Mortgage California Blog

This Week’s Market Commentary

December 10th, 2012

This week brings us the release of five economic reports that are considered relevant to mortgage rates, but only four of them are of concern. In addition to them, we also have the year’s last FOMC meeting and other related Fed events and two Treasury auctions that have the potential to influence mortgage pricing. The biggest news comes the middle and late days of the week, so we should see more movement in rates as the week progresses.

 

There is nothing of relevance scheduled for Monday. This means we can expect the stock markets to drive bond trading and mortgage rates again. If the major stock indexes open the week with gains Monday morning, bonds may move lower, pushing mortgage rates higher. But a weak open in stocks could lead to slightly lower mortgage rates Monday. We could also see traders position themselves ahead of the week’s agenda, so even though there is nothing concerning on the calendar, we could see mortgage rates change.

 

October’s Goods and Services Trade Balance report will be posted early Tuesday morning. This report gives us the size of the U.S. trade deficit, but it is considered to be of low importance to mortgage rates. It is actually the week’s least important monthly report. It is expected to show a $42.7 billion trade deficit, which would be an increase from September. Unless it varies greatly from forecasts, I don’t expect this data to affect mortgage pricing Tuesday.

 

Wednesday has no important economic data scheduled for release but it does have the 12:30 PM adjournment of the FOMC meeting that began Tuesday. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting, but traders and analysts are anxious to get the Fed’s current economic forecasts. Also worth noting is that the 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 hosted by Fed Chairman Bernanke. The meeting will adjourn at 12:30 PM, forecasts will be posted at 2:00 PM and the press conference will begin at 2:15 PM. It is fairly safe to assume that all of that will lead to afternoon volatility in the markets and mortgage rates Wednesday.

 

There are Treasury auctions scheduled for several days this week, but the two important ones are the 10-year Note sale Wednesday and the 30-year Bond sale Thursday. Wednesday’s auction is the more important of the two and will likely have a bigger influence on mortgage rates. Results of Wednesday’s sale will be posted at 11:30 AM ET due to the FOMC events while Thursday’s will be at the usual 1:00 PM. If they were met with a strong demand from investors, particularly international buyers, we should see strength in bonds and improvements to mortgage pricing those days shortly after. On the other hand, a weak interest in the auctions could lead to upward revisions to mortgage rates.

 

Thursday has two important economic reports scheduled for release, both at 8:30 AM ET. November’s Retail Sales report is one of them. This report will give us a key measurement of consumer spending by tracking sales at retail level establishments. This data is highly important to the markets because consumer spending makes up over two-thirds of the U.S. economy. Rapidly rising consumer spending raises the possibility of seeing solid economic growth. Since long-term securities such as mortgage bonds are usually more appealing to investors during weaker economic conditions, a large increase in retail sales will likely drive bond prices lower and mortgage rates higher Thursday. Current forecasts are calling for an increase of 0.4% in November’s sales.

 

November’s Producer Price Index (PPI) will also be posted early Thursday morning. It measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices, giving a more stable reading for analysts to consider. If Thursday’s release reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market should respond well and mortgage rates should fall. Current forecasts are showing a 0.5% decline in the overall index and a 0.1% rise in the core data.

 

Friday has more highly important data when November’s Consumer Price Index (CPI) is posted at 8:30 AM ET. It is similar to Thursday’s Producer Price Index, except it tracks inflationary pressures at the more important consumer level of the economy. Current forecasts call for a decline of 0.2% in the overall index and a 0.1% rise in the core data reading. This data is one of the most watched inflation indexes, which is extremely important to long-term securities such as mortgage related bonds. Rising inflation erodes the value of a bond’s future fixed interest payments, making them less appealing to investors. That translates into falling bond prices and rising mortgage rates. Therefore, weak readings would be favorable for the bond market and mortgage shoppers.

 

The week closes with November’s Industrial Production mid-morning Friday. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Analysts are expecting it to show a 0.4% increase in output, indicating modest manufacturing growth. A smaller than expected rise would be good news for bonds, while a stronger reading may result in slightly higher mortgage pricing. However, the CPI release is much more important to the markets than this data.

 

Overall, there is a high probability that we will see an active week in the financial and mortgage markets. Wednesday will probably be the most important day due mostly to the Fed events, but Thursday has two very important economic reports so we may see plenty of volatility that day also. Monday is an easy choice for least important, however, we could still see an extension of Friday’s trading affect mortgage rates Monday also. I still believe we are due for a stock pullback that will cause a flight-to-safety in bonds, hence the optimistic approach towards interest rates. On the other hand, with so much on tap this week and a strong likelihood of several active days in the markets, it is strongly recommended that you maintain contact with your mortgage professional if still floating an interest rate.

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