Thursday, July 16, 2020

Market Commentary

Updated on July 16, 2020 10:04:44 AM EDT

Yesterday afternoon’s release of the Fed Beige Book didn’t reveal any major surprises. It did show that economic activity improved in most of the Fed districts from the previous update, but that was expected as states reopened for business. There appears to be concerns about what the future holds and there may be a need for layoffs if activity does not rapidly improve further. Comments in the report showed that the Paycheck Protection Program (PPP) loans did indeed save many jobs, at least temporarily. Now that employer funds have been used, many businesses may not be able to maintain a full staff. This could affect monthly unemployment figures in the near future. However, because the report contained no surprises, we saw little reaction to the release in the bond and mortgage markets.

The first of this morning’s two important economic releases was Junes Retail Sales report that showed consumer-level sales rose 7.5% last month, well above the 5.0% increase that was expected. Even a secondary reading that excludes more costly auto transactions came in much stronger than thought. This means consumers, which makes up nearly 70% of the economy, spent more than predicted last month. While it is clearly bad news for bonds since it is a sign of economic strength, it hasn’t had much of an influence on this morning’s mortgage rates. Expected volatility in the data and good news from the morning’s other release are helping to improve mortgage rates this morning.

Last week’s unemployment figures were also released early this morning, revealing 1.3 million new claims for benefits were filed. That was a tad higher than forecasts and close to the previous week’s revised total, indicating the employment sector is still in trouble. This allows us to consider the data good news for bonds and mortgage rates.

Tomorrow has two reports set for release that have a moderate chance of influencing mortgage rates. Junes Housing Starts is first, set for 8:30 AM ET. It will give us an indication of housing sector strength and future mortgage credit demand, but usually doesnt cause much movement in mortgage rates unless it varies greatly from forecasts. Tomorrows release is expected to show an increase in new home groundbreakings from May’s starts. The lower the number of starts, the better the news it is for the bond market, as it would indicate a weaker than expected new home portion of the housing sector.

The final economic report of the week will be the University of Michigans Index of Consumer Sentiment at 10:00 AM ET tomorrow. This index is released in a preliminary form each month and then followed up two weeks later with a final reading. The preliminary reading for July is expected to show a small increase from Junes final reading of 78.1. This would indicate that surveyed consumers were slightly more comfortable with their own financial and employment situations this month as they were last month. It is believed that if consumer confidence in their own finances is rising, they are more apt to make a large purchase in the near future. And with consumer spending making up such a large part of our economy, investors pay close attention to reports such as these. Accordingly, a decline in confidence would be good news for mortgage rates because it means many consumers will probably delay making a large purchase in the immediate future, limiting economic growth.

 ©Mortgage Commentary 2020