Market Commentary for the Week of July 28th

This week brings us the release of eight economic reports that may impact mortgage rates, some of which are considered to be highly influential. In addition to the economic data, there is also another FOMC meeting that certainly has the potential to cause chaos in the markets and a couple of Treasury auctions Tuesday and Wednesday. There is important data scheduled every day except Monday, so there is a strong likelihood of seeing noticeable mortgage rate movement and possibly multiple intra-day revisions this week.

The first economic data of the week comes late Tuesday morning when the Conference Board posts their Consumer Confidence Index (CCI) for July at 10:00 AM ET. This index measures consumer sentiment, giving us an idea of consumer willingness to spend. If consumers are more confident in their own financial and employment situations, they are apt to make large purchases in the near future. This is important because consumer spending makes up such a large portion of our economy. If the CCI reading is weaker than expected, meaning that consumers were less confident than thought and likely will delay making a large personal purchase, we may see bond prices rise and mortgage rates drop Tuesday morning. Current forecasts are calling for a reading of 85.6, which would be a higher reading than June’s 85.2 and indicate consumers are a little more comfortable with their finances than they were last month.

Wednesday has two pieces of data that are likely to influence rates. The first is the ADP Employment report before the markets open, which has the potential to cause some movement in the markets if it shows much stronger or weaker numbers. This report tracks changes in private-sector jobs in the company’s clients that use them for payroll processing. While it does draw attention, it is my opinion that it is overrated and is not a true reflection of the broader employment picture. It also is not very accurate in predicting results of the monthly government report that follows a couple days later. Still, because we sometimes see a noticeable reaction to the report, it is on this week’s calendar.

The first of this week’s three extremely important report is the preliminary reading of the 2nd Quarter Gross Domestic Product (GDP) at 8:30 AM ET Wednesday. This index is considered to be the benchmark indicator of economic growth or weakness. It is the total of all goods and services that are produced in the U.S. and usually has a great deal of influence on the financial markets. This reading is arguably the single most important report we get regularly. Current forecasts are estimating that the economy grew at a 3.1% annual rate during the second quarter, rebounding significantly from the first quarter’s 2.9% decline. A faster rate of growth should hurt bond prices, leading to higher mortgage rates Wednesday. But a smaller than expected reading will likely fuel a bond market rally and push mortgage pricing lower since it would indicate the economy was not as strong as many had thought.

Also Wednesday is the adjournment of the fifth FOMC meeting of the year that begins Tuesday. This is not a meeting that will be followed by a press conference with Fed Chair Yellen nor is it expected to yield a change to key interest rates. Theoretically, we would like to hear something in the post-meeting statement that indicates the Fed is not going to raise rates until late next year or 2016. There is a decent chance that this meeting and statement will yield no surprise and have little impact on the markets. However, it is such a key event that draws so much focus from analysts and market participants that just a slight variation in the verbiage can cause a noticeable reaction in the financial and mortgage markets. The meeting will adjourn at 2:00 PM ET, so any reaction will come during mid-afternoon hours.

Thursday’s only data is the 2nd Quarter Employment Cost Index (ECI) that tracks employer costs for wages and benefits. This gives us a measurement of wage-inflation. If it shows a large increase, we may see wage inflation concerns rise as employers will need to pass those increases into the pricing of their products and services. That would cause the bond market to fall and mortgage rates to rise. A smaller than expected increase would be good news for the bond market and mortgage pricing. Current forecasts are showing a rise of 0.4%.

That takes us to Friday, where we have four economic reports, including two major releases. The first is the most important report we see each month when the Labor Department posts their monthly Employment report for July. This report gives us the U.S. unemployment rate, number of jobs added or lost during the month and average hourly earnings for July. The best scenario for the bond market is rising unemployment, a sizable loss of jobs and little change in earnings. While many believe the preliminary reading to the GDP is the single most important report in general, it is posted quarterly rather than monthly like the Employment report. Friday’s report is expected to show that the unemployment rate remained at 6.1% last month while approximately 220,000 jobs were added to the economy. Due to the importance of these readings, we will most likely see quite a bit of volatility in the markets and mortgage pricing Friday morning following their 8:30 AM ET posting.

June’s Personal Income and Outlays data will also be posted early Friday morning. This report helps us measure consumer ability to spend and current spending habits. If it shows sizable increases, bond selling could lead to higher mortgage rates. Current forecasts are calling for an increase of 0.4% in income and a 0.4% rise in spending. A larger than expected increase in income means consumers have more funds to spend, which is not favorable to bonds because consumer spending makes up over two-thirds of the U.S. economy. We would like to see declines in spending and income that would indicate economic weakness, but the smaller the increase in each, the better the news for mortgage rates. It is worth noting though that the Employment report will draw more attention than this data will be.

Next is July’s University of Michigan Index of Consumer Sentiment just before 10:00 AM ET that will help us measure consumer optimism about their own financial situations. This data is considered relevant because rising consumer confidence usually translates into higher levels of spending that adds fuel to the economic recovery and is looked at as bad news for bonds. Friday’s release is an update to the preliminary reading we saw two weeks ago, so unless we see a drastic revision to the preliminary estimate of 81.3, I think the markets will probably shrug off this news.

And finally, the Institute for Supply Management’s (ISM) manufacturing index for July will be posted at 10:00 AM ET Friday. This index measures manufacturer sentiment by surveying trade executives about business conditions during the month and is considered to be of high importance to the markets. One reason it draws so much attention is that this report is usually the first released each month that tracks the preceding month’s activity. A reading above 50.0 means more surveyed executives felt that business improved this month than those who said it had worsened. June’s reading came in at 55.3, above that important threshold. Friday’s release is expected to show a reading of 55.9, meaning surveyed executives felt business conditions improved from June to July. Ideally, we would like to see a decline as it would point towards a softening manufacturing sector, especially is it gets close to 50.0.

Overall, I am expecting to see an extremely active week for financial markets and mortgage rates. I think that the most important day is either going to be Wednesday due to the GDP release and FOMC adjournment or Friday with July’s employment numbers and ISM index being posted. The least important day is Monday since nothing of importance is scheduled. I suspect we will see plenty of movement in not only mortgage rates, but also the financial markets in general this week. If still floating an interest rate, I would definitely maintain constant contact with my mortgage professional as it is going to be an interesting five days.