely because when consumers are feeling more confident about their own financial situations, they are more likely to make a large purchase in the near future. Rising confidence and the higher levels of spending that usually follow are considered negative news for bonds and mortgage rates. Tomorrow’s report is expected to show an increase from this months preliminary reading of 71.8. A higher reading would be considered bad news for bonds and mortgage pricing while a large downward revision should help boost bond prices and lead to a slight improvement in rates tomorrow.

Chairman Powell will be participating in a webcast affiliated with Princeton University at 11:00 AM ET. His words likely will not cause much movement in the markets since he has spoken publicly several times recently. That said, market participants will be listening for any surprises regarding monetary policy or the future of the economy.

 ©Mortgage Commentary 2020