June 11th, 2012
This week is pretty busy with five economic reports scheduled to be released, all of which are being posted over three days. Three of the five are considered to be of high importance to the markets and mortgage rates.
The rest are of interest to the markets but likely will not cause a large change in mortgage rates unless they vary greatly from forecasts. In addition to the economic data, we also have two Treasury auctions that have the potential to influence bond trading and mortgage rates.
None of the relevant data is being posted tomorrow or Tuesday, so look for the stock markets to influence bond trading and mortgage rates again. Of particular interest will be this weekend’s news that Spain’s banks are receiving a significant cash infusion to at least temporarily ease the crisis there. This will likely fuel a stock rally today that should pressure bonds and mortgage rates. On top of that, weakness late Friday has us going into the new week with a small upward revision built into today’s morning rates.
The first data of the week comes Wednesday when two of the highly important reports are scheduled. May’s Retail Sales data and Producer Price Index (PPI) will both be released at 8:30 AM ET Wednesday morning. The sales data gives us a very important measure of consumer spending, which is highly relevant to the bond market because consumer spending makes up over two-thirds of the U.S. economy. Analysts are expecting to see that retail-level sales fell 0.2% last month. A larger decline in sales, signaling a slowing economy, would be good news for the bond market and could lead to lower mortgage rates Wednesday.
The second release of the day is one of the week’s two key measurements of inflation. May’s Producer Price Index (PPI) will help us measure inflationary pressures at the producer level of the economy. There are two readings of this index, the overall and the core data. The core data is considered to be the more important one because it excludes more volatile food and energy prices. A large increase could raise concerns about inflation rising as soon as the economy gains some traction. This would not be good news for bond prices or mortgage rates since inflation erodes the value of a bond’s future fixed interest payments. Rising inflation causes investors to sell bonds, driving prices lower, pushing their yields upward and mortgage rates higher. Analysts are expecting to see a decline of 0.7% in the overall index and a 0.2% rise in the core data.
The two relevant Treasury auctions scheduled will also be held the middle part of the week. A 10-year Treasury Note sale is scheduled for Wednesday while 30-year Bonds will be sold Thursday. Results of both auctions 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, however, weak demand could lead to selling and an increase to mortgage rates. It is common to see some pressure in bonds right before these sales as investors prepare for them, but as long as the sales are not weak those pre-auction losses are usually recovered once they are completed.
Thursday has one of the week’s most important and arguably one of the single most important reports the bond market gets each month. That is May’s Consumer Price Index (CPI). It is very similar to Wednesday’s PPI, but measures inflationary pressures at the more important consumer level of the economy. It is expected to show a 0.2% decline in the overall reading and a 0.1% increase in the core data. A larger than expected increase in the core reading would most likely lead to a noticeable upward change to mortgage rates Thursday, while a weaker core reading could lead to a bond rally and lower mortgage pricing.
Friday closes the week with two relevant reports, the first coming mid-morning when May’s Industrial Production data is released. This report will be released at 9:15 AM ET and is considered to be moderately important. It measures output at U.S. factories, mines and utilities, giving us a fairly important measurement of manufacturing sector strength. If it reveals that production is rising, concerns of manufacturing strength may come into play in the bond market. A larger increase then the expected 0.1% would indicate that the manufacturing sector is stronger than thought and would likely help push mortgage rates slightly higher.
June’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be posted late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. It is expected to show a reading of 77.0, which would be a decline from May’s 79.3. A smaller than expected reading would be considered good news for bonds because it would mean that surveyed consumers were less optimistic about their own financial situations than thought. That often means they are less likely to make large purchases in the near future, but since this report is only moderately important it likely will not influence mortgage rates considerably.
Overall, look for Wednesday or Thursday to be the biggest day of the week. Not just because it brings the release of three of the week’s five reports, but also because of the importance of some of those releases. We saw plenty of movement in the markets and mortgage pricing last week and it is quite likely that this week will be similar. The stock markets will also influence bond trading and mortgage rates, so watch the major indexes in addition to the economic reports. It is highly recommended that you maintain contact with your mortgage professional this week if still floating an interest rate.