Princeton Capital Blog

This Week’s Market Commentary

July 8th, 2013

Mortgage Market Commentary

This week brings us the release of only two relevant economic reports for the bond market to digest in addition to the minutes from the last FOMC meeting and two fairly important Treasury auctions. Only one of the economic reports is considered to be of high importance and everything on the week’s calendar will come during the middle and latter days of the week. This means we are likely to see the most volatility in mortgage pricing between Wednesday afternoon and Friday morning. There are also some heavily watched corporate earnings releases scheduled for the stock markets this week that can influence bond trading and therefore, mortgage pricing several days.

 

There is nothing of relevance scheduled for release Monday or Tuesday except some high profile corporate earnings reports. Alcoa is expected to post their earnings after the market closes Monday, so it will have an impact on overnight and early morning trading Tuesday. This company isn’t necessarily important to gauging economic strength, but it is the first Dow component company that posts earnings each quarter. Since it is the first look into Dow-related earnings, it draws plenty of attention in the markets. Generally speaking, weaker corporate earnings translates into stock selling that makes bonds more attractive to investors. As bond prices rise, yields fall and mortgage rates usually follow bond yields.

Wednesday has the first of two important Treasury auctions when 10-year Notes will be sold. That sale will be followed by a 30-year Bond auction Thursday. These sales can influence market trading in bonds and possibly affect mortgage rates. If the sales are met with a strong demand from investors, particularly Wednesday’s sale, we should see afternoon improvements in bonds that could lead to downward revisions to mortgage rates. However, if buyers stay on the sidelines, we may see bonds fall after results are posted at 1:00 PM ET and mortgage rates move higher those days. With the recent massive sell-off in bonds, it is difficult to be optimistic about this week’s sales.

Also Wednesday is the afternoon release of the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following their 2:00 PM ET release. I find it hard to believe that they could reveal anything more surprising than we got after the last FOMC meeting or during Chairman Bernanke’s press conference that followed. Still, market participants will be looking for anything new, particularly about the estimated timeframe when the Fed will begin tapering their current $85 billion a month bond buying program (QE3). The minutes will give us how members voted for related motions and could cause more volatility in the markets if there is anything unexpected in them.

The week’s monthly economic data comes Friday morning when the final two events take place. The first is June’s Producer Price Index (PPI) from the Labor Department. It is a very important release because it measures inflationary pressures at the producer level of the economy. It is expected to show a 0.3% increase in the overall reading and a 0.1% increase in the core data reading. The core reading is the more important of the two because it excludes more volatile food and energy prices, revealing a more reliable inflation reading. The bond market should react favorably if we get weaker than expected readings, but a larger than expected rise in the core reading could send mortgage rates higher Friday.

The final report of the week is the University of Michigan’s Index of Consumer Sentiment. This index is released in a preliminary form each month and then followed up two weeks later with a final reading. The preliminary reading for July will be posted late Friday morning and is expected to rise from June’s final reading of 84.1. This would indicate that consumers were a little more comfortable with their own financial situations this month than last month. It is believed that if consumers are confident in their own finances, they are more apt to make large purchases in the near future. And with consumer spending making up over two-thirds of our economy, investors pay close attention to reports such as these. So, a decline in confidence would be good news for mortgage rates because it means many consumers will probably delay making a large purchase in the immediate future, limiting economic activity.

Also worth noting is the fact that Monday kicks off the corporate earnings reporting season when Alcoa posts their quarterly results. Market participants are anxiously waiting for these announcements to see how our economy and global financial situations are affecting earnings. Just as important as this past quarter’s results are their forward-looking estimates. If revenue, earnings and projections from the big-named companies exceed expectations, stocks will likely rally. This would make bonds less appealing to investors and lead to bond selling. But if results are weaker than expected, indicating that the global economy is stifling earnings, bonds could draw more attention from investors as stocks slide.

Overall, it is difficult to try to label one particular day as the most important this week. It is easy to say the least important will likely be Monday or Tuesday with no economic events scheduled, but Friday’s heavy selling on bonds that accelerated into closing could extend into Monday’s trading. As mentioned a couple times recently, I would be extremely cautious floating an interest rate until the yield on the benchmark 10-year Treasury Note nears 3.00%. Friday’s selling pushed it to 2.71%, so there is a realistic possibility of seeing further selling in bonds that will continue to pressure mortgage rates. The single most important day for the bond market is either Wednesday due to the 10-year Note auction and the release of the FOMC minutes or Friday morning when the two most important economic reports of the week will be posted. Monday also could be a very active day if Friday’s negative tone carries into morning trading. Accordingly, I strongly recommend maintaining contact with your mortgage professional if still floating an interest rate.

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