June 12th, 2017
This extremely busy week brings us the release of six pieces of economic data that are relevant to mortgage rates along with a couple of Treasury auctions. However, the theme of the week will be Fed-related with an FOMC meeting, economic forecasts and a press conference with Fed Chair Janet Yellen mid-week. With this much important data and these Fed events coming in the same week, there is little doubt that we will have an active week for the financial and mortgage markets.
The two relevant Treasury auctions will take place Monday and Tuesday. 10-year Treasury Notes will be sold Monday while 30-year Bonds will be sold Tuesday. Results of both auctions will be posted at 1:00 PM ET on the sale days. If investor demand was high for these securities, we may see bonds rally during afternoon trading. However, weak interest in these sales could lead to bond selling and an increase in mortgage rates.
The week’s economic data starts early Tuesday when May’s Producer Price Index (PPI) will be released at 8:30 AM ET. It helps us measure inflationary pressures at the producer level of the economy. There are two readings to this index, the overall and the core data. The core data is considered to be the more important one because it excludes more volatile food and energy prices. A large increase could raise concerns about inflation rising, making another Fed rate increase more likely sooner than later. This would not be good news for bond prices or mortgage rates since inflation erodes the value of a bond’s future fixed interest payments. Rising inflation causes investors to sell bonds, driving bond prices lower, pushing their yields upward and bringing mortgage rates higher. Analysts are expecting to see no change in the overall reading and 0.2% rise in the core data. Good news for mortgage shoppers would be declines in these.
Wednesday is packed with important events that are all expected to affect mortgage rates. It begins with the Commerce Department posting May’s Retail Sales data at 8:30 AM ET. This report gives us a very important measurement of consumer spending, which is closely watched by bond traders because consumer spending makes up over two-thirds of the U.S. economy. Analysts are expecting to see that retail-level sales rose 0.1% last month. A decline in sales, signaling a slowing economy, would be great news for the bond market and could lead to lower mortgage rates Wednesday morning. On the other hand, a stronger level of sales will likely create bond weakness and an increase in rates.
The second release of the day is also one of the two key measurements of inflation that we get each month. That will be May’s Consumer Price Index (CPI), also coming early Wednesday morning. This is the sister report to the PPI, tracking inflationary pressures at the consumer level of the economy rather the manufacturing level. As with the PPI, there are two readings that analysts watch. Forecasts are calling for the overall reading to be unchanged while the core reading rises 0.2%. The weaker the readings, the better the news it is for mortgage rates.
Wednesday also has this week’s Fed events with three of them. The first is the 2:00 PM adjournment of the FOMC meeting that began Tuesday. This is when Fed Chair Yellen and company will decide whether or not to change key short-term interest rates. The general consensus is that they will make a .25% bump at this meeting. The recent weak economic data led some market participants to change their timeline of the Fed’s rate hikes, pushing their predictions for the next increase to the following meeting. Still, the majority believe a move will be made this week. If they don't make a move, we should see a positive reaction in bonds and mortgage rates.
Also at 2:00 PM ET Wednesday, the Fed will release their updated estimates for future economic activity. They will post their predictions on GDP growth, unemployment and inflation. These could be a market mover if they show even minor revisions to any of the key headline economic numbers. The larger the change, the more likely the markets will react. Revisions that point toward slower economic growth would be good news for the bond market and mortgage rates as it would mean the Fed will probably make their next rate increase later than sooner.
They will be followed by a press conference hosted by Fed Chair Yellen at 2:30 PM ET. These press conferences with the media often lead to significant afternoon volatility in the markets and mortgage rates. Any surprises will probably cause a noticeable reaction in the markets. That means there is a high probability of seeing afternoon changes to mortgage rates Wednesday.
May’s Industrial Production data will be released at 9:15 AM ET Thursday, giving us a measurement of manufacturing sector strength. It tracks output at U.S. factories, mines and utilities, but is considered to be only moderately important to mortgage rates. If it reveals that production is rapidly rising, concerns of manufacturing strength may come into play in the bond market and cause selling in bonds. Analysts are expecting to see a 0.1% increase, meaning industrial output was slightly stronger last month than in April. A large decline would be favorable to bonds and mortgage pricing.
There are two more reports scheduled for Friday morning. May’s Housing Starts at 8:30 AM ET is the first. It tracks groundbreakings of new home projects, but is not considered to be of high importance. This means it likely will not affect mortgage rates unless its results vary greatly from forecasts. Market analysts are expecting to see an increase in starts of new homes last month. Good news for the bond market and mortgage rates would be a good-sized decline because a weakening housing sector makes broader economic growth less likely.
June’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be posted late Friday morning. This index measures consumer willingness to spend and usually has a minor to moderate impact on the financial markets. It is expected to show a reading of 97.0, which would be a slight decline from May’s 97.1. A smaller than expected reading would be considered good news for bonds because it would mean that surveyed consumers were less optimistic about their own financial and employment situations than thought. That often means they are less likely to make large purchases in the near future, but since this report is only moderately important it likely will not influence mortgage rates considerably unless it shows a significant variance from forecasts.
The week’s most important day is Wednesday without a doubt, but we could see noticeable movement in rates Tuesday also. The calmest day will probably be Monday or Friday. I would not be surprised to see intraday revisions to mortgage rates multiple days, but it’s a safe bet to happen at least on Wednesday. This is certainly a week that you should maintain contact with your mortgage professional if still floating an interest rate.