Weekly Mortgage Commentary-April 14, 2014

This week brings us the release of five economic reports that have the potential to affect mortgage rates. We also have round two of corporate earnings releases that can significantly impact the stock markets and help direct funds into or away from bonds. Strong earnings reports should fuel a stock rally that pressures bonds and leads to higher mortgage rates. On the other hand, disappointing earnings news should make bonds more attractive and lead to rate improvements.

 

The Commerce Department will start this week’s activities with the release of March’s Retail Sales data early Monday morning. This piece of data gives us a measurement of consumer spending levels, which is very important because consumer spending makes up over two-thirds of the U.S. economy. Forecasts are calling for 1.0% increase in sales from February to March. If we see a larger increase in spending, the bond market will likely fall and mortgage rates will rise as it would indicate consumers are spending more than thought, fueling economic growth. However, a weaker than expected level of sales could push bond prices higher and mortgage rates lower Monday.

March’s Consumer Price Index (CPI) is the second report of the week, coming at 8:30 AM ET Tuesday. This index is one of the more important pieces of data the bond market gets each month. It is similar to last week’s PPI but measures inflationary pressures at the consumer level of the economy. If inflation is rapidly rising, bonds become less appealing to investors, leading to bond selling and higher mortgage rates. There are two readings in the index that traders watch- the overall and the core data that excludes more volatile food and energy prices. Analysts are expecting to see a 0.1% rise in the overall readings and a 0.1% increase in the core reading. The core data is the more important reading, which ideally would show a decline in prices at the consumer level, keeping inflation concerns subdued.

Wednesday has three pieces of economic data worth watching. The first of the day is March’s Housing Starts report that tracks groundbreakings of new home construction. It gives us a measurement of housing sector strength and future demand for mortgage credit. It is not considered to be highly important to the markets but does draw enough attention to influence trading if it reveals surprisingly strong or weak numbers. The report will be posted at 8:30 AM ET and is expected to show an increase in starts from February to March. Good news for mortgage rates would be a decline in starts that points toward housing sector weakness.

The second report Wednesday will be March’s Industrial Production data at 9:15 AM ET. It tracks output at U.S. factories, mines and utilities, translating into an indication of manufacturing sector strength. Current forecasts are calling for an increase in production of 0.5%. This data is considered to be only moderately important to rates, so it will take more than just a slight variance to influence bond trading and mortgage pricing. Signs of manufacturing sector strength are considered negative news for mortgage rates, so a decline in output would be favorable news for the bond market and mortgage shoppers.

Also Wednesday is afternoon release of the Federal Reserve’s Fed Beige Book report. This report is named simply after the color of its cover but details economic conditions throughout the U.S. by Fed region. Since the Fed relies heavily on the contents of this report during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any significant surprises. Generally speaking, signs of strong economic growth or inflation rising form the last update would be considered negative for bonds and mortgage rates. Slowing economic conditions with little sign of inflationary pressures would be ideal for mortgage rates.

That concludes the week’s monthly or quarterly economic reports that are likely to affect mortgage rates. The bond market will close early Thursday and will be closed Friday in observance of the Good Friday holiday. The stock markets will be closed Friday but have a full day of trading Thursday. All the markets will reopen for regular trading Monday morning. It is fairly common to see a little pressure in bonds just before a holiday as investors look to protect themselves over the long weekend.

Overall, the most important reports are Monday’s Retail Sales and Tuesday’s CPI index, but Wednesday has three releases so it may be an active day also. I believe we will see the most movement in mortgage rates either Monday or Wednesday. However, we need to keep a close eye on the stock markets for mortgage rate direction also. If stocks extend last week’s sell-off, we could see further gains in bonds and improvements to mortgage rates. The benchmark 10-year Treasury yield is currently almost 2.62%, which is well below the 2.68% we considered a resistance level. I don’t see it remaining where it is now for very long. I believe we are more likely to see it move back closer to that threshold than below 2.60% in the immediate future. Therefore, I am holding my conservative stance towards rates and recommend locking a rate if closing in the near future.

Weekly Morgage Commentary-April 7, 2014

This week brings us the release of only two monthly economic reports that are relevant to mortgage rates, in addition to a couple of Treasury auctions and the minutes from the last FOMC meeting that have the potential to be influential on the bond market and mortgage pricing. Corporate earnings season also kicks off this week, which could be instrumental in driving stock prices significantly higher or lower. Since stock movement often affects bond trading, we will also be watching the earnings releases from some of the bigger names and bellwethers to help gauge bond direction and mortgage rates movement. There is no relevant economic news scheduled for release Monday or Tuesday. The first events of the week will come Wednesday afternoon. One is the release of the minutes from the last FOMC meeting. Market participants will be looking at them closely as they give us insight to the Fed’s current thought process and individual Fed member opinions. Any surprises in the 2:00 PM ET release, particularly about inflation, economic conditions or their current bond buying program, could cause afternoon volatility in the markets Wednesday and possible changes in mortgage pricing. The two Treasury auctions are scheduled for Wednesday and Thursday. There is a 10-year Treasury Note sale Wednesday and a 30-year Bond sale Thursday. We could see some weakness in bonds ahead of the sales as participating firms sell current holdings to prepare for them. This weakness is usually only temporary if the sales are met with a decent demand. The results of the auctions will be posted at 1:00 PM ET each day. If the demand from investors was strong, the bond market could rally during afternoon trading, leading to lower mortgage rates. If the sales were met with a poor demand, the afternoon weakness may cause upward revisions to mortgage pricing Wednesday and/or Thursday afternoon. Friday has both of the week’s important economic data scheduled. The Labor Department will start the day by posting March’s Producer Price Index (PPI) at 8:30 AM ET. It will give us an important measurement of inflationary pressures at the producer level of the economy. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. If it shows rapidly rising prices, inflation fears may hurt bond prices since it erodes the value of a bond’s future fixed interest payments, leading to higher mortgage rates. A good size decline in prices would be good news for the bond market and mortgage rates. Current forecasts are calling for a 0.1% increase in the overall reading and a 0.1% rise in the core data. The only other monthly release of the week worth watching is the University of Michigan’s Index of Consumer Sentiment at 9:55 AM ET Friday. Their consumer sentiment index will give us an indication of consumer confidence, which hints at consumers’ willingness to spend. If confidence is rising, consumers are more apt to make large purchases. But, if they are growing more concerned of their personal financial or employment situations, they probably will delay making that purchase. This influences future consumer spending data and can have a moderate impact on the financial markets. Good news would be a sizable decline from March’s 80.0 reading. Current forecasts are calling for a reading of approximately 81.0. Overall, look for the most movement in rates the latter part of the week. I don’t believe Friday’s rally in bonds will necessarily carry into Monday’s trading, so any gains to open the week will likely be a result of stock losses that help shift funds into bonds. Wednesday could be the most active day of the week if the FOMC minutes reveal any surprises. If not, the best bet would be Friday. Tuesday appears to be the lightest and will probably be the calmest day for mortgage rates. Look for the stock markets to also influence bond trading and mortgage rates a good part of the week as traders react to the corporate earnings news. I am expecting it to be an active week for the mortgage market, so please maintain contact with your mortgage professional if still floating an interest rate.