Princeton Capital Blog

This Week’s Market Commentary

March 11th, 2013

Mortgage Market CommentaryThis week brings us the release of five relevant economic reports along with two Treasury auctions for the markets to digest. A couple of the week’s reports are considered highly important, so we could see a fair amount of movement in rates again. There is nothing of relevance to mortgage rates being released or taking place Monday or Tuesday, so all of the week’s events are scheduled over three days.

The first thing on the calendar will come from the Commerce Department early Wednesday morning when they post February’s Retail Sales data. This data is extremely important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, data that is related usually has a big impact on the markets. This month’s report is expected to show an increase in sales of approximately 0.5%. If it reveals a larger than expected increase, the bond market will likely fall and mortgage rates will move higher as it would indicate a stronger level of economic growth than many had thought. If it reveals a much smaller than expected increase, I expect to see bond prices rise and mortgage rates improve Wednesday morning.

There are two Treasury auctions this week that could potentially affect mortgage rates. The first is the 10-year Treasury Note auction Wednesday and the 30-year bond sale will be held Thursday. Results of both sales will be posted at 1:00 PM ET on the sale days. If investor demand was high, we may see bonds rally during afternoon trading as it would hint that investors still have an appetite for longer-term securities. However, weak demand in the sale could lead to selling and an increase in mortgage rates late Wednesday and/or Thursday.

The Labor Department will post February’s Producer Price Index (PPI) early Thursday morning. This important index measures inflationary pressures at the producer level of the economy. There are two portions of the index- the overall reading and the core data. The core data is more important and watched more closely because it excludes more volatile food and energy (including gasoline) prices. If the index shows a large increase, inflation concerns will rise, making long-term investments such as mortgage-related bonds less attractive to investors. This would lead to higher mortgage rates Thursday morning. Current forecasts are calling for a 0.7% increase in the overall reading and a 0.2% increase in the core data.

Friday has the remaining three economic reports scheduled. February’s Consumer Price Index (CPI) will be released early Friday morning, which measures inflationary pressures at the very important consumer level of the economy. Its results can definitely have a huge impact on the bond market, especially long-term securities such as mortgage-related bonds. It is expected to show a 0.5% increase in the overall index and a 0.2% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall Friday.

The day’s next report will come mid-morning when February’s Industrial Production report is posted. This report measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.4% increase from January’s level. A decline would be considered extremely favorable news for bonds and mortgage rates because it would indicate manufacturing sector weakness and a broader economic recovery is more difficult if manufacturing activity is slipping.

The week’s final piece of data is the University of Michigan’s Index of Consumer Sentiment for March just before 10:00 AM ET Friday. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending levels and economic growth. A drop in confidence will probably hurt the stock markets and boost bond prices, leading to lower mortgage rates, assuming the CPI matches forecasts. Bad news for bonds and mortgage rates would be rising confidence. It is expected to show a reading of 77.8, which would be a very slight increase from February’s final reading 77.6.

Overall, I would label Friday as the most important day of the week, but Wednesday is also likely to be active for mortgage rates. Stocks rallied last week, helping to drive bond yields and mortgage rates higher. The yield on the benchmark 10-year Treasury Note rose above 2.00% again, closing the week at 2.04%. This is troublesome for mortgage rates if it remains above that threshold as it could become a floor of support. Since mortgage rates follow bond yields, it would mean rates are more likely to rise than move much lower in the immediate future. This week will tell us a lot about which direction bond yields and mortgage pricing will be headed in the near future, so please be cautious of still floating an interest rate and closing soon.

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