Princeton Capital Blog

This Week’s Market Commentary

July 9th, 2012

This week brings us the release of three 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 all of the reports are scheduled for release the middle and latter parts 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 today or Tuesday except some high profile corporate earnings reports. The first data of the week is May’s Goods and Services Trade Balance report early Wednesday morning, which measures the size of the U.S. trade deficit. This data is not considered to be of high importance to the bond market and will not likely have much of an impact on mortgage rates. However, if it does vary greatly from analysts’ forecasts of a $48.9 billion deficit, we may see some movement in bond prices and possibly a slight change in mortgage pricing. This is the least important of this week’s events.

Also worth noting about 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, especially if they show unexpected dissention among some of its members during discussion and voting at the last meeting or give any indication of the Fed’s possible next move with monetary policy. Of particular interest will be discussion about a potential QE3 program.

Furthermore, Wednesday also 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 as they did with the recent 5-year and 7-year Note auctions, we may see bonds fall after results are posted at 1:00 PM ET and mortgage rates move higher those days.

The next monthly data comes Friday morning when the final two reports are posted. 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 0.6% decline in the overall reading and a 0.2% 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. 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 slightly from June’s final reading of 73.2. 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 tomorrow 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 the global financial crisis 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 will be more attractive to investors as stocks slide. That could help boost bond prices and help lower mortgage rates.

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 tomorrow or Tuesday with no economic events scheduled, but the stock markets could react heavily to earnings news and influence bond trading enough to move 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. Accordingly, I strongly recommend maintaining contact with your mortgage professional if still floating an interest rate.

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