This week brings us the release of six relevant economic reports for the bond market to digest in addition to semi-annual congressional testimony by Fed Chair Janet Yellen and two Treasury auctions. Most of the data that is being posted is considered to be of high importance, meaning we will likely see more volatility in the financial markets and mortgage pricing this week. It starts off light with nothing of importance set for tomorrow or Tuesday. However, the rest of the week is packed with mortgage-relevant reports and other events.
Wednesday doesn't have a relevant morning economic release but does have several events that could easily influence the markets and mortgage pricing. They begin late Wednesday morning when Fed Chair Janet Yellen will start her semi-annual update about the economy and monetary policy before Congress. She will speak to the House Financial Services Committee Wednesday and the Senate Banking Committee Thursday, 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. 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 Wednesday.
We usually see the most movement in the markets and mortgage rates during the first day of this testimony. This is because 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.
The first of this week’s two important Treasury auctions will take place Wednesday when 10-year Notes will be sold. That sale will be followed by a 30-year Bond auction Thursday. These sales can influence market trading in bonds and possibly affect mortgage rates. If the sales are met with a strong demand from investors, particularly Wednesday's sale, we could see afternoon improvements in bonds that could lead to downward revisions to mortgage rates. However, if buyers stay on the sidelines, we may see bonds fall after results are posted at 1:00 PM ET and mortgage rates move higher those days.
The Federal Reserve will release its Beige Book report at 2:00 PM ET Wednesday. 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.
The first economic data of the week is June's Producer Price Index (PPI) from the Labor Department early Thursday morning. It is very important data because it measures inflationary pressures at the producer level of the economy. It is expected to show a 0.1% decline in the overall reading and a 0.2% increase in the core data reading. The core reading is the more important of the two because it excludes more volatile food and energy prices, revealing a more reliable inflation reading. The bond market should react favorably if we get weaker than expected readings, but a larger than expected rise in the core reading could send mortgage rates higher early Thursday.
All four of the remaining reports will be posted Friday morning. June's Retail Sales report will start the day at 8:30 AM ET. 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 0.1% 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.
Next up is June's Consumer Price Index (CPI), also at 8:30 AM ET. This is a mirror of Thursday's PPI with the exception that this report measures inflation at the more important consumer level of the economy. Analysts have forecasted no change in the overall index and a 0.2% rise in the core data. Higher than expected readings could raise future inflation fears and push mortgage rates higher, while readings that fall short of forecasts should lead to lower rates early Friday.
June's Industrial Production data is the third report of the day, coming 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 during the month. That would basically be bad news for bonds, however the CPI and Retail Sales will take center stage during early morning trading.
The final report of the week will be the University of Michigan's Index of Consumer Sentiment just before 10:00 AM ET Friday. 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 Friday and is expected to show little change from June's final reading of 95.1. This would indicate that consumers were just as comfortable with their own financial and employment situations this month as they were 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 growth.
Overall, Wednesday has the potential to be the most active day of the week, depending on what type of reaction the markets have to the Fed’s congressional testimony. If there are any surprises in her testimony or answers, the reaction in the markets will probably be strong. Friday is also a good candidate with four economic reports, two of which are important. The calmest day will likely be tomorrow or Tuesday, although corporate earnings season starts this week. Better than expected earnings would be good for stocks and have a negative impact on bonds. Disappointing earnings should fuel bond buying and lower mortgage rates. With so much going on this week, it is highly recommended that you maintain contact with your mortgage professional if closing soon and still floating an interest rate.