Mortgage Rate Market Update

Sep 13, 2010

This Week opens with more pressure on the rate markets. The end of the drive to continual lower rates appears finished, though we still do not expect mortgage interest rates to increase a lot. Mortgage rates did not fall nearly as much as treasury rates as investors stampeded to safety on worries the economy would fall back into recession, so it is unlikely mortgage rates will ratchet up in lock step with treasury rates. The 10 yr note yield has increased 40 basis points in rate over the last three weeks while mortgage rates although higher now, have not increased much.

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This week has a full plate of economic data; the first round of a lot of key August data. Retail sales, four reports on the manufacturing and business sector, both PPI and CPI for August and Congress back in play. We expect market volatility will continue driven by uncertainty that still hangs over the economic outlook and elections coming up. The 10 yr note is approaching oversold short term readings, given any weaker data we would expect the note and mortgage prices will increase but the wider perspective now is negative for rates. Use any improvement in mortgage prices to lock in clients that have been floating looking for better rates. Keep a closer look on the rate markets this week

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Date Time (ET) Statistic For Market Expects Prior
09/13/10 02:00:00 PM Treasury Budget Aug -$95.0B -$103.6B
09/14/10 08:30:00 AM Retail Sales Aug 0.30% 0.40%
09/14/10 08:30:00 AM Retail Sales ex-auto Aug 0.30% 0.20%
09/14/10 10:00:00 AM Business Inventories Jul 0.70% 0.30%
09/15/10 08:30:00 AM NY Fed – Empire Manufacturing Survey Sep 6.4 7.1
09/15/10 09:15:00 AM Industrial Production Aug 0.30% 1.00%
09/15/10 09:15:00 AM Capacity Utilization Aug 75 74.80%
09/15/10 10:30:00 AM Crude Inventories 09/11/10 NA -1.85M
09/16/10 08:30:00 AM Initial Claims 09/11/10 460K 451K
09/16/10 08:30:00 AM Continuing Claims 09/04/10 4450K 4478K
09/16/10 08:30:00 AM PPI Aug 0.30% 0.20%
09/16/10 08:30:00 AM Core PPI Aug 0.10% 0.30%
09/16/10 10:00:00 AM Philadelphia Fed Sep 2 -7.7
09/17/10 08:30:00 AM CPI Aug 0.20% 0.30%
09/17/10 08:30:00 AM Core CPI Aug 0.10% 0.10%
09/17/10 09:55:00 AM Mich Sentiment Sep 70 68.9

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August’s Retail Sales report will be posted early Tuesday morning. It will give us a very important measurement of consumer spending, which is extremely relevant to the markets because it makes up two-thirds of the U.S. economy. Current forecasts are calling for a 0.3% increase in sales. Analysts are also calling for a 0.3% rise in sales if more volatile auto sales are excluded. Larger th an expected increases would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate economic growth.

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Wednesday’s Industrial Production report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be moderately important but could help change mortgage rates if there is a significant difference between forecasts and the actual reading. Analysts are expecting to see a 0.3% increase in production. A higher level of output could lead to higher mortgage rates, while a weaker than expected figure would hint at a soft manufacturing sector and would be considered good news for bonds and mortgage rates.

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One of the week’s two important inflation readings will posted by the Labor Department early Thursday morning. This is August’s Producer Price Index (PPI), which gives us an important measurement of infla tionary pressures at the producer level of the economy. There are two readings that analysts follow in this release. They are the overall index and the core data reading. The core data is the more important of the two since it excludes more volatile food and energy prices. Analysts are predicting a 0.3% increase in the overall index, and a rise of 0.1% in the core data. Stronger than expected readings could fuel inflation concerns in the bond market. That would be bad news for bonds and mortgage rates because inflation is the number one nemesis of the bond market as it erodes the value of a bond’s future fixed interest payments. As inflation becomes more of a concern in the markets, bonds become less appealing to investors, leading to falling prices and higher mortgage rates.

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Friday has two reports scheduled, but one is much more important than the other. The first is August’s Consumer Price Index (CPI) during early morning hours. The CPI is one of the most imp ortant reports we see each month. It is considered to be a key indicator of inflation at the consumer level of the economy. As with its’ sister PPI report, there are two readings in the report- the overall index and the core data reading. Current forecasts show a 0.2% increase in the overall reading and a 0.1% rise in the core data reading. As with the PPI, a larger increase in the core data would likely lead to higher mortgage rates.

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The second report of the day and last of the week will be posted by the University of Michigan during late morning trading. Their Index of Consumer Sentiment will give us an indication of consumer confidence, which hints at consumers’ willingness to spend. If confidence is rising, consumers are more apt to make large purchases. But, if they are growing more concerned of their personal financial situations, they probably will delay making that large purchase. This influences future consumer spending data and can im pact the financial markets. It is expected to show a reading of 70.0, which would mean confidence rose from August’s level. That would be considered bad news for bonds and mortgage rates, but the CPI is much more important to the markets than this data is. Therefore, expect to see the CPI results drive the markets and mortgage pricing much more than this data.

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Tuesday and Friday may have the biggest rate swings week with the Retail Sales and CPI reports being released respectively. However, Thursday’s PPI release is also extremely important to the markets, so it cannot be ignored either. Tomorrow will probably end up being the calmest day for mortgage rates, but we still may see minor changes if the stock markets show much movement. Maintain fairly constant contact with your mortgage professional if still floating an interest rate.

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