Another Week of Volatility

Updated on October 16, 2011 8:23 PM EST:   This week brings us the release of seven economic reports for the markets to digest, in addition to a speaking engagement by Fed Chairman Bernanke. Also worth noting is the fact that this will be an extremely busy week for corporate earnings, which usually translates into stock volatility. The most important economic reports are scheduled for the middle part of the week, but we may see movement in mortgage rates each day. Intra-day revisions to mortgage rates on more than one day are also possible. Therefore, proceed with caution if closing in the near future.

Tomorrow has September’s Industrial Production data scheduled to be posted. It will be released mid-morning, giving us an indication of manufacturing strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.2% increase in output from August’s level, meaning that manufacturing activity rose slightly. A larger than expected increase in production would be negative for bonds and mortgage rates as it would indicate economic strength. A decline in output would likely push mortgage rates lower tomorrow morning.

September’s Producer Price Index (PPI) will be released early Tuesday morning. This is one of the two very important inflation readings we get each month. This index measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.2% increase in the overall index and a 0.1% rise in the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. A larger than expected increase could raise concerns in the bond market about future inflation and lead to higher mortgage rates Tuesday. However, weaker than expected readings should result in lower rates.

Wednesday has three reports scheduled that may influence mortgage rates. The first is the sister report of Tuesday’s PPI. This would be September’s Consumer Price Index (CPI). It measures inflationary pressures at the more important consumer level of the economy and is one of the most important reports that the bond market gets each month. Analysts are expecting to see a rise of 0.3% in the overall index and an increase of 0.2% in the core data reading. A larger than expected increase in the core reading could raise inflation concerns, pushing bond prices lower and mortgage rates higher. Inflation is the number one nemesis of the bond market because it erodes the value of a bond’s future fixed interest payments. When inflation is a threat, even down the road, bonds sell for discounted prices that push their yields higher. And since mortgage rates tend to follow bond yields, this leads to higher rates for mortgage borrowers.

September’s Housing Starts is Wednesday’s second release, also coming at 8:30 AM ET. This report will probably not have much of an impact on the bond market or mortgage rates. It gives us a measurement of housing sector strength and mortgage credit demand by tracking construction starts of new homes, but is usually considered to be of low importance to the financial and mortgage markets. It is expected to show an increase in new home starts between August and September. I believe we need to see a significant surprise in this data for it to influence mortgage rates.

The final report scheduled for release Wednesday will come during afternoon trading when the Federal Reserve posts its’ Beige Book at 2:00 PM ET. This data details economic conditions throughout the U.S. by region and is relied upon heavily by the Federal Reserve when determining monetary policy at their FOMC meetings. If it reveals stronger signs of economic growth from the last release, we could see mortgage rates revise higher Wednesday afternoon.

Thursday has the last two reports of the week with the release of September’s Existing Home Sales data and Leading Economic Indicators (LEI), both at 10:00 AM ET. This index attempts to measure future economic activity, particularly during the next three to six months. Current forecasts are calling for an increase of 0.3% from August’s reading. This would indicate that economic activity is likely to increase moderately over the next couple of months. That would be relatively bad news for the bond market and mortgage rates, but this report is considered to be only moderately important. Therefore, a small increase would not be of much concern to the bond and mortgage markets. Ideally, we would like to see a decline in the index.

The National Association of Realtors will release September’s Existing Home Sales data. This report gives us an indication of housing sector strength and mortgage credit demand by tracking home resales. I don’t see it having much of an influence on the bond market or mortgage rates, but a reading that varies greatly from analysts’ forecasts could lead to a slight change in mortgage pricing. It is expected to show a decline in sales from August to September, meaning the housing sector remained soft. That would be favorable news for the bond market since a weak housing sector makes a broader economic recovery less likely.

Overall, it appears that Tuesday or Wednesday are the likely candidates for the most important day of the week. In addition to the economic data Tuesday, Fed Chairman Bernanke will speak at a Boston Fed conference during early afternoon hours. This adds to the days’ value as his words always have the potential to cause volatility in the markets. Besides the economic reports, there are many companies posting earning reports during the week, including some big names that include Apple, Citigroup, IBM and Intel. If the corporate earnings releases are generally weaker than forecasts, stocks may suffer, making bonds more appealing to investors. The end result would likely be an improvement in rates. The flip side though is stronger than expected earnings that drive stocks higher, pushing bond prices lower and mortgage rates upward. Accordingly, please maintain contact with your mortgage professional if still floating an interest rate.

Market Update

Updated on October 11, 2011 12:26 PM EST

Tuesday’s bond market has opened well in negative territory as a reaction to yesterday’s rally in stocks. The bond market was closed yesterday in observance of the Columbus Day holiday, but the stock markets were open for trading. The Dow and Nasdaq both rallied yesterday 330 points and 86 points respectively as news from overseas eased financial fears, at least temporarily. Since the bond market was closed, the reaction in bonds is taking place early this morning.

This morning’s stock trading is less troublesome for the bond market with the Dow with and Nasdaq mixed. Dow is currently down 5 points while the Nasdaq has gained 16 points. The bond market is currently down 18/32, pushing the yield on the benchmark 10-year Treasury Note up to 2.14%.This will likely equate to this morning’s mortgage rates being approximately .125 – .250 of a discount point higher than Friday’s morning pricing.

There is no relevant economic data being posted this morning, so look for the stock markets to be the biggest influence on bond trading and mortgage rates. If the major stock indexes move noticeably higher than current levels, we could see further weakness in bonds and upward revisions to mortgage rates later today. However, if they move much lower than where they are currently, the result could be improvements to mortgage pricing this afternoon.

The rest of the week brings us the release of only three economic reports that are of interest to the mortgage market along with the minutes from the last FOMC meeting and two important Treasury auctions. The week also gets heavy in quarterly earnings releases for companies, which could cause significant movement in the stock markets. The earnings results could affect bond trading as investors move funds into stocks if the reports are good. The other possibility is that earnings would generally disappoint, meaning investors may move funds out of stocks and into bonds as a safe-haven. The latter would be good news for the bond market and mortgage rates.

Tomorrow afternoon brings us the release of the minutes from the Fed’s last FOMC meeting. These may be a major mover of the markets or could be a non-factor, depending on what they say. The key will be concerns over the economy, inflation and the Fed’s next move. If Fed members were concerned about the economy slipping into another recession, we may see the bond market move higher and mortgage rates lower after the their release at 2:00 PM ET tomorrow. It will be interesting to see how much debate and disagreement amongst members took place during the meeting. Also, investors will be looking for any indication of what the Fed may do next to help boost economic activity. I suspect that we will see some movement in the markets as a result of this release tomorrow afternoon.

Also tomorrow is the first of two important Treasury auctions this week. The sale of 10-year Notes will be held tomorrow while 30-year Bonds will be sold Thursday. We often see some weakness in bonds ahead of the sales as the firms participating prepare for them. However, as long as the auctions are met with decent demand from investors, the firms usually buy them back. This tends to help recover any presale losses. But, if the sales are met with a lackluster interest from investors- particularly international buyers, the bond market may move lower after the results are posted and mortgage rates may move higher. Those results will be announced at 1:00 PM each sale day.

Overall, I am expecting to see a fair amount of movement in mortgage rates this week, especially the latter part of the week. The key economic report is Friday’s Retail Sales data but tomorrow’s FOMC minutes also have the potential to heavily influence the markets. Therefore, we can label tomorrow or Friday as the most important day of the week. Also worth noting is the active week for corporate earnings that can cause a great deal of volatility in stocks and mortgage rates any day of the week. Accordingly, please proceed cautiously and maintain contact with your mortgage professional if you have not locked an interest rate yet.