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Wednesday’s bond market has opened in positive territory again even though this morning’s economic data gave us mixed results. The stock markets are mixed with the Dow up 81 points and the Nasdaq nearly unchanged from yesterday’s close. The bond market is currently up 5/32 (2.69%), which should improve this morning’s mortgage rates by approximately .125 – .250 of a discount point. I see some resistance on the benchmark 10-year Note at 2.68%, meaning yields are likely to move higher than below that level unless we get something significant in our favor to break it. This is why I am holding the conservative stance towards rates and recommend proceeding cautiously if still floating.
The first of today’s two economic reports was January’s Producer Price Index (PPI) at 8:30 AM ET. It showed a 0.2% increase in both the overall and core data readings. The overall matched forecasts but the more important core reading was slightly higher than the 0.1% rise that was expected. Since this data tracks inflationary pressures at the producer or manufacturing level of the economy and bonds tend to thrive when inflation and economic growth is weak, we should consider this news neutral to slightly negative for the bond market and mortgage rates.
January’s Housing Starts was also posted at 8:30 AM ET. The Commerce Department showed that construction starts of new homes, a housing sector strength measurement, fell 16% last month. That was much weaker than expected and the largest monthly drop in almost three years, indicating the new home portion of the housing sector slowed drastically in January. However, the large drop is being attributed to the bad weather during the month that delayed many groundbreakings. The large decline is good news for the bond and mortgage markets because it points towards economic weakness. Although, because it is considered to be only a moderately important report and the general belief is that the weather is the largest cause of the drop, we are seeing a fairly quiet reaction to the news.
We also have the release of the minutes from the most recent FOMC meeting later this afternoon. Traders will be looking for any indication of the Fed’s next move regarding monetary policy, particularly discussion about the pace of reducing the Fed’s current bond buying programs and concerns about economic growth. They will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading. These minutes may lead to afternoon volatility in the markets and mortgage rates, or they may be a non-factor. However, they do carry the potential to influence rates so they should be watched.
Tomorrow has three pieces of data that are relevant to mortgage rates. The first is the weekly unemployment update at 8:30 AM ET. It is expected to show that 335,000 new claims for unemployment benefits were filed last week, down from the previous week’s 339,000. The larger the number of initial claims, the better the news it is for mortgage rates because rising claims hints at a softening employment sector. It is worth noting though that this data only gives us a week’s worth of new claims, so its impact on mortgage rates is often subdued unless we get wide a variance from forecasts.
The second report of the day is the sister release of today’s PPI. At 8:30 am ET tomorrow, January’s Consumer Price Index (CPI) will be posted, giving us a key measure of inflation at the consumer level of the economy. With exception to maybe the Employment report, the CPI is arguably the single most important monthly report for the bond market. Its results can have a significant impact on the financial markets, especially on long-term securities such as mortgage-related bonds. Inflation isn’t exactly a concern currently, but there are many that feel the Fed’s stimulus programs are going to fuel rapid inflation down the road, so analysts still track the readings closely. The report is expected to show a 0.2% increase in the overall index and a 0.1% rise in the more important core data that excludes food and energy costs. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall tomorrow morning.
January’s Leading Economic Indicators (LEI) will be posted at 10:00 AM ET tomorrow. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.4% increase, meaning that economic activity may rise in the near future. A smaller than expected increase would be good news for the bond market and mortgage rates, but the CPI draws much more attention than the LEI. Therefore, for this report to influence mortgage pricing, it will have to show a sizable variance from forecasts and the CPI will have to match estimates.