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Mortgage Rates (1/9/2011 - the week ahead)

January 11th, 2011 9:24 PM by Lehel S.

This week brings us the release of seven pieces of economic data to digest along with two important Treasury auctions. None of them are scheduled for tomorrow or Tuesday, meaning all of the week’s events come over two and a half days. Until we get to the week’s first relevant event Wednesday afternoon, look for the stock markets to be a major contributor to movements in bond prices and mortgage rates. Stock strength will likely equate into bond weakness and higher mortgage rates, and vice versa if stocks fall. 





The first economic data of the week is the Federal Reserve’s Beige Book report at 2:00 PM ET Wednesday. This report, which is named simply after the color of its cover, details economic conditions throughout the U.S. by region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises, particularly regarding inflation, unemployment or future hiring.

The two important Treasury auctions will be held Wednesday and Thursday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important of the two as it will give us a better indication for demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would result in upward revisions to mortgage rates.

Thursday has two monthly pieces of data scheduled, with one being much more important to the markets than the other. That would be the Labor Department’s Producer Price Index (PPI) at 8:30 AM ET. The PPI is important to the markets and mortgage rates beca use it measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.7% increase in the overall reading and a 0.2% increase in the more important core data reading that excludes volatile food and energy prices. A larger than expected increase in the core reading could mean higher mortgage rates Thursday since inflation is the number one nemesis of the bond market. It erodes the value of a bond’s future fixed interest payments, making them less attractive to investors. Accordingly, they are sold at a discount to offset the drop in value, which drives their yields higher. And since mortgage rates follow bond yields, this means higher rates for borrowers.

November’s Goods and Services Trade Balance is the second report of the day Thursday, but is the week’s least important data. It measures the size of the U.S. trade deficit and is expected to show a $40.6 billion deficit. This data usually does not di rectly affect mortgage rates, but it does influence the value of the U.S. dollar versus other currencies. A stronger dollar makes U.S. securities more attractive to international investors because they are worth more when sold and converted to the investor’s domestic currency. But unless we see a significant variance from forecasts, I don’t believe this data will lead to a change in mortgage rates Thursday.





The remaining four reports will all be posted Friday morning. December’s Retail Sales data is the first and one of two highly important reports on the day, both of which will be released at 8:30 AM ET. This Commerce Department report measures consumer spending by tracking sales at retail establishments in the U.S. Since consumer spending makes up two-thirds of the U.S. economy, any related data is watched closely. Current forecasts are calling for an increase in sales of approximately 0.7%. A smaller than expected increa se in sales would indicate consumers did not spend as much as thought, helping to prevent rapid economic growth. That would be considered good news for the bond market and mortgage rates.

The second is December’s Consumer Price Index (CPI) at 8:30 AM. This is also one of the most important monthly reports that we see each month since it measures inflationary pressures at the consumer level of the economy. The overall index is expected to rise 0.4% while the core data is expected to increase 0.1%. Weaker than expected readings should lead to bond improvements and lower mortgage rates Friday morning. 





December’s Industrial Production report is next with a release time of 9:15 AM ET. This data measures output at U.S. factories, mines and utilities, giving us a good indication of manufacturing sector strength or weakness. Current forecasts are calling for an increase in production of 0.4% from November’s level. A smal ler than expected increase would be considered good news for bonds and could help lower mortgage rates, but the Retail Sales data and CPI are by far the most important data of the day and will have the biggest impact on Friday’s mortgage pricing.

The final report of the week is January’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment. This index measures consumer willingness to spend and often has enough of an impact on the financial markets to slightly change mortgage rates, but it usually is not released the same day as two highly important reports. Therefore, I don’t believe this month’s reading will cause movement in mortgage rates. Good news would be if it shows a reading weaker than the 75.0 that is expected. December’s final reading was 74.5, indicating that consumer sentiment likely rose this month. The bond market prefers to see waning confidence because if consumers are less optimist ic about their own financial situations, they are less apt to make large purchases in the near future. Slowing spending levels limits fuel for economic growth, making long-term securities such as mortgage bonds more attractive to investors.





Overall, Friday is by far the most important day of the week. The single most important report is probably the CPI, but the Retail Sales report is a close second. Both are considered to be of high importance and can heavily influence the markets. Therefore, I strongly recommend maintaining contact with your mortgage professional this week, especially the latter part 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... Float 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 no w... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers. 
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Posted by Lehel S. on January 11th, 2011 9:24 PM

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