Market Commentary week of October 9th, 2017

Finance Digital Data ConceptThis week brings us the release of four economic reports for the markets to digest over four trading days, most of which is considered important data. In addition to that data, there are two Treasury auctions that certainly have the potential to affect mortgage rates and the minutes from the last FOMC meeting. The bond market will be closed tomorrow in observance of the Columbus Day holiday as will most banks, so there will not be an update to this report tomorrow. The stock markets will be open for trading though. This means that the lenders that are open for business will likely not be issuing new rates tomorrow, opting to use Friday’s pricing or not accepting new rate locks. The bond market will reopen for regular trading Tuesday morning.

The first release of the week doesn’t come until Wednesday afternoon when the minutes from the most recent FOMC meeting will be posted at 2:00 PM ET. These may move the markets or could be a non-factor, depending on what they say. The key points traders are looking for are concerns over our and the global economies, inflation, reducing the Fed’s balance sheet and the Fed’s next monetary policy move (rate hike). It is worth noting though that the last FOMC meeting was followed by revised economic predictions and a press conference with Fed Chair Yellen. Therefore, the likelihood of seeing a significant surprise in the minutes is relatively low.

Wednesday also has the first of this week’s two important Treasury auctions. The sale of 10-year Notes will be held Wednesday 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, so any reaction will come during early afternoon trading.

Thursday’s sole monthly release is September’s Producer Price Index (PPI). This index measures inflationary pressures at the manufacturing level of the economy and is considered to be highly important to the bond market. Analysts are expecting to see a 0.4% rise in the overall index and an increase of 0.2% in the more important 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. Unexpected growth in inflation also makes a Fed rate hike likely to be sooner than later. 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.

Friday has the remaining three economic reports, starting with September’s Retail Sales report at 8:30 AM ET. This highly important data measures consumer level sales and is very important to the markets because consumer spending makes up over two-thirds of the U.S. economy. If consumer level spending is strong, overall economic growth is likely to be stronger, making bonds less attractive to investors. If we see weaker than expected readings in this report, the bond market should respond favorably and mortgage rates will probably improve Friday morning. Current forecasts are calling for a 1.6% increase in sales, although the sizable jump is being attributed to storm-related purchases. Good news for the bond market and mortgage pricing would be a much smaller increase.

Next up is September’s Consumer Price Index (CPI), also at 8:30 AM ET. It tracks inflationary pressures at the very 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 0.6% increase in the overall index and an increase of 0.2% in the core data. A larger than expected increase in the core reading could raise inflation concerns, pushing bond prices lower and mortgage rates higher.

The last release of the week will be posted by the University of Michigan late Friday morning. Their Index of Consumer Sentiment for October will give us an indication of consumer confidence, which helps us measure consumers’ willingness to spend. If consumer confidence in their own financial situation is rising, they are more apt to make large purchases. But, if they are growing more concerned about their job security or finances, they probably will delay making that large purchase. This influences future consumer spending data and can impact the financial markets. It is expected to show a reading of 95.5, meaning confidence rose from September’s level of 95.1. A decline would be considered favorable news for bonds and mortgage rates because waning consumer spending usually translates into slower economic growth.

Overall, it appears Friday is an easy label for the most important day of the week with two highly important reports being posted, although Thursday could be active also. Tuesday could be the calmest but following a three-day weekend in bonds we still may see some movement in rates. Please maintain contact with your mortgage professional if still floating an interest rate because this will probably be a pretty active week for the financial and mortgage markets.