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This week brings us the release of six economic reports and two relevant Treasury auctions for the bond market to digest in addition to another FOMC meeting. Most of the data is set for the first half of the week, so we could see plenty of movement in rates the first couple days. The data scheduled this week ranges from moderately to extremely important, so some reports will have a much bigger impact on trading than others. We also need to keep an eye on the stock markets as they can be heavily influential on bond market direction and mortgage rates.
The week kicks off tomorrow with the release of a moderately important manufacturing report. September’s Industrial Production report will be posted at 9:15 AM ET tomorrow, giving us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.3% increase in production output, indicating minor growth in the sector. Good news for the bond market and mortgage rates would be a decline in this data.
There are three reports scheduled for release Tuesday, two of which are very important to the financial and mortgage markets. The first is September’s Retail Sales report at 8:30 AM ET that measures consumer spending. This data is very important to the markets because consumer spending makes up over two-thirds of the U.S. economy. Therefore, any related data is watched closely. If we see weaker than expected readings in this report, the bond market should respond favorably and mortgage rates should drop Tuesday morning. However, stronger than expected sales would fuel optimism about the economy and would likely lead to a stock rally that hurts bonds prices and pushes mortgage rates higher. Current forecasts are calling for a 0.1% decline in retail-level sales, meaning consumers spent a little less last month than they did in August. Good news for the bond market and mortgage pricing would be a larger decline in sales.
September’s Producer Price Index (PPI) is the second key report of the day, also at 8:30 AM ET. This is one of the two very important inflation readings we get each month. The index measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.2% increase in the overall index and a 0.1% rise in the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. A larger than expected increase could raise concerns in the bond market about future inflation, leading to higher mortgage rates Tuesday. However, weaker than expected readings should result in bond market strength and lower mortgage pricing.
October’s Consumer Confidence Index (CCI) is Tuesday’s last report. This Conference Board index will be released at 10:00 AM ET and gives us a measurement of consumer willingness to spend. It is expected to show a drop in confidence from last month’s 79.7 reading. That would mean that consumers felt a worse about their own financial and employment situations than last month, indicating they are less likely to make large purchases in the near future. That would be good news for the bond market because consumer spending makes up a significant part of our economy. As long as the reading doesn’t exceed the forecasted 74.1, we will likely see the bond market react favorably to this report.
Wednesday’s only economic data is also very important to the bond market. September’s Consumer Price Index (CPI) will be released at 8:30 AM ET Wednesday. It measures inflationary pressures at the very important consumer level of the economy and is one of the most important reports that the bond market gets each month. Analysts are expecting to see a rise of 0.1% in the overall index and an increase of 0.1% in the core data reading. A larger than expected increase in the core reading could raise inflation concerns, pushing bond prices lower and mortgage rates higher. Inflation is the number one nemesis of the bond market because it erodes the value of a bond’s future fixed interest payments, so when inflation is a threat, even down the road, bonds sell for discounted prices that push their yields higher. And since mortgage rates tend to follow bond yields, this leads to higher rates for mortgage borrowers.
This week’s FOMC meeting is a two-day meeting that begins Tuesday and adjourns Wednesday afternoon. There really is no possibility of the Fed changing key short-term interest rates this week. But market participants will be looking at the post-meeting statement for any indication of a change in Fed sentiment or possibly further development on tapering of their current bond buying program. Possible effects the government shutdown had on the economy will also be of interest to the markets. The meeting will adjourn at 2:00 PM ET Wednesday, so look for any reaction to the statement to come during afternoon hours.
There is no major economic news set for release Thursday, but there is a highly influential report scheduled for late Friday morning. That will come from the Institute for Supply Management (ISM), who will post their manufacturing index for October at 10:00 AM ET. This index measures manufacturer sentiment, which is important because it gives us an indication of manufacturing sector strength or weakness. It is considered to be one of the more important reports we see each month, partly because it is the first report every month that tracks the preceding month’s activity. Friday’s release is expected to show a reading of 55.0, indicating that manufacturer sentiment slipped from September’s level of 56.2. This means fewer surveyed business executives felt business improved during the month than in September, hinting at manufacturing sector weakness. A smaller than expected reading would be good news for bonds and mortgage rates, especially if it drops below the benchmark ! 50.0.
This week also has Treasury auctions scheduled the first three days. The only two that have the potential to influence mortgage rates are Tuesday’s 5-year and Wednesday’s 7-year Note sales. If those sales are met with a strong demand from investors, particularly Wednesday’s auction, bond prices may rise during afternoon trading. This could lead to improvements to mortgage rates shortly after the results of the sales are posted at 1:00 PM ET each day. But a lackluster investor interest may create selling in the broader bond market and lead to upward revisions to mortgage rates.
Overall, it appears Tuesday or Wednesday could be the most active day for mortgage rates and Thursday will probably be the lightest. The importance of Friday’s sole report makes it likely to be an active day also, although I suspect the most movement will take place the middle days.