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Monday’s bond market has opened well in positive territory due to weekend
news and not this morning’s economic data. The stock markets are following
suit with a strong open of their own. The Dow is currently up 138 points
while the Nasdaq has gained 47 points. The bond market is currently up
29/32, which should improve this morning’s mortgage rates by approximately
.500 of a discount point.
Today’s only relevant economic data was the release of August’s Industrial
Production report at 9:15 AM ET. It showed a 0.4% increase in output at
U.S. factories, mines and utilities. This was slightly below forecasts, making
the data positive for the bond market. However, this is only a moderately
important report and it was a minor variance from forecasts, so its impact
on today’s mortgage pricing has been minimal.
What is driving this morning’s rally is news that Lawrence Summers has
removed his name for consideration as the next Fed Chairman. While that may
not seem like a big deal or worthy of a bond and stock rally, it actually
is. This is because there were believed to be only two serious candidates
to take over from current Chairman Bernanke when he steps down. It was Mr.
Summers and Ms. Janet Yellen, who is the current Vice Chairman of the Fed’s
Board of Governors and now is the favorite to take over as chairman. This
is big news because Ms. Yellen is thought to believe in a much more
accommodating position (low short-term interest rates) than Mr. Summers
does. In other words, the markets now believe key short-term interest rates
may not be bumped higher until even later than current expectations whereas
Mr. Summers as chairman would be sooner. It is somewhat equivalent to the
Fed announcing they expect to start raising key interest rates in 2015
instead of the current thought of 2014.
That news over the weekend did motivate a shift in my stance towards
mortgage rates. This morning’s bond rally and improvement to mortgage rates
was expected. Hence the shift to float recommendations into today’s
pricing. Now that we have seen that improvement, it is time to direct our
attention back to the week’s extremely important schedule. And with that
comes a more cautious approach towards rates, at least until we get past
the major events scheduled the middle part of the week.
Tomorrow does have a key piece of economic data scheduled for release that
is highly influential on the bond market. That would be August’s Consumer
Price Index (CPI) at 8:30 AM ET. It is considered to be a key indicator of
inflation at the consumer level of the economy. As with its' sister PPI
report last week, there are two readings in the report- the overall index
and the core data reading. Current forecasts show a 0.2% increase in the
overall reading and a 0.2% rise in the core data reading. The core reading
is the more important of the two because it excludes more volatile food and
energy prices, leaving more reliable data for analysts to digest. A sizable
increase would signal rising inflation that erodes the value of a bond’s
future fixed interest payments, causing bond prices to fall, yields to rise
and mortgage rates to move higher tomorrow morning. Ideally, bond traders
would like to see little change or a decline in the CPI readings.
August's Housing Starts will start Wednesday’s activities at 8:30 AM ET but
the afternoon brings us the good stuff. The two-day FOMC meeting will
adjourn at 2:00 PM ET Wednesday, which will be followed by updated economic
forecasts by the Fed and a press conference with Chairman Bernanke at 2:30
PM ET. That is the most significant day of the week and will likely cause a
great deal of volatility in the financial and mortgage markets. A good part
of the importance comes from the question of whether or not and by how much
the Fed will ease back their monthly bond purchases that are currently
taking place at a rate of $85 billion a month. All the speculation over the
past several months will come to a head and we will finally have our
answer. For the record, I am predicting a small token reduction of
approximately $5 billion - $10 billion a month or no move at all.
If I were considering financing/refinancing a home, I would.... Lock if my
closing was taking place within 7 days... Lock if my closing was taking
place between 8 and 20 days... Float if my closing was taking place between
21 and 60 days... Float if my closing was taking place over 60 days from
now...
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