This Week’s Market Commentary
This week brings us the release of six relevant economic reports that may influence mortgage rates in addition to two Treasury auctions and an afternoon of FOMC events. Several of the economic reports and the FOMC stuff are all considered to be highly important to the financial and mortgage markets, meaning that we may see significant changes to rates this week. There is a very good chance of seeing noticeable changes in rates several days. There is no relevant news scheduled to be posted Monday, so look for the stock markets to be the biggest force behind bond trading and changes to mortgage pricing until we get to the middle part of the week.
The week’s first event is July’s Goods and Services Trade Balance data early Tuesday morning, giving us the size of the U.S. trade deficit. It is expected to show a deficit of approximately $44.0 billion, which would be an increase from June’s $42.9 billion. However, I would consider this the least important of this week’s events, meaning it will likely have little impact on bond trading or mortgage rates unless it varies greatly from forecasts.
There are two Treasury auctions this week that have the potential to influence mortgage rates. The first is Wednesday’s 10-year Treasury Note auction, which will be followed by a 30-year Bond auction Thursday. It is fairly common to see some weakness in bonds before these sales as investors prepare for them. If the sales are met with a decent demand from investors, indicating that interest in longer-term securities such as mortgage-related bonds still exists, the earlier losses are usually recovered after the results are announced. The results of Wednesday’s sale will be posted at 1:00 PM ET while Thursday’s results are set for 11:30 AM ET due to other events scheduled that day. If demand was strong, particularly from international investors, we should see mortgage rates improve during afternoon trading Wednesday. However, due to the magnitude of Thursday’s Fed events, that day’s auction will likely have little impact on the bond market and mortgage rates.
One of the week’s two important inflation readings is the only economic report scheduled for release Thursday morning. The Labor Department will post August’s Producer Price Index (PPI) at 8:30 AM ET, giving us an important measurement of inflationary pressures at the producer level of the economy. There are two readings that analysts follow in this release. They are the overall index and the core data reading. The core data is the more important of the two since it excludes more volatile food and energy prices. Analysts are predicting a 1.2% increase in the overall index, and a rise of 0.2% in the core data. Stronger than expected readings could fuel inflation concerns in the bond market. That would be bad news for bonds and mortgage rates because inflation is the number one nemesis of the bond market as it erodes the value of a bond’s future fixed interest payments. As inflation becomes more of a concern in the markets, bonds become less appealing to investors, leading to falling prices and higher mortgage rates.
Thursday’s Fed events start with the 12:30 PM adjournment of the FOMC meeting that began Wednesday. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting, but there is a great deal of hope in the market that we are getting closer to another move by the Fed such as QE3. Friday’s Employment numbers helped bolster the calls for Fed action. I believe that an announcement of a bond buying program should rally not only stocks but also bonds and mortgage rates because those are the securities that the Fed will purchase in the QE program. On the other hand, the lack of at least a strong indication that QE3 is coming soon will probably lead to selling in the markets and an upward revision to mortgage rates.
Also worth noting is that the FOMC meeting is ending earlier than the traditional 2:15 PM because it is one of the meetings that will be followed by a press conference with Fed Chairman Bernanke. The meeting will adjourn at 12:30 PM while the press conference will begin at 2:15 PM and will probably lead to afternoon volatility in the markets and mortgage rates Thursday. The Fed will also update their economic and monetary policy projections right before the press conference begins. They are expected to be posted at 2:00 PM ET. Any significant revisions to the Fed’s outlook on unemployment, GDP growth or their timetable for keeping key rates at current levels will also cause volatility in the markets and mortgage rates.
Friday has the remaining four pieces of economic data with two of them considered to be major releases. Those highly important reports are August’s Retail Sales and Consumer Price Index (CPI) will both be posted at 8:30 AM. The sales report will give us a very important measurement of consumer spending, which is extremely relevant to the markets because it makes up over two-thirds of the U.S. economy. Current forecasts are calling for a 0.7% increase in sales. Analysts are also calling for a 0.8% rise in sales if more volatile auto transactions are excluded. Larger than expected increases would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate economic growth.
The Consumer Price Index (CPI) is also one of the most important reports we see each month. It is considered to be a key indicator of inflation at the consumer level of the economy. As with its’ sister PPI report, there are two readings in the report- the overall index and the core data reading. Current forecasts show a 0.6% increase in the overall reading and a 0.2% rise in the core data reading. As with the PPI, a larger increase in the core data would signal rising inflation and would likely lead to higher mortgage rates Friday morning.
August’s Industrial Production data will be posted mid-morning Friday. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be moderately important but could help change mortgage rates if there is a significant difference between forecasts and the actual reading. Analysts are expecting to see a 0.2% decline from July’s level of output. A sizable increase could lead to slightly higher mortgage rates, while a weaker than expected figure would indicate a softer than thought manufacturing sector and would be considered good news for bonds and mortgage rates. However, the CPI and Retail Sales reports are the key data of the day and will likely influence mortgage pricing much more than the production report will.
The last release of the week will be posted by the University of Michigan late Friday morning. Their Index of Consumer Sentiment will give us an indication of consumer confidence, which hints at consumers’ willingness to spend. If consumer confidence in their own financial situation is rising is rising, they are more apt to make large purchases. But, if they are growing more concerned about their job security or finances, they probably will delay making that large purchase. This influences future consumer spending data and can impact the financial markets. It is expected to show a reading of 73.3, which would mean confidence slipped from August’s level of 74.3. That would be considered favorable news for bonds and mortgage rates because waning consumer spending indicates slower economic growth.
Overall, I think we need to label Thursday as the most important day of the week with the PPI and Fed events scheduled. However, Friday has some very important economic data set for release and also has the potential to heavily influence bond trading and mortgage rates. Monday will probably end up being the calmest day for mortgage rates, but we still may see minor changes if the stock markets show much movement. I strongly recommend maintaining contact with your mortgage professional if still floating an interest rate, especially the latter part of the week.
