This week looks to be quite busy with the release of five pieces of relevant monthly economic data for the markets to digest, three of which are highly important. In addition to the data, there are also a couple of Treasury auctions that may affect rates. The week starts off with none of these events, but we will likely see a negative reaction to the weekend announcement of an agreement with Mexico that appears to have averted the threatened tariffs. Since tariffs are believed to be bad for economic growth, the announcement is good for stocks and bad for bonds.
May's Producer Price Index (PPI) will start the week’s activities at 8:30 AM ET Tuesday. It measures inflationary pressures at the producer level of the economy. There are two readings to this index that analysts pay attention to. They are the overall reading and the more important core data. A large increase would fuel concerns about inflation rising at the manufacturing level. 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 and allows the Fed to be more aggressive towards raising key interest rates. 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 a 0.1% increase in the overall reading and 0.2% rise in the core data. The core reading is watched more closely because it excludes volatile food and energy prices, leaving more stable data to rely on. Good news for mortgage shoppers would be weaker readings.
Next up is May's Consumer Price Index (CPI) early Wednesday morning, which is the sister release of the PPI. The difference being the CPI measures inflationary pressures at the 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 significant surprises. Current forecasts are calling for a 0.1% increase in the overall index and a 0.2% rise in the core data reading. This data can also affect the Fed's timeline for raising or lowering key short-term interest rates as they are concerned about inflation. They have been able to avoid raising rates because inflation has remained below their preferred 2.0% annual rate. A spike in these readings could alter the theory that Chairman Powell and friends will need to lower key rates once or twice before the end of the year, which would be bad news for bonds and mortgage pricing.
The two relevant Treasury auctions will take place Wednesday and Thursday. 10-year Treasury Notes will be sold Wednesday while 30-year Bonds will be sold Thursday. Results of both auctions will be posted at 1:00 PM ET on the sale days. If investor demand was high for these securities, we may see bonds rally during afternoon trading. However, weak interest in these sales could lead to bond selling and an increase in mortgage rates.
Thursday has no important monthly or quarterly reports to be concerned with, but Friday has three of them. The Commerce Department will post May's Retail Sales data at 8:30 AM ET Friday. 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 0.7% 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 Friday morning. On the other hand, a stronger level of sales will likely create bond weakness and an increase in rates.
May's Industrial Production data will be released at 9:15 AM ET Friday. It will give us an indication of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. However, this report 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 lead to selling in bonds. Analysts are expecting to see a 0.2% increase, meaning industrial output was slightly stronger last month than in April. A large decline would be favorable to bonds and mortgage pricing.
June's preliminary reading to the University of Michigan's Index of Consumer Sentiment will be posted late Friday morning to close out this week’s calendar. This index measures consumer willingness to spend and usually has a minor to moderate impact on the financial markets. It is expected to show a reading of 98.6, which would be a decline from May's 100.0. A smaller than expected reading would be considered good news for bonds because it would mean that surveyed consumers were less optimistic about their own financial and employment situations than thought. That often means they are less likely to make large purchases in the near future, but since this report is only moderately important it probably will not influence mortgage rates considerably unless we see a significant variance from forecasts and there are no surprises in the day’s other releases.
Overall, Wednesday is the best candidate for most important day for mortgage rates due to the CPI and 10-year Treasury Note auction. Friday could be pretty active also with Retail Sales being posted. The calmest day will probably be Thursday unless something unexpected happens. Despite the recent bond rally, it would be prudent to maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.