Market Commentary for the Week of May 12th

This week brings us the release of six economic reports that may have the potential to influence mortgage rates. There is data scheduled to be posted four of the five days with Monday being the empty one. Several of the reports are considered to be of elevated importance to the bond market and therefore mortgage rates. This raises the possibility of seeing noticeable movement in rates multiple days this week.

The first piece of data this week is April’s Retail Sales at 8:30 AM ET Tuesday morning. This is an extremely important report for the financial markets since it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so this data can have a pretty significant impact on the markets. Current forecasts are calling for a 0.3% increase in sales from March to April. A weaker than expected level of sales should push bond prices higher and mortgage rates lower Tuesday morning as it would signal that economic activity may not be as strong as thought. However, an unexpected increase could renew theories of economic growth that would lead to more stock buying and bond selling, pushing mortgage rates higher.

Wednesday has April’s Producer Price Index (PPI) at 8:30 AM ET. It helps us track inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, indicating inflation is not a concern at the manufacturing level, we should see the bond market improve. The overall index is expected to rise 0.2%, while the core data that excludes more volatile food and energy prices has been forecasted to also rise 0.2%. A decline in the core data would be ideal for mortgage shoppers because inflation is the number one nemesis for long-term securities such as mortgage-related bonds. As inflation rises, longer-term securities become less appealing to investors since inflation erodes the value of those securities’ future fixed interest payments. That is why the bond market tends to thrive in weaker economic conditions with low levels of inflation.

Thursday has two reports scheduled with the first being April’s Consumer Price Index (CPI) at 8:30 AM ET. This is the sister report of Tuesday’s PPI report, but measures inflationary pressures at the more important consumer level of the economy. These results will be watched closely and could lead to significant volatility in the bond market and mortgage pricing if they show any surprises. Current forecasts are calling for a 0.3% increase in the overall index and a 0.2% rise in the core data reading. As with the PPI, the core data is the more important of the two readings and will help dictate mortgage rate direction.

April’s Industrial Production is the second of the day but will come at 9:15 AM ET. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.1% increase in production, indicating that manufacturing activity was fairly flat. A decline in output would be good news for the bond market and mortgage rates because it would indicate that the manufacturing sector is not as strong as thought. This report is considered to be moderately important, so it will likely need to show unexpected strength or weakness to cause movement in mortgage rates.

The last two pieces of data will be posted Friday morning. April’s Housing Starts gives us an indication of housing sector strength and mortgage credit demand by tracking newly issued permits and actual starts of new home construction. It is expected to show an increase in new construction starts from March’s reading, hinting at housing sector growth. However, since this report is not considered to be of high importance to the bond market, it likely will have little impact on mortgage rates unless it varies greatly from forecasts.

May’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will close out the week’s calendar just before 10:00 AM ET Friday. This index measures consumer willingness to spend, which relates to consumer spending. If consumers are more confident in their own financial situations, they are more apt to make large purchases in the near future. This report usually has a moderate impact on the financial markets though, because it is not exactly factual data. It is expected to show a reading of 84.5, which would be an increase from April’s final reading of 84.1, indicating consumers are a little more confident and more likely to spend than they were last month. If it shows a large decline in consumer confidence, bond prices could rise and mortgage rates would move slightly lower because waning confidence means consumers are less apt to make a large purchase in the near future.

Overall, the calmest day for mortgage rates will likely be Monday while the best candidates for most active day are Tuesday and Thursday. Both have key economic data being posted that will attract plenty of attention in the bond market. We also need to watch stocks for mortgage rate movement. Generally speaking, stock weakness makes bonds more attractive while stock gains tend to draw funds from bonds, leading to higher mortgage rates.