Princeton Capital Blog

This Week’s Market Commentary

February 13th, 2012

There are six economic reports worth watching this week that are likely to affect mortgage rates in addition to the minutes from the last FOMC meeting. Some of the economic reports are very important to the financial and mortgage markets, meaning it will probably be another active week for mortgage rates.

There is no relevant economic data scheduled for tomorrow, so look for the stock markets to be the biggest influence on bond trading and mortgage rates. The Greek Parliament is debating the requirements for their bailout today, so any decision there will likely help drive trading and mortgage prices tomorrow morning.

The week’s first release is one of the highly important ones when the Commerce Department posts January’s Retail Sales data. This report is very important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched quite closely. If Tuesday’s report reveals weaker than expected sales, the bond market should thrive and mortgage rates will fall since it would be a sign that the economy is not as strong as many had thought. However, a stronger reading than the 0.8% increase that is expected could lead to higher mortgage rates.

January’s Industrial Production data will be released mid-morning Wednesday. It gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities and can have a moderate impact on the financial markets. Analysts are expecting to see a 0.6% increase in production from December to January. A smaller than expected rise in output would be good news and should push bond prices higher, lowering mortgage rates Wednesday.

Wednesday also brings us the release of the FOMC minutes. Traders will be looking for any indication of the Fed’s next move regarding monetary policy. They will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading. These minutes may indicate if there is a consensus amongst Fed members or if there is disagreement about their actions or inactions. This release may lead to afternoon volatility Wednesday, or it may be a non-factor. However, the minutes do carry the potential to influence mortgage rates so they should be watched.

January’s Housing Starts will be posted early Thursday morning, giving us an indication of housing sector strength and mortgage credit demand. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for an increase in starts of new housing.

The Labor Department will post their Producer Price Index (PPI) for January early Thursday morning also. It measures inflationary pressures at the producer level of the economy and is considered to be one the two key measures of inflation we see each month. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. It is expected to show an increase of 0.3% in the overall reading and a 0.1% rise in the core data. Good news for bonds would be a decline in both readings, particularly the core data as it would ease concerns about inflation that make long-term securities less attractive to investors.

The sister report to Thursday’s PPI will be posted early Friday morning when January’s Consumer Price Index (CPI) is released. The difference between the two is that the CPI measures inflationary pressures at the more important consumer level of the economy. With exception to maybe the Employment report, the CPI is the single most important report that we see each month. Its results can have a huge impact on the financial markets, especially on long-term securities such as mortgage-related bonds. It is expected to show a 0.3% 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.

Also Friday morning will be the release of the Leading Economic Indicators (LEI) for January. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.5% increase, meaning that economic activity may rise in the near future. A smaller than expected rise would be good news for the bond market and mortgage rates, but the CPI draws much more attention than the LEI. Therefore, for this report to influence mortgage pricing, it will have to show a sizable variance from forecasts and the CPI will have to match estimates.

Overall, the most important day of the week will likely be Tuesday or Friday with the Retail Sales and CPI reports released. There is nothing of concern scheduled for tomorrow, so we can label it as the best candidate for the calmest day unless current events in Greece have an impact on the markets. In other words, be prepared for an active week in the markets and mortgage rates.

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