Yesterday's 7-year Treasury Note auction drew a fairly strong demand from investors, particularly international buyers. The benchmarks all pointed to a decent sale, notably better than Wednesday's 5-year Note auction. Bonds had already improved before the 1:00 PM ET results announcement, but extended those gains a bit more after they were posted. This led to some lenders making an intraday improvement in rates early afternoon, while many likely waited for this morning's rates to reflect the change. Either way, the auction did have a positive influence on mortgage pricing.
April's Personal Income and Outlays report at 8:30 AM ET failed to bring any negative surprises, at least in the key portions of the report. The closely watched Personal Consumption Expenditures (PCE) indexes that the Fed relies heavily on as their preferred gauge of inflation rose 0.1% last month, pegging expectations. On an annual basis, the overall reading rose at a 2.1% pace, down from March's 2.3%. April's year-over core PCE fell from March's 2.7% to 2.5%. Both annual readings were slightly softer than forecasts, meaning in the Fed's eyes inflation was weaker than thought. This is good news for bonds and mortgage rates because slowing inflation makes long-term securities, such as mortgage bonds, more attractive to investors.
The other headline numbers to come from the early morning report showed income jumped 0.8% last month, exceeding predictions of up 0.3%. That indicates consumers had more money to spend than expected. However, the spending reading pegged forecasts of a 0.2% increase. It is apparent that even though consumers had more money available to spend, they didn't spend it. We are labeling this part of the report to be neutral to slightly negative for rates.
Closing out this week's calendar was the University of Michigan's revised Index of Consumer Sentiment for May at 10:00 AM ET. They announced a reading of 52.2 that was higher than the preliminary reading of 50.8 from two weeks ago. Analysts were expecting to see 52.0, meaning consumers felt a bit better about their own financial situations than previously thought. Rising confidence usually translates into strong consumer spending that fuels economic growth. Accordingly, this report should also be considered neutral to slightly negative for rates.
Next week doesn't have a large number of economic reports set for release, but most of what is scheduled are considered to be highly important. The week will give us the typical new month reports such as the ISM manufacturing index late Monday morning and May's Employment report Friday morning. In between, there are a couple of moderately important reports. We also will be watching several Fed-member speaking engagements since a few of them have topics related to monetary policy and the outlook of the U.S. economy. Look for details on all of next week's activities in Sunday evening's weekly preview.
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