Thursday's market update

Thursday’s bond market has opened in positive territory following a weaker than expected GDP reading. The stock markets are showing minor gains after an afternoon rally yesterday pushed the Dow higher and allowed it to close above 14,000. The Dow is currently up 8 points while the Nasdaq has gained 13 points. The bond market is currently up 4/32, but due to afternoon weakness yesterday we will likely see little change from yesterday’s morning mortgage pricing. The revised 4th Quarter GDP reading was posted early this morning, showing that the economy grew slightly during the last three months of the year. The 0.1% annual rate of growth was an upward revision to the preliminary reading that showed a 0.1% contraction, indicating that the economy was just a bit stronger than previously estimated. Still, this was the weakest quarterly rate of growth since early 2011 and was short of expectations that called for a 0.5% growth rate. In other words, the economy was a little stronger than previously announced but not as strong as many had thought. Therefore, we should consider this news favorable for the bond market and mortgage rates. Today’s second piece of data came from the Labor Department who said 344,000 new claims for unemployment benefits were filed last week. This was down from the previous week’s revised total of 366,000 and well below the 350,000 that was forecasted. That makes the data bad news for bonds and mortgage pricing because declining initial claims indicates a strengthening employment sector of the economy. Fortunately, since this data tracks only a single week’s worth of new claims, its impact on the financial and mortgage markets has been fairly minimal this morning. Tomorrow has three more pieces of economic data that is likely to influence mortgage rates. The first is January’s Personal Income and Outlays data 8:30 AM ET, which gives us an indication of consumer ability to spend and current spending habits. Forecasts are calling for a decline in income of 2.4% while spending is expected to rise 0.2%. The expected sizable decline in income is a result of the 2.6% spike we saw last month in December’s data that was attributed to Fiscal Cliff worries. Many large companies paid dividends and bonuses in December instead of January as they traditionally do in case the Fiscal Cliff issue did not get resolved. This allowed those payments to be taxed at the expected lower rates of 2012 instead of the 2013 rates that would have kicked in had there been no resolution. This means that we will see income fall sharply from December’s inflated level. Lower levels of income mean consumers have less money to spend. And weaker levels of consumer spending helps limit overall economic growth, making long-term securities such as mortgage-related bonds, more attractive to investors. The University of Michigan's revision to their Index of Consumer Sentiment for February will be announced just before 10:00 AM ET tomorrow. Current forecasts show this index unchanged from its preliminary estimate of 76.3. This index is fairly important because it helps us measure consumer confidence that translates into consumer willingness to spend, but is not considered to be a major market mover. This means it will probably not have a significant impact on mortgage rates, especially with other important data being released tomorrow morning. The Institute for Supply Management (ISM) will release their manufacturing index for February at 10:00 AM ET tomorrow. This index measures manufacturer sentiment and can have a pretty large impact on the financial and mortgage markets if it varies from forecasts. It is expected to show a small decline from January's 53.1 to 52.4 this month. This is important because a reading above 50.0 means more surveyed manufacturers felt business improved during the month than those who felt it had worsened, meaning growth is likely in the manufacturing sector. If we see a weaker than expected reading, the bond market could rally. But, a higher than forecasted reading could lead to major selling in bonds, causing mortgage rates to rise tomorrow morning. One of the reasons this data is considered so important is the fact that it is usually the first monthly report posted that covers the preceding month. Its posting date is the first business day of the month, allowing for a current snapshot of economic conditions. If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now...       Alan Russell 161 South San Antonio Rd. | Los Altos, CA 95022 Ph: 650-947-2296 | Fax: 408-335-1118 alanrussell@princetoncap.com CLICK HERE TO STOP RECEIVING OUR REPORT