Mortgage Rates Fell Today

Mortgage rates fell today following the much weaker-than-expected reading on Q1 GDP.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios is 4.25% with 4.125% costing a few dollars more.

A huge miss on Q1 GDP by almost every economist and analyst that make their living by forecasting.   Does the larger decline have any significance? The uproar today from those that believe the economy will grow regardless of the Q1 data was mostly directed toward the weather in Q1. The stock market didn’t fold and US interest rates while better today were unable to hold the lows of this morning. The percentage of those suspect about the anticipated growth rate forecasts were somewhat drowned out. It isn’t in human nature to easily accept bad news. Most of what I read through the day paints the future to be a lot better and while accepting the shock in the Q1 decline blame most of it on the weather. The weather was bad, but there is an increasing pension over the last few years to hang a lot of the negative news on the weather---hurricanes, blizzards, droughts, heat waves---all have taken on an increasing excuse when expected data is less than thought. The weather is never credited for better than thought news.

This afternoon’s $35B 5yr note auction was good - stronger bidding from indirect bidders (foreign central banks and large foreign investors) and a little better cover offset the soft direct bidding. The 5yr is the middle of the curve, important because its yield has increased more than the long end (10yr note) recently.

More key data tomorrow with weekly claims expected -2K to 310K.  May personal income and spending both expected to have increased 0.4%. The core PCE expected +0.2%--the Fed’s preferred inflation index. Treasury will auction $29B of 7yr notes.

Technicals a little more bullish today but the 10yr didn’t hold at its low 2.53% rate this afternoon as the stock market relentlessly moves higher, headed for the DJIA to break 17K. The best we can say now is, the 10yr has to hold below 2.58% or we will have to say today’s rally was a false reaction to extreme Q1 weakness and that the outlook for the economy remains strong. Q2 GDP will be up, maybe at 2.5%. The advance report will surface a month from now.

In summary, weak economic data helped mortgage rates improve once again today, but the weakest report was the final reading of first quarter GDP which is backwards looking. Thus, the gains were not as much as you would hope. Tomorrow, we get much more important data with consumer consumption and personal income, as well as inflation data with the release of the Fed's favorite gauge the PCE index and finally weekly jobless claims. As the day has progressed, we have given back some of today's gains and I am fearful the data tomorrow will not spark a strong enough rally to justify floating. I favor and I am recommending to my clients that are within 30 days of funding to lock in today’s gains.