This Week’s Market Commentary

 

This week brings us the release of only four pieces of economic data that is relevant to mortgage rates, but one of them is a key inflation reading that is very important to the bond market. However, the theme of the week will be Fed-related with a FOMC meeting, economic forecasts and a press conference with Fed Chairman Bernanke. There is nothing of importance scheduled for Monday, so expect to see stock movement drive bond trading and mortgage rates until we get to Tuesday’s data.
May’s Consumer Price Index (CPI) starts the week’s data early Tuesday morning. This index gives us a very important measurement of inflationary pressures at the consumer level of the economy. As with last week’s Producer Price Index (PPI), there are two readings that analysts watch. Forecasts are calling for 0.2% rise in the overall reading and a 0.1% increase in the core data. The core reading is the more important of the two because it excludes more volatile food and energy prices, leaving a more stable measure of inflation. Indexes like this are important to the bond market and mortgage rates because rising inflation makes a long-term security’s future interest payments less valuable to investors. That leads them to be sold at a discount, causing yields and mortgage rates to move higher. Therefore, we would like to see weaker than expected readings, indicating inflationary pressures are softer than analysts are thinking. The weaker the readings, the better the news it is for mortgage rates.
May’s Housing Starts will also be posted Tuesday at 8:30 AM ET. This data tracks construction 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 noticeably last month, indicating 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 unless the CPI matches forecasts and this report shows a significant surprise.
Wednesday’s only events are Fed related, but there are three of them. The first is the 12:30 PM adjournment of the FOMC meeting that began Tuesday. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting, but there is a great deal of speculation that they will address or clarify their intentions on tapering their current bond-buying program (QE3). The post-meeting statement may or may not answer some of the questions that analysts and traders have. If it does, look for an immediate reaction in the financial and mortgage markets.
At 2:00 PM ET Wednesday, the Fed will release their updated estimates for future economic growth. They will likely post their predictions on GDP growth, unemployment and inflation. These could be a market mover if they show even minor revisions to any of the key headline economic numbers. The larger the change, the more likely the markets will react. Revisions that point toward slower economic growth would be good news for the bond market and mortgage rates.
The FOMC meeting is ending earlier than the traditional 2:15 PM because it is one of them that will be followed by a press conference hosted by Fed Chairman Bernanke. The meeting will adjourn at 12:30 PM while the press conference will begin at 2:15 PM and will probably lead to significant afternoon volatility in the markets and mortgage rates Wednesday. The key topic will be QE3 and what change the Fed expects to make and when it will likely happen.
Thursday has two pieces of data that we need to watch, both coming at 10:00 AM ET. The first is May’s Existing Home Sales report from the National Association of Realtors. This report tracks resales of existing homes, giving us a measurement of housing sector strength. It is considered to be moderately important to the markets, but can influence mortgage rates if it shows a sizable difference between forecasts and actual results. Analysts are currently expecting to see a slight increase in sales, pointing towards a stable housing sector. That would be neutral news for the bond market and mortgage rates. A weaker housing sector makes overall economic growth more difficult, so a sizable decline would be ideal for the bond market and mortgage shoppers.
May’s Leading Economic Indicators (LEI) will also be posted at 10:00 AM Thursday. 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 0.2% increase from April’s reading. This means it is predicting a slight increase in economic growth over the next several months.
Overall, Wednesday is easily the best candidate as most active day for mortgage rates, but we will likely also see a fair amount of movement Tuesday. Friday looks to be the least important day unless something unexpected happens. For the week, I would be surprised if we did not see plenty of movement in rates although the biggest moves will probably take place the middle part. Please maintain contact with your mortgage professional if still floating an interest as the markets can become extremely volatile at any time.