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Tuesday’s bond market has opened relatively flat after this morning’s important economic data gave us mixed results but no significant surprises. The stock markets are not far off the same path with the Dow up 34 points and the Nasdaq up 1 point. The bond market is currently down 2/32, which should keep this morning’s mortgage rates at yesterday’s levels.
The Commerce Department gave us the first of this morning’s three economic reports. They announced at 8:30 AM ET that September’s Retail Sales fell 0.1% last month as analysts were expecting. However, a secondary reading that excludes more volatile auto transactions showed a 0.4% rise in retail-level sales when only a 0.2% increase was forecasted. This indicates that consumers spent more than many had thought if auto sales are ignored, making the data slightly negative for the bond market and mortgage rates.
September’s Producer Price Index (PPI) was also released at 8:30 AM ET. The Labor Department said the overall index fell 0.1% while the core data rose 0.1%. The overall reading was weaker than forecasts, which is good news for long-term securities such as mortgage-related bonds. Unfortunately, more weight is given to the core data because it excludes more volatile food and energy prices, leaving more stable to work with. Analysts were calling for a 0.1% increase in the core data. Therefore, we should consider these results neutral-to-slightly positive for the bond and mortgage markets.
The final economic release of the morning came from the Conference Board, who posted their Consumer Confidence Index (CCI) for October at 10:00 AM ET. It came in at 71.2, below the 74 that was forecasted and well short of September’s revised reading of 80.2. This means that surveyed consumers were less optimistic about their own financial situations this month than many had thought and much less than they were last month. Both are good news for the bond market and mortgage rates because waning confidence means consumers are less likely to make a large purchase in the near future, helping to limit overall economic growth.
We also have the first of this week’s two Treasury auctions that have the potential to affect bond trading and mortgage pricing later today. That would be the 5-year Treasury Note sale that will be followed by a 7-year Note auction tomorrow. If these sales are met with a strong demand from investors, particularly tomorrow’s auction, bond prices may rise during afternoon trading. That could lead to improvements in mortgage rates shortly after the results of the sales are posted at 1:00 PM ET each day. But a lackluster investor interest, especially from international investors, may create selling in the broader bond market and lead to upward revisions to mortgage rates during afternoon trading.
There is only piece of economic data being posted tomorrow, but it is very important to the bond market. September’s Consumer Price Index (CPI) will be released at 8:30 AM ET that 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 began today and adjourns tomorrow 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 tomorrow, so look for any reaction to the statement to come during afternoon hours.