Daily market update

Greetings! Here's your Daily Commentary report compliments of Alan Russell & Princeton Capital! Call me today for current rates and market information at (650) 947-2296.           This week brings us the release of five relevant economic reports that may influence mortgage rates in addition to an afternoon of FOMC events. A couple of items on this week’s calendar are considered to be highly important to the financial and mortgage markets, meaning there is a high probability of seeing significant changes to rates this week. This is especially true the middle days of the week. August's Industrial Production data will be posted mid-morning tomorrow. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be moderately important but could help change mortgage rates if there is a significant difference between forecasts and the actual reading. Analysts are expecting to see a 0.5% increase from July's level of output. A sizable increase could lead to slightly higher mortgage rates, while a weaker than expected figure would indicate a softer than thought manufacturing sector and would be considered good news for bonds and mortgage rates. The Consumer Price Index (CPI) that will be released early Tuesday morning is one of the most important monthly reports for the bond market. 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 Tuesday 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. 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 July and August. I believe we need to see a significant surprise in this data for it to have a noticeable impact on Wednesday's mortgage rates since what follows later in the day is much more important to the markets. Wednesday's Fed events start with the 2:00 PM ET 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 in the markets that they will take the first step towards winding down their bond buying program (QE3). Tapering talk has been widespread over the past several months and we have finally reached the day of reckoning for all those predictions. I would not be surprised to see a small token reduction in the monthly bond purchases, more or less to break the ice or get that first step out of the way. However, I don’t believe that economic growth has gained momentum at the rate that the Fed was expecting over the summer months, at least not enough to justify a significant reduction. They are currently buying $85 billion a month in government and mortgage-related securities. Generally speaking, a reduction in the purchases will be negative news for the bond market and mortgage pricing. This is partly because it is mortgage-related bonds being purchased that affect mortgage rates. An announcement that they will continue to buy these bonds at the current pace should cause a bond rally and lead to lower mortgage rates. I would not be surprised to see stocks and bonds move the same direction in reaction to the Fed’s move, or lack of a move. It is my guess that a token reduction will be announced to take the first step, still maintaining the objective of the program. My estimate reduction is in the neighborhood of $5 billion or $10 billion a month. This would be an amount that gives the Fed the option to hold that level for as long as needed yet still have started the unwinding process and allows the markets to react to the fact they have started to taper. Also worth noting is that this FOMC meeting is one that will be followed by updated economic predictions and a press conference with Fed Chairman Bernanke. Traders will be looking for any revisions to the Fed's outlook on unemployment, GDP growth and their timetable for keeping key interest rates at current levels. The meeting will adjourn and the economic forecasts will be released at 2:00 PM ET while the press conference will start at 2:30 PM. All this will most likely lead to afternoon volatility in the markets and mortgage rates Wednesday. Thursday has the remaining two relevant reports scheduled, both at 10:00 AM ET. The first is August's Existing Home Sales from the National Association of Realtors. This report will give us an indication of housing sector strength by tracking home resales. It is expected to show a small decline from July's sales, however, this data probably will be neutral towards mortgage pricing unless its results vary greatly from forecasts. The Conference Board will post its Leading Economic Indicators (LEI) for August Thursday also. The LEI index attempts to measure economic activity over the next three to six months. It is expected to show a 0.6% increase, meaning that it is predicting moderate growth in economic activity over the next several months. A larger increase would be considered negative news for bonds and could lead to a minor increase in mortgage rates Thursday, but neither of the day’s reports is considered to be highly important. Overall, there is little doubt that this is going to be an active week for the financial and mortgage markets. Wednesday is the key day due to the FOMC schedule and hopefully some resolution to the tapering question. Tomorrow isn’t too concerning, but Tuesday’s data is very important to bonds and Wednesday’s afternoon trading could carry into Thursday morning also. Friday appears to be the lightest day with nothing of importance scheduled except for a couple of Fed member speeches mid-day. In other words, expect to see the most movement the middle days of the week. I would not be surprised to see a significant move in bond prices and mortgage rates this week, so it is strongly recommended to maintain contact with your mortgage professional if still floating an interest rate and closing any time in the near future. 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... Lock if my closing was taking place between 21 and 60 days... Lock if my closing was taking place over 60 days from now...       Alan Russell 161 South San Antonio Rd. | Los Altos, CA 95022 Ph: 650-947-2296 | Fax: 408-335-1118 alanrussell@princetoncap.com CLICK HERE TO STOP RECEIVING OUR REPORT