Santa Fe Las Campanas Bond/Stock Market Report

Friday’s bond market has opened in positive territory due to slightly weaker than expected economic news and early stock weakness. The stock markets initially opened in negative territory and dropped noticeably during Fed Chairman Bernanke’s speech in Jackson Hole, Wyoming. However, the major indexes have rebounded from those earlier lows and have pushed into positive ground. The Dow is currently up 4 points, which is almost a 230-point swing from its low point of the day. The Nasdaq also has shown a strong recovery, currently up 24 points after dropping 34 points earlier. The bond market is currently up 10/32, meaning we should see an improvement of approximately .250 of a discount point in this morning’s mortgage rates if comparing to yesterday’s morning pricing.
This morning’s economic reports showed results that were mixed for bonds and mortgage rates, but neither revealed any significant surprises. The revision to the 2nd Quarter Gross Domestic Product (GDP) came in a 1.0% when analysts were expecting to see a 1.1% rate of growth during the quarter. The difference is good news for bonds and interest rates, however, the overall downward revision is the better news. The 0.3% downward revision sounds and looks better than the 0.1% variance from forecasts.
August’s revision to the University of Michigan’s Index of Consumer Sentiment gave us similar results. It stood at 55.7 this month according to today’s update, nearly matching forecasts of a 55.8 reading. The preliminary reading that was released earlier this month showed 54.9, indicating that consumers were more optimistic about their own financial situations than previously thought. That can be considered negative news for the bond market because it means that consumers may be more willing to make large purchases in the near future. Since consumer spending makes up two-thirds of the U.S. economy, waning levels of confidence are considered to be favorable for long-term investments such as mortgage-related bonds.
Mr. Bernanke’s speech this morning caused a fair amount of volatility in the markets. He said that next month’s FOMC meeting has been changed to a two-day meeting so that they have additional time to consider what steps to take to help boost economic growth. He warned that the Fed’s hands are somewhat tied, calling on Washington to do their share, specifically to be careful when make deficit reduction decisions. He hinted about concern that some measures considered by Congress my hurt the economy in the short-term. Overall, he basically let us know that the Fed is considering further action but did not give any details as to what that may be.
Yesterday’s 7-year Note auction went fairly well. By most measurements it did better than Wednesday’s 5-year Note sale. Still, investor demand was not overwhelmingly strong, which raises the question if current bond yields may be limiting further investment. If that is the case, then we may have seen the bottom in mortgage rates, at least for the time being.
Next week is packed with relevant economic reports, including back-to-back heavyweights Thursday and Friday (ISM and Employment respectively). There is data scheduled for each day of the week, including Monday’s Personal Income and Outlays report.