Despite stronger than expected housing data and a nice rally in the stock market, investors showed significant demand for bonds, including mortgage backed securities (MBS). As a result, prices for MBS improved, causing mortgage rates to end the week a little lower.
The housing data released this week showed that home buyers were busy in April signing contacts to purchase homes. The market for both previously owned homes and newly built homes saw their best activity in years. Improved labor market conditions and low mortgage rates are a great combination to support a very active housing market.
The Pending Home Sales Index, which measures the number of contracts signed to buy previously owned homes, jumped in April by 5% over March, to the highest level of activity since February 2006. Similarly, the New Home Sales report, which measures the number of contracts signed to buy newly built homes, surged by 17% over March, to its best level since January 2008.
The Fed has stated that the decision on when to next hike the federal funds rate will depend on the incoming economic data. This week's data certainly increases the chance of a rate hike in the near term. Besides the strong housing data, Durable Goods orders rose in April by much more than expected. Orders jumped 3.4% from March when an increase of only 0.5% was expected. March orders were revised higher as well. Although the durable orders data is volatile from month to month, the April data does show that demand for big ticket items is high and that there is confidence in improved future economic activity.
Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the core PCE price index, an inflation indicator favored by the Fed, will come out on Tuesday. The ISM national manufacturing index will be released on Wednesday, and the ISM national services index will come out on Friday. Mortgage markets will be closed on Monday in observance of Memorial Day.