Weekly Mortgage Commentary_January 14, 2013

This week beings us the release of seven economic reports that are relevant to mortgage rates, with some of the data considered to be highly important to the financial and mortgage markets. There is nothing scheduled for release during trading hours that may influence mortgage rates. However, Fed Chairman Bernanke will speak at the University of Michigan at 4:30 PM ET. The topic will be the economy and monetary policy, so there is a decent possibility of his words affecting the markets. But since the event is considered after-hours, we won’t be able to see whatever is said influence mortgage pricing until Tuesday morning.

The first economic reports of the week will be posted early Tuesday morning. The Commerce Department will release December’s Retail Sales data at 8:30 AM ET. This Commerce Department report measures consumer spending by tracking sales at retail level establishments in the U.S. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched closely. Current forecasts are calling for an increase in sales of approximately 0.3%. A smaller than expected increase in sales would be good news for bonds and mortgage rates because it would hint at weaker than thought economic growth.

Tuesday’s second report is the Labor Department’s Producer Price Index (PPI), also at 8:30 AM ET. The PPI is important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. Analysts are expecting to see no change in the overall reading and a 0.2% increase in the more important core reading that excludes volatile food and energy prices. A larger than expected increase in the core reading could mean higher mortgage rates Tuesday since inflation is the number one nemesis of the bond market. It erodes the value of a bond’s future fixed interest payments, making them less attractive to investors. Accordingly, they are sold at a discount to offset the drop in value, which drives their yields higher. And since mortgage rates follow bond yields, rising inflation usually translates into higher interest rates for borrowers.

Wednesday also has multiple reports scheduled for release. The first and most important is December’s Consumer Price Index (CPI) at 8:30 AM. This is one of the most important monthly reports that we see each month since it measures inflationary pressures at the consumer level of the economy. As with the PPI, there are two readings in the release. The overall index is expected to remain unchanged while the core data is expected to increase 0.1%. Weaker than expected readings would be favorable news and should lead to bond strength and lower mortgage rates Wednesday morning.

December’s Industrial Production report is also on Wednesday’s agenda with a release time of 9:15 AM ET. This data measures output at U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength or weakness. Current forecasts are calling for an increase in production of 0.2% from November’s level. A weaker reading would be considered good news for bonds and could help lower mortgage rates, but the CPI is by far the more important data for the bond market and will have the biggest impact on that day’s mortgage pricing.

Lastly for Wednesday, the Federal Reserve’s Beige Book will be posted at 2:00 PM ET. This report is named simply after the color of its cover and details economic conditions throughout the U.S. by Fed region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises, particularly regarding inflation, unemployment or future hiring. Any reaction to the report though will come during afternoon trading.

Thursday’s sole monthly data is December’s Housing Starts at 8:30 AM. It helps us measure housing sector strength and future mortgage credit demand by tracking construction starts of new homes. It is not considered to be one of the more important releases each month, so I don’t see it causing much movement in mortgage rates Thursday but does carry the potential to affect trading and rates if it shows a significant surprise.

The final report of the week is January’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment. This index measures consumer willingness to spend and can usually have enough of an impact on the financial markets to slightly change mortgage rates. If consumers feel better about their own financial situations, they are more apt to make a large purchase in the near future, fueling economic activity. Good news would be a reading weaker than the 75.0 that is expected.

Overall, Tuesday or Wednesday will probably be the most active day for mortgage rates with some key economic data being posted both days. The least active day will probably be Monday, but Thursday also has little to be too concerned with. But the stock markets can be a big influence on bond trading and mortgage pricing any day, so maintaining contact with your mortgage professional this week is highly recommended if still floating an interest rate.

Weekly Mortgage Commentary_January 7, 2013

This week brings us little to drive bond trading and mortgage rates. There is only one monthly economic report scheduled, which is considered to be of low importance to the markets anyhow. That would give the appearance that we are in for a quiet week for mortgage rates, but I don’t believe this will be the case. There probably will be less activity and movement than we saw last week. However, I suspect that we will still end up seeing a fair amount of movement in rates between Monday’s opening and Friday’s closing.

There is nothing of importance scheduled to be posted Monday or Tuesday. This means that the stock markets will probably dictate bond direction there first part of the week. If the major stock indexes rally again, they will pressure bonds leading to higher mortgage rates. However, stock weakness should allow bond prices to rise and mortgage rates to improve.

Besides the sole monthly economic report late in the week, we also have two Treasury auctions that have the potential to influence mortgage pricing. They will be held Wednesday and Thursday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important of the two as it will give us a better indication for demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would likely result in upward revisions to mortgage rates.

Also worth noting is some news from overseas before the markets open Thursday. The Bank of England’s monetary policy announcement (equivalent to our FOMC) will be released at 7:15 AM ET while the European Central Bank will announce at 7:45 AM ET. The ECB will draw the most attention as global investors are extremely concerned about the Eurozone and what actions will be taken to shore up some of its’ member’s finances. We should be on alert for a reaction in the bond and mortgage markets if they yield any surprises.

November’s Goods and Services Trade Balance will be posted early Friday morning. It measures the size of the U.S. trade deficit and is expected to show a $41.8 billion deficit. This data usually does not directly affect mortgage rates, but it does influence the value of the U.S. dollar versus other currencies. A stronger dollar makes U.S. securities more attractive to international investors because they are worth more when sold and converted to the investor’s domestic currency. But unless we see a significant variance from forecasts, I don’t believe this data will lead to a change in mortgage rates Friday.

Overall, it would be easy to say this will be a calm week for the mortgage markets due to the lack of important or highly influential events scheduled. I would not be surprised to see stocks move lower for the week, helping to push funds back into bonds. We saw some improvement in bonds late Friday, so if your lender did not improve rates during afternoon trading, you have an improvement of approximately .125 – .250 of a discount point waiting at Monday’s opening. That could shrink or get larger depending on how the markets perform during early morning trading, but there is a decent possibility of starting the week off in the right direction. With the benchmark 10-year Treasury Note currently yielding 1.90%, I believe there is more likelihood of seeing bonds improve (pushing yields and mortgage rates lower) in the immediate future than seeing them move lower (raising yields and mortgage pricing). Of course, this is just speculation and only an opinion, so please maintain contact with your mortgage professional if still floating an interest rate.