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Brian Dawson

10-11-2012 Market Update

Thursday, October 11, 2012 - Article by: Brian Dawson - Land Home Financial Services - Message

Thursday's bond market has opened in negative territory again following stronger than expected economic news and early stock strength. The stock markets are showing gains during early trading with the Dow up 36 points and the Nasdaq up 18 points. The bond market is currently down 13/32, but due to strength late yesterday we will likely see little change in this morning's mortgage rates if comparing to yesterday's early pricing.

Yesterday afternoon's Fed Beige Book report showed moderate economic growth in most of the Fed's 12 regions. The only thing in the report that really stood out was fairly decent gains in the housing sector. That could be a problem for mortgage rates if it continues because a strengthening housing sector makes an overall economic recovery more viable. Still, the report didn't cause much concern or optimism in the stock or bond markets and had little influence on yesterday's mortgage pricing.

The Labor Department said early this morning that 339,000 new claims for unemployment benefits were filed last week, well below forecasts of 370,000. Not only was this a much smaller number of claims than forecasts and the previous week, it also was the lowest total since February of 2008. New like this helps support last Friday's monthly employment figures and indicates that the employment sector is improving. That makes the data negative for the bond market and mortgage rates since it points towards economic strength. This report usually has little influence on the markets because it tracks only a single week's worth of initial claims, but this was enough of a surprise to push bonds lower this morning and mortgage rates a little higher had it not been for strength late yesterday that is offsetting this morning's losses.

August's Trade Balance report was also released at 8:30 AM ET, showing that our trade deficit stood at $44.2 billion that month. This was a bit larger than the $43.8 billion that was expected, but the low importance of this data means it has not affected today's trading or mortgage pricing.

We also have another Treasury auction to watch for this afternoon. They will sell 30-year Bonds today and post results at 1:00 PM ET. Yesterday's 10-year Note auction was met with a strong demand from investors, indicating that appetite for long-term U.S. debt is currently high, which helped buoy the broader bond market yesterday afternoon. The results of yesterday's sale gives optimism to today's auction, but the 10-year Note sale usually has a bigger impact on bond trading and mortgage rates than today's 30-year Bonds do. However, another strong sale could lead to bond strength and possibly a small improvement to mortgage rates later this afternoon.

There are two more pieces of economic data scheduled for release tomorrow morning, one of which is very important to the bond market and mortgage rates. That would be September's Producer Price Index (PPI) at 8:30 AM ET. This is one of the two very important inflation readings we get each month. This index measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.8% increase in the overall index and a 0.2% rise in the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices, giving a more stable inflation reading. A larger than expected increase could raise concerns in the bond market about future inflation and lead to higher mortgage rates tomorrow. However, weaker than expected readings should result in bond market strength and lower mortgage pricing.

The last report of the week is October's preliminary reading to the University of Michigan's Index of Consumer Sentiment late tomorrow morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. Rising confidence means consumers feel better about their own financial and employment situations, meaning they are more apt to make a large purchase in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, any related date is watched closely. Good news for the bond market would be a sizable decline in consumer confidence, but due to the importance of the PPI report, I suspect this data will have little impact on mortgage rates. It is expected to show a reading of 78.5, up slightly from September's final of 78.3.

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