This week brings us the release of five pieces of economic data that are relevant to mortgage rates, but two of them are key inflation readings that are very important to the bond market. 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 week’s activities start early Tuesday when the Commerce Department posts May's Retail Sales data. 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 0.3% 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 Tuesday morning. On the other hand, a stronger level of sales will likely create bond weakness and an increase in rates.
Wednesday begins with two morning economic releases. The first is one of the two key measurements of inflation that we get each month. May's Producer Price Index (PPI) will be released at 8:30 AM ET, helping us measure inflationary pressures at the producer level of the economy. There are two readings of 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 a 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 increases of 0.3% in the overall reading and 0.1% in the core data. Good news for mortgage shoppers would be declines in these.
May's Industrial Production data will be released at 9:15 AM ET Wednesday, 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 0.2% decline, meaning industrial output was softer last month than in April. A larger decline would be favorable to bonds and mortgage pricing.
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 Chairm Yellen and company will decide whether or not to change key short-term interest rates. There is a possibility of it happening at this meeting but the general consensus is that they will not act yet. The recent weak employment numbers led to many market participants changing their timeline of the Fed’s rate hikes, pushing their predictions for the next increase to the following meeting at the earliest. However, even if no change is made at this meeting, all eyes will be watching the post-meeting statement for any hints at when they will make a move. If there are any surprises, look for an immediate reaction in the financial and mortgage markets.
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 that rate increase later than sooner.
They will be followed by a press conference hosted by Chairperson 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 Consumer Price Index (CPI) will be posted early Thursday 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 a 0.3% rise in the overall reading and a 0.2% increase in the more important core data. The weaker the readings, the better the news it is for mortgage rates.
The week’s calendar will close with a relatively minor release early Friday morning. May's Housing Starts, that track groundbreakings of new home projects, will be posted at 8:30 AM ET. It is one of the month's least important reports and likely will not affect mortgage rates unless its results vary greatly from forecasts. It is expected to show that starts of new homes fell last month, indicating softness in the housing sector. That is good news for the bond market and mortgage rates because a weakening housing sector makes broader economic growth less likely. However, this data is not important enough to cause a noticeable change in mortgage rates unless there is a wide variance between forecasts and the actual results.
The week’s most important day is Wednesday without a doubt, but we could see noticeable movement in rates Tuesday also, along with Thursday. The calmest day will probably be 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.