Today’s only relevant economic data was the release of August’s Industrial Production report at 9:15 AM ET. It showed a 0.4% increase in output at U.S. factories, mines and utilities. This was slightly below forecasts, making the data positive for the bond market. However, this is only a moderately important report and it was a minor variance from forecasts, so its impact on today’s mortgage pricing has been minimal although we have already had one rate worsening.
What is driving this morning’s rally is news that Lawrence Summers has removed his name for consideration as the next Fed Chairman. While that may not seem like a big deal or worthy of a bond and stock rally, it actually is. This is because there were believed to be only two serious candidates to take over from current Chairman Bernanke when he steps down. It was Mr. Summers and Ms. Janet Yellen, who is the current Vice Chairman of the Fed’s Board of Governors and now is the favorite to take over as chairman. This is big news because Ms. Yellen is thought to believe in a much more accommodating position (low short-term interest rates) than Mr. Summers does. In other words, the markets now believe key short-term interest rates may not be bumped higher until even later than current expectations whereas Mr. Summers as chairman would be sooner. It is somewhat equivalent to the Fed announcing they expect to start raising key interest rates in 2015 instead of the current thought of 2014.
That news over the weekend did motivate a shift in my stance towards mortgage rates. This morning’s bond rally and improvement to mortgage rates was expected. Hence the shift to float recommendations into today’s pricing. Now that we have seen that improvement, it is time to direct our attention back to the week’s extremely important schedule. And with that comes a more cautious approach towards rates, at least until we get past the major events scheduled the middle part of the week.
Tomorrow does have a key piece of economic data scheduled for release that is highly influential on the bond market. That would be August’s Consumer Price Index (CPI) at 8:30 AM ET. It is considered to be a key indicator of inflation at the consumer level of the economy. As with its' sister PPI report last week, 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 0.2% rise in the core data reading. The core reading is the more important of the two because it excludes more volatile food and energy prices, leaving more reliable data for analysts to digest. A sizable increase would signal rising inflation that erodes the value of a bond’s future fixed interest payments, causing bond prices to fall, yields to rise and mortgage rates to move higher tomorrow morning. Ideally, bond traders would like to see little change or a decline in the CPI readings.
August's Housing Starts will start Wednesday’s activities at 8:30 AM ET but the afternoon brings us the good stuff. The two-day FOMC meeting will adjourn at 2:00 PM ET Wednesday, which will be followed by updated economic forecasts by the Fed and a press conference with Chairman Bernanke at 2:30 PM ET. That is the most significant day of the week and will likely cause a great deal of volatility in the financial and mortgage markets. A good part of the importance comes from the question of whether or not and by how much the Fed will ease back their monthly bond purchases that are currently taking place at a rate of $85 billion a month. All the speculation over the past several months will come to a head and we will finally have our answer. For the record, I am predicting a small token reduction
At this time I am suggesting to float your rate and wait to lock in until Tuesday.
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