Princeton Capital Blog

This Week’s Market Commentary

March 14th, 2011

This week brings us the release of five relevant economic reports along with an FOMC meeting for the markets to digest. A couple of the week’s reports are considered highly important, as is of course the FOMC meeting.

The first thing on the calendar is the Federal Open Market Committee (FOMC) meeting Tuesday. It is widely believed that the Fed will make no change to key short-term interest rates at this meeting, but the post-meeting statement will be watched closely for any indication of when they will make a move. Generally speaking, the bond market wants to hear that inflation is not an immediate concern and that key rates will be kept at current levels for the near future.

If the statement reassures traders that the Fed will not be raising rates anytime soon and that inflation remains subdued, we can expected the bond market to thrive and mortgage rates to move lower late Tuesday. However, if the statement hints of a move in key short-term interest rates sooner than later, or if inflation is becoming a point of concern, afternoon bond selling will likely lead to higher mortgage rates.

The Labor Department will post February’s Producer Price Index (PPI) early Wednesday morning. This important index measures inflationary pressures at the producer level of the economy. If the index shows a large increase, inflation concerns will rise, making long-term investments such as mortgage-related bonds less attractive to investors. This would lead to higher mortgage rates Wednesday morning. Current forecasts are calling for a 0.6% increase in the overall reading and a 0.2% increase in the core data.

Thursday has the remaining three economic reports scheduled. February’s Consumer Price Index (CPI) will be released early Thursday morning, which measures inflationary pressures at the very important consumer level of the economy. Its results can definitely have a huge impact on the financial markets, especially long-term securities such as mortgage-related bonds.

It is expected to show a 0.4% increase in the overall index and a 0.1% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall Thursday.

The next data will come mid-morning when February’s Industrial Production report is posted. This report measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.6% increase from January’s level. A decline would be considered extremely favorable news for bonds and mortgage rates because it would indicate manufacturing sector weakness and a broader economic recovery is more difficult if manufacturing activity is slipping.

The Conference Board will post its Leading Economic Indicators (LEI) for February late Thursday morning. This index attempts to measure economic activity over the next three to six months. It is considered to be moderately important, but likely will not influence mortgage rates unless the CPI matches forecasts and this report shows a large variance from expectations. Current forecasts are calling for a 0.9% increase, meaning it is predicting that economic activity will likely expand rapidly in the coming weeks. A decline would be considered good news for the bond market and mortgage rates.

Overall, look for Thursday to be the most important day of the week due to the CPI release, but Tuesday’s FOMC meeting can also heavily influence the markets. Wednesday may also be an active day for rates with the PPI on tap. Friday will probably be the calmest day for mortgage rates, but it appears there is a good possibility of seeing plenty of movement in rates the next several days.

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