Today's Market Commentary

Friday’s bond market has opened down again following stronger than expected results from some key economic data. The stock markets are showing early gains with the Dow up 62 points and the Nasdaq up 14 points. The bond market is currently down 6/32, but we will likely see little change in this morning’s mortgage rates compared to yesterday’s morning pricing due to strength in bonds late yesterday. This morning’s potential increase in rates will be offset by the late gains of yesterday.

Today’s most important report was the initial reading of the 4th Quarter Gross Domestic Product (GDP). It revealed a 5.7% annual rate of growth during the last quarter of 2009. This was much better than expected and the fastest pace in six years, indicating that the economy is likely growing at a faster pace than many had thought. That creates a negative for bonds because once the economy begins to gain momentum, inflations concerns will rise in the markets. Since inflation is the number one nemesis of the bond market, bonds tend to suffer when inflation is strengthening, leading to higher mortgage rates.
Preventing a sizable sell-off in bonds was a much lower than expected inflation reading within the data. That inflation reading came in half of forecasts, meaning that inflation isn’t a concern yet. However, many experienced traders and analysts firmly believe that it will follow shortly if economic activity continues to grow at a pace similar to what today’s GDP reading showed. Therefore, we have seen some selling in bonds, but considering the headline GDP reading, we should be content with this morning’s trading.
The second piece of data that came out this morning was the 4th Quarter Employment Cost Index (ECI). It revealed a 0.5% increase in employer costs for wages and benefits. While this was higher than expected, it really has not had much of an impact on bond trading or mortgage rates because the GDP news is bigger news.
And to cap off today’s relevant economic data was a higher than expected revision to the University of Michigan’s Index of Consumer Sentiment for January. This index measures consumer confidence, which is thought to indicate consumer willingness to spend. The 74.4 reading indicates that consumers were more optimistic about their own financial situation this month than many had thought. Strengthening confidence usually translates into more consumer spending, fueling economic growth. However, this report doesn’t carry enough power to heavily influence the markets, especially following the initial GDP reading for the quarter.
Next week brings us several important economic reports for the markets to digest. The first two come Monday morning with the release of December’s Personal Income and Outlays data and January’s ISM manufacturing index. The week ends with the almighty Employment report on Friday. There is not much to be concerned with in between, but the week will likely be an active one for the markets and mortgage rates. Look for more details on next week’s events in Sunday’s weekly preview.