Princeton Capital Blog

This Week’s Market Commentary

July 16th, 2012

This week brings us the release of seven relevant economic reports for the bond market to digest in addition to semi-annual Congressional testimony by Fed Chairman Bernanke.

Several of the economic reports are considered to be of high importance, meaning we will likely see more volatility in the financial markets and mortgage pricing over the next several days.

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. In other words, we are likely in for a very active week.

June’s Retail Sales report will be posted at 8:30 AM ET this morning. This data is considered to be of high importance because it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so any related data is watched closely. The Commerce Department is expected to say that sales at retail level establishments rose 0.2% last month. A larger than expected increase in sales will likely cause bond selling and lead to higher mortgage rates because it would mean consumers are spending more than thought. That would point towards economic growth, making bonds less attractive to investors.

Tuesday has two pieces of economic data scheduled. The first is June’s Consumer Price Index (CPI) at 8:30 AM ET, which is a mirror of last week’s PPI with the exception that Tuesday’s CPI measures inflation at the more important consumer level of the economy. Analysts have forecasted a 0.1% increase in the overall index and a 0.2% rise in the core data. The core data is considered to be the key reading because it gives us a more stable measure of inflation as it excludes more volatile food and energy prices. Higher than expected readings could raise inflation fears and push mortgage rates higher, while readings that fall short of forecasts should lead to lower rates early Tuesday.

June’s Industrial Production data is the second report of the day at 9:15 AM ET. This data measures output at U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength. It is expected to show a 0.3% rise in production, indicating that the manufacturing sector strengthened slightly during the month. That would basically be bad news for bonds, however, the CPI will take center stage Tuesday morning along with our next event.

Late Tuesday morning, Fed Chairman Bernanke will present his semi-annual update about the economy and monetary policy before Congress. He will speak before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday, each at 10:00am ET. His testimony will be broadcast and watched very closely. Analysts and traders will be looking for the Fed’s opinion on the status of the economy and their expectations of future growth, inflation and unemployment concerns that will lead to the Fed’s next move. Of particular interest will be the possibility of another stimulus move to help keep rates low and boost economic activity (QE3). This should create a great deal of volatility in the markets during the prepared testimony and the question and answer session that follows. If he indicates that inflation may become a point of concern or anything that hints at rapid economic growth, we can expect to see the bond market fall and mortgage rates rise Tuesday.

We usually see the most movement in rates during the first day of this testimony as the Chairman’s prepared words for both appearances are quite similar to each other, meaning that the second day of testimony rarely gives us anything we did not hear during the first day. The general exception is something asked or answered during the Q&A portion of the second day’s appearance.

With exception to the second day of Fed testimony, the only thing of relevance scheduled for Wednesday morning is June’s Housing Starts report. This data gives us an indication of housing sector strength by tracking construction starts of new homes, but is not considered to be of high importance. Analysts are currently expecting to see a large increase in new starts. However, I don’t see this data having much of an impact on mortgage rates Wednesday unless it varies greatly from forecasts.

Wednesday afternoon does bring us something that could influence the markets and possibly mortgage pricing. The Federal Reserve will release its Beige Book report at 2:00 PM ET Wednesday afternoon. This report is named simply after the color of its cover, but it is considered to be important to the Fed when determining monetary policy during their FOMC meetings. It details economic activity and conditions by region throughout the U.S. Since Fed Chairman Ben Bernanke’s testimony to Congress the day before gave us a recent update, I don’t think we will see any significant surprises in this report. Therefore, we will likely see little movement in mortgage rates Wednesday afternoon as a result of this report.

The National Association of Realtors will post June’s Existing Home Sales figures late Thursday morning. This report gives us a measurement of housing sector strength and mortgage credit demand. Current forecasts are calling for a moderate increase in sales from May’s totals. A drop in sales would be considered good news for bonds and mortgage rates because a weak housing sector would make it difficult for the economy to recover anytime soon. However, unless this data varies greatly from forecasts it probably will lead to only a minor change in mortgage rates.

June’s Leading Economic Indicators (LEI) will be the last piece of data this week, being posted at 10:00 AM Thursday. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of moderate importance to the bond market. It is expected to show a 0.2% decline, meaning that we may see a slowdown in economic activity over the next few months. A large decline in the index would be good news for the bond and mortgage markets.

Overall, Tuesday is probably the most important day of the week because it brings us the CPI and the first day of Fed testimony. Today may also be a key day due to the importance of the Retail Sales report that will be posted. In an unusual schedule, the most important reports and events are scheduled during the early part of the week.

We usually see a lighter first day or so before heading into the key reports the latter part. The week’s corporate earnings also have the potential to heavily influence bond trading and mortgage rates via stock market swings. I suspect we will see plenty of movement in the markets and mortgage rates the first couple days, so please maintain contact with your mortgage professional at least those days if still floating an interest rate.

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