This week is likely to be quite interesting. There are only four pieces of economic news scheduled for release, but two of them are highly important inflation readings. We also have another Federal Open Market Committee (FOMC) meeting, which may bring a much-sought rate cut. There is little doubt in my mind that we will see quite a bit of volatility in the markets and likely mortgage rates the next several days.There is no relevant news due to be posted tomorrow. The first important piece of data comes Tuesday morning with the release of August's Producer Price Index (PPI). This report will give us a very important measurement of inflationary pressures at the producer level of the economy. There are two readings that analysts follow in this release. They are the overall index and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. Analysts are currently calling for a 0.1% decline in the overall index, and a rise of 0.1% in the core data. Stronger than expected readings could fuel inflation concerns in the bond market and lead to an increase in mortgage rates Tuesday morning.
The FOMC meeting will adjourn at 2:15 PM Tuesday. There is significant debate about a possible change to key short-term interest rates at this meeting. The general consensus is that the Fed will cut rates for the first time since June 2003. There is also debate about how much of a rate cut is coming. Many analysts are calling for a half-point decline at this meeting or a quarter point cut at the next two meetings. I am not so sure the Fed will lower the Fed Funds rate at this meeting. My estimates are only 30% chance of it happening at this meeting and only little possibility of a half point cut. But, Mr. Bernanke and friends have little interest in our thoughts. I suspect that if they leave rates unchanged, the financial markets will be disappointed and will tank. A quarter point move will also be somewhat of a disappointment and could lead to weakness in stocks.
The wildcard is that regardless of how the markets react to the Fed move and its post-meeting statement, if we see significant weakness in stocks, the bond market may benefit as a safe-haven from the volatility. This could lead to lower mortgage rates. However, that is much too speculative to bet that way with mortgage rates. There just is no way to predict am emotional response in the markets. Accordingly, I strongly recommend proceeding carefully regarding mortgage rates the next few days.
August's Consumer Price Index (CPI) will be released Wednesday morning at 8:30 am ET. The CPI is one of the most important reports we see each and every month. It is considered to be a key indicator of inflation at the consumer level of the economy. As with the PPI, there are two readings in the report- the overall index and the core data reading. Current forecasts are calling for no change in the overall reading and a 0.2% rise in the core data reading. A larger increase in the core data would likely lead to higher mortgage rates Wednesday, while a smaller increase would be good news.
August's Housing Starts report will also be released early Wednesday morning. This report will probably not have much of an impact on the bond market or mortgage rates. It gives us a measurement of housing sector strength and mortgage credit demand, but is usually considered to be of low importance to the financial markets. Since it is being released the same day as the CPI, it is unlikely to cause movement in mortgage rates.
Late Thursday morning, the Conference Board will release its Leading Economic Indicators (LEI). This index attempts to measure economic activity over the next three to six months. If it estimates an increase in activity, the bond market will probably fall and mortgage rates will rise slightly. If it shows weaker than expected readings, the bond market may rally and mortgage rates should fall. Current forecasts are calling for no change from July's reading.
Overall, I expect to see some pressure in bonds tomorrow as investors prepare for Tuesday's events. I am not in total agreement with what many analysts and market participants are predicting will happen Tuesday, therefore, I am holding the lock recommendations for the time being. Please proceed cautiously is still floating an interest rate. This will likely be one of those key weeks in the mortgage market.
If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
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