Market Commentary for the Week of July 14th

This week brings us the release of seven relevant economic reports for the bond market to digest in addition to semi-annual Congressional testimony by Fed Chair Janet Yellen. A couple of the economic reports are considered to be of high importance, meaning we will likely see more volatility in the financial markets and mortgage pricing over the next several days. There are also some more heavily watched corporate earnings releases scheduled for the stock markets this week that can influence stock trading and therefore, bond and mortgage pricing. In other words, we are likely in for another very active week for mortgage rates.

Today has nothing of relevance to mortgage rates. June’s Retail Sales report will start the week’s activities at 8:30 AM ET tomorrow morning. This data is considered to be of high importance because it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so any related data is watched closely. The Commerce Department is expected to say that sales at retail level establishments rose 0.6% last month. A larger than expected increase in sales will likely cause bond selling and lead to higher mortgage rates since it would mean consumers are spending more than thought. That would point towards economic growth that makes bonds less attractive to investors.

Late tomorrow morning, Fed Chair Janet Yellen will start her semi-annual update about the economy and monetary policy before Congress. She will speak before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday, each at 10:00am ET. Her testimony will be broadcast and watched very closely. Analysts and traders will be looking for the Fed’s opinion on the status of the economy and their expectations of future growth, inflation and unemployment concerns that will lead to the Fed’s next move. These topics should create a great deal of volatility in the markets during the prepared testimony and the question and answer session that follows. If she indicates that inflation may become a point of concern or anything that hints at rapid economic growth, we can expect to see the bond market fall and mortgage rates rise Tuesday.

We usually see the most movement in the markets and mortgage rates during the first day of this testimony as the speaker’s prepared words for both appearances are quite similar to each other, meaning that the second day of testimony rarely gives us anything we did not hear during the first day. The general exception is something asked or answered during the Q&A portion of the second day’s appearance.

Wednesday has three reports scheduled that we need to watch in addition to day two of Fed testimony. The first is June’s Producer Price Index (PPI) at 8:30 AM ET, which measures inflationary pressures at the producer level of the economy. Analysts have forecasted a 0.2% increase in the overall index and a 0.2% rise in the core data. The core data is considered to be the key reading because it gives us a more stable measure of inflation as it excludes more volatile food and energy prices. Higher than expected readings could raise inflation fears and push mortgage rates higher, while readings that fall short of forecasts should lead to lower rates early Tuesday.

June’s Industrial Production data is the second report of the day at 9:15 AM ET. This data measures output at U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength. It is expected to show a 0.4% rise in production, indicating that the manufacturing sector strengthened slightly during the month. That would basically be bad news for bonds, however the PPI will take center stage Wednesday morning.

Wednesday afternoon does bring us something that could influence the markets and possibly mortgage pricing. The Federal Reserve will release its Beige Book report at 2:00 PM ET Wednesday afternoon. This report is named simply after the color of its cover, but it is considered to be important to the Fed when determining monetary policy during their FOMC meetings. It details economic activity and conditions by Fed region throughout the U.S. If there are any significant changes in conditions since the last update, we could see afternoon moves in the markets and mortgage rates. Signs of weakness should translate into bond strength and better mortgage rates.

Thursday morning’s only monthly economic data is June’s Housing Starts report. This data gives us an indication of housing sector strength by tracking construction starts of new homes, but is not considered to be of high importance. Analysts are currently expecting to see an increase in new starts. However, I don’t see this data having much of an impact on mortgage rates Thursday unless it varies greatly from forecasts.

Friday has the last two reports, both during late morning trading. The first of those is the University of Michigan’s Index of Consumer Sentiment just before 10:00 AM ET. 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 82.5. This would indicate that consumers were more comfortable with their own financial and employment situations this month than last month. It is believed that if consumer confidence in their own finances is rising, they are more apt to make a large purchase in the near future. And with consumer spending making up such a large part 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.

The final report of the week is June’s Leading Economic Indicators (LEI) at 10:00 AM ET Friday. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of moderate importance to the bond market. It is expected to show a 0.5% increase, meaning it is predicting gains in economic growth over the next few months. A large decline in the index would be good news for the bond and mortgage markets.

Overall, look for Tuesday to be the key day of the week due to the importance of that day’s data and Fed Chair Yellen’s testimony, but Wednesday’s economic data is also important to the bond market and mortgage rates. Monday is the best candidate for least important day. I would be surprised if we didn’t see noticeable movement in rates several days this week. Accordingly, please maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.