Princeton Capital Blog

This Week’s Market Commentary

June 13th, 2011

This week is pretty busy with seven economic reports scheduled to be released, all of which are being posted over four days.

Three of the seven are considered to be of high importance to the markets and mortgage rates. The remaining ones are of interest to the markets but likely will not cause a large change in mortgage rates unless they vary greatly from forecasts.

There are two reports scheduled for release Wednesday, but one of them is the week’s most important and arguably the single most important report we see each month. That is May’s Consumer Price Index (CPI). It is very similar to Tuesday’s PPI, but measures inflationary pressures at the more important consumer level of the economy. It is expected to show a 0.1% increase 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 Wednesday, while a weaker core reading could lead to a bond rally and lower mortgage pricing.

The first data of the week comes Tuesday 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 Tuesday 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 two-thirds of the U.S. economy. Analysts are expecting to see that retail-level sales fell 0.7% last month. A larger decline in sales would be good news for the bond market and could lead to lower mortgage rates Tuesday.

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 an increase of 0.1% in the overall index and a 0.2% rise in the core data. It will not take much of a variance from forecasts for the markets to react, which would most likely lead to changes in mortgage rates.

Wednesday’s second relevant report will come 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 0.2% would indicate that the manufacturing sector is stronger than thought and would likely help push mortgage rates higher. That is assuming that the CPI doesn’t surprise us.

May’s Housing Starts will be posted early Thursday morning. This data tracks starts of new home projects. It is the week’s least important report and likely will not affect mortgage rates unless its results vary greatly from forecasts. It is expected to show that starts of new homes rose last month, indicating some strength in the housing sector. That is basically bad news for the bond market and mortgage rates because a weak housing sector makes a broader economic recovery less likely. However, this data is not important enough to cause a noticeable change in mortgage rates.

Friday has the remaining two reports, both during late morning hours. June’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment is the first. 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 73.5. 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.

May’s Leading Economic Indicators (LEI) will close out the week’s data at 10:00 AM Friday. The Conference Board, who is a New York-based business research group, will post this data. It attempts to predict economic activity over the next three to six months. Good news for mortgage rates would be a decline in this index, but it is expected to show a 0.4% increase.

Overall, look for Tuesday or Wednesday to be the biggest day of the week. Not just because it brings the release of four of the week’s seven 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. The fact that the Dow closed the week below 12,000 will be headline news if it does not bounce back above. It is highly recommended that you maintain contact with your mortgage professional this week if still floating an interest rate.

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