July 31st, 2009 3:36 PM by Mel Samick
Thursday's bond market has opened in negative territory following strong stock gains and renewed fears about the amount of debt the government is selling. The stock markets are rallying around fairly positive earnings reports that have the Dow up 83 points and the Nasdaq up 16 points. The bond market is currently up 19/32.Today's only economic news was weekly unemployment claims from the Labor Department. They reported that 584,000 new claims for unemployment benefits were filed last week. This nearly matched forecasts and therefore has had no impact on this morning's bond trading or mortgage rates.Neither of yesterday's afternoon events were favorable to bonds. The Fed Beige Book indicated that the economy is stabilizing in several regions of the U.S., which is bad for bonds because economic strength makes long-term securities such as mortgage-related bonds less attractive to investors. Yesterday's 5-year Note sale did not go too well, leading many to believe there is little chance of a strong demand in today's 7-year Note sale. If we do get another lackluster interest in today's auction, we most likely will see further weakness in bonds this afternoon. That may cause upward revisions to mortgage rates after the results are posted at 1:00 PM ET.There are two important releases scheduled to be posted tomorrow morning. The first is the preliminary reading of the 2nd Quarter Gross Domestic Product (GDP), which is considered to be the best indicator of economic activity. It is the sum of all goods and services 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 piece of data we get regularly. Current forecasts are estimating that the economy shrank at a 1.5% annual rate du ring the second quarter. A smaller decline will probably hurt bond prices, leading to higher mortgage rates tomorrow. But a larger than expected decline could fuel a bond market rally and lead to lower mortgage pricing. The second report of the day is the 2nd Quarter Employment Cost Index (ECI) that measures employers' costs for wages and benefits. It is considered to be an important measurement of wage inflation and can have a pretty big impact on the bond market and mortgage rates if it varies much from forecasts. If it shows a rapid increase, raising inflation concerns, the bond market may drop and mortgage rates rise. It is expected to reveal an increase of 0.3%.I would not be surprised to see afternoon revisions to mortgage rates this afternoon and a sizable move tomorrow. If today's auction does not show a fairly strong interest from investors, particularly international buyers, and tomorrow's GDP reading gives us a stronger than expected readi ng, those changes will probably reflect higher rates.