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Monday’s bond market has opened well in positive territory due to weekend news and not this morning’s economic data. The stock markets are following suit with a strong open of their own. The Dow is currently up 138 points while the Nasdaq has gained 47 points. The bond market is currently up 29/32, which should improve this morning’s mortgage rates by approximately .500 of a discount point.
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.
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.