Santa Fe Las Campanas Stock/Bond Market Report

Friday’s bond market has opened in negative territory following stronger than expected consumer spending data (1.1% jump) and a positive open for stocks. The stock markets are reacting favorably to the data and decent earnings results last night. The Dow is currently up 95 points while the Nasdaq has gained 29 points. The bond market is currently down 14/32, which will likely push this morning’s mortgage rates higher by approximately .250 of a discount point.

The Commerce Department gave us this morning’s big economic news with the release of September’s Retail Sales report. It showed a 1.1% jump in retail level spending, greatly exceeding forecasts of a 0.6% increase. Even if more volatile auto-related transactions were excluded, sales rose 0.6% when analysts were expecting to see only a 0.3% rise. This means consumers were spending much more last month than many had thought. Since consumer spending makes up two-thirds of the U.S. economy, this is good news for stocks because it boosts corporate earnings outlooks. However, it is bad news for the bond market and mortgage rates since it hints that the economy may be stronger than we think, making long-term securities such as mortgage-related bonds less attractive to investors. That has led to this morning’s bond weakness and increase in mortgage pricing.
Also posted this morning was October’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment. It revealed a reading of 57.5 that fell short of the 60.0 that was expected. This means surveyed consumers were more pessimistic about their own financial situations than last month. That is favorable news for the bond market because it is it believed that waning consumer confidence translates into lower levels of consumer spending. If consumers are more worried about losing their job or paying the mortgage, they are less likely to make a large purchase in the near future. Today’s early report contradicts that, but the sales data measures past spending while the sentiment index gives us an indication of future spending. Unfortunately, the sale data carries more significance in the market and is the focus of this morning’s trading.
Next week has a handful of reports scheduled for release that may influence mortgage rates. There is relevant data coming mid-morning Monday when we will get September’s Industrial Production data. The rest of the week is fairly busy with the release of several other reports including two key inflation readings, a couple of housing sector reports, the Fed Beige Book and a speaking engagement by Fed Chairman Bernanke.