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This week brings us the release of only two relevant economic reports for
the bond market to digest in addition to the minutes from the last FOMC
meeting and two fairly important Treasury auctions. Only one of the
economic reports is considered to be of high importance and everything on
the week’s calendar will come during the middle and latter days of the
week. This means we are likely to see the most volatility in mortgage
pricing between Wednesday afternoon and Friday morning. There are also
some heavily watched corporate earnings releases scheduled for the stock
markets this week that can influence bond trading and therefore, mortgage
pricing several days.
There is nothing of relevance scheduled for release tomorrow or Tuesday
except some high profile corporate earnings reports. Alcoa is expected to
post their earnings after the market closes tomorrow, so it will have an
impact on overnight and early morning trading Tuesday. This company isn’t
necessarily important to gauging economic strength, but it is the first
Dow component company that posts earnings each quarter. Since it is the
first look into Dow-related earnings, it draws plenty of attention in the
markets. Generally speaking, weaker corporate earnings translates into
stock selling that makes bonds more attractive to investors. As bond
prices rise, yields fall and mortgage rates usually follow bond yields.
Wednesday has the first of two important Treasury auctions when 10-year
Notes will be sold. That sale will be followed by a 30-year Bond auction
Thursday. These sales can influence market trading in bonds and possibly
affect mortgage rates. If the sales are met with a strong demand from
investors, particularly Wednesday's sale, we should see afternoon
improvements in bonds that could lead to downward revisions to mortgage
rates. However, if buyers stay on the sidelines, we may see bonds fall
after results are posted at 1:00 PM ET and mortgage rates move higher
those days. With the recent massive sell-off in bonds, it is difficult to
be optimistic about this week’s sales.
Also Wednesday is the afternoon release of the minutes from the last FOMC
meeting. There is a possibility of the markets reacting to them following
their 2:00 PM ET release. I find it hard to believe that they could
reveal anything more surprising than we got after the last FOMC meeting
or during Chairman Bernanke’s press conference that followed. Still, market
participants will be looking for anything new, particularly about the
estimated timeframe when the Fed will begin tapering their current $85
billion a month bond buying program (QE3). The minutes will give us how
members voted for related motions and could cause more volatility in the
markets if there is anything unexpected in them.
The week’s monthly economic data comes Friday morning when the final two
events take place. The first is June's Producer Price Index (PPI) from
the Labor Department. It is a very important release because it measures
inflationary pressures at the producer level of the economy. It is
expected to show a 0.3% increase in the overall reading and a 0.1%
increase in the core data reading. The core reading is the more important
of the two because it excludes more volatile food and energy prices,
revealing a more reliable inflation reading. The bond market should react
favorably if we get weaker than expected readings, but a larger than
expected rise in the core reading could send mortgage rates higher
Friday.
The final report of the week is the University of Michigan's Index of
Consumer Sentiment. This index is released in a preliminary form each
month and then followed up two weeks later with a final reading. The
preliminary reading for July will be posted late Friday morning and is
expected to rise from June's final reading of 84.1. This would indicate
that consumers were a little more comfortable with their own financial
situations this month than last month. It is believed that if consumers
are confident in their own finances, they are more apt to make large
purchases in the near future. And with consumer spending making up over
two-thirds of our economy, investors pay close attention to reports such
as these. So, a decline in confidence would be good news for mortgage
rates because it means many consumers will probably delay making a large
purchase in the immediate future, limiting economic activity.
Also worth noting is the fact that tomorrow kicks off the corporate
earnings reporting season when Alcoa posts their quarterly results.
Market participants are anxiously waiting for these announcements to see
how our economy and global financial situations are affecting earnings.
Just as important as this past quarter's results are their
forward-looking estimates. If revenue, earnings and projections from the
big-named companies exceed expectations, stocks will likely rally. This
would make bonds less appealing to investors and lead to bond selling.
But if results are weaker than expected, indicating that the global
economy is stifling earnings, bonds could draw more attention from
investors as stocks slide.
Overall, it is difficult to try to label one particular day as the most
important this week. It is easy to say the least important will likely be
tomorrow or Tuesday with no economic events scheduled, but Friday’s heavy
selling on bonds that accelerated into closing could extend into
tomorrow’s trading. As mentioned a couple times recently, I would be
extremely cautious floating an interest rate until the yield on the
benchmark 10-year Treasury Note nears 3.00%. Friday’s selling pushed it
to 2.71%, so there is a realistic possibility of seeing further selling
in bonds that will continue to pressure mortgage rates. The single most important
day for the bond market is either Wednesday due to the 10-year Note
auction and the release of the FOMC minutes or Friday morning when the
two most important economic reports of the week will be posted. Tomorrow
also could be a very active day if Friday’s negative tone carries into
morning trading. Accordingly, I strongly recommend maintaining contact
with your mortgage professional if still floating an interest rate.
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...
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