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Our Weekly Mortgage Market Commentary

August 8th, 2016

Financial accounting stock market graphsThis week brings us the release of four pieces of monthly economic data in addition to two Treasury auctions that have the potential to affect mortgage rates. Some of the data is considered to be highly important, meaning we could see noticeable changes to mortgage rates multiple days. There is nothing of relevance scheduled to be posted or take place Monday, so look for the stock markets to heavily influence bond trading and mortgage pricing as the week starts.

Employee Productivity and Costs data for the second quarter will start this week's calendar early Tuesdaymorning. It will give us an indication of employee output per hour. High levels of productivity are believed to allow the economy to grow without fears of inflation. I don’t see this being a big mover of mortgage rates, but it may influence rates slightly during morning trading. Analysts have predicted a 0.5% rise in productivity during the second quarter and a 1.7% increase in labor costs. A sizable increase in productivity and a smaller than expected rise in costs could help improve bonds, contributing to lower slightly mortgage rates Tuesday.

There are two Treasury auctions this week that also have the potential to influence mortgage rates. The first isWednesday’s 10-year Treasury Note auction, which will be followed by a 30-year Bond auction Thursday. It is fairly common to see some weakness in bonds before these sales as investors prepare for them. If the sales are met with a decent demand from investors, indicating that interest in longer-term securities such as mortgage-related bonds is good, the earlier losses are usually recovered after the results are announced. Results of sales will be posted at 1:00 PM ET of each auction day. If demand was strong, particularly from international investors, we should see mortgage rates improve during afternoon trading those days. However, weak levels of interest could lead to broader selling in the bond market that could push mortgage rates higher.

The three remaining reports are all set for release Friday morning. The first will be July’s Retail Sales data at8:30 AM ET. This highly important report comes from the Commerce Department and will give us a measurement of consumer spending. Consumer level spending figures are extremely relevant to the markets because it makes up over two-thirds of the U.S. economy. Current forecasts are calling for a 0.4% increase in sales. Analysts are also calling for a 0.2% rise in sales if more volatile and costly auto transactions are excluded. Larger than expected increases would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate stronger economic growth.

July’s Producer Price Index (PPI) will also be posted at 8:30 AM ET, giving us an 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 since it excludes more volatile food and energy prices. Analysts are predicting no change in the overall index and a rise of 0.2% in the core data. Stronger than expected readings may raise inflation concerns in the bond market and help guarantee a Fed rate hike sooner than later this year. That would be bad news for bonds and mortgage rates because inflation is the number one nemesis of the bond market as it erodes the value of a bond’s future fixed interest payments. As inflation becomes more of a concern in the markets, bonds become less appealing to investors, leading to falling prices, rising yields and higher mortgage rates.

The last release of the week will come from the University of Michigan late Friday morning. Their Index of Consumer Sentiment for August will give us an indication of consumer confidence, which projects consumer willingness to spend. If a consumer’s confidence in their own financial and employment situation is rising, they are more apt to make large purchases in the near future. But, if they are growing more concerned about their job security or finances, they probably will delay making that large purchase. This influences future consumer spending data and therefore, impacts the financial markets. It is expected to show a reading of 91.0 that would mean confidence was stronger than July’s level of 90.0. That would be considered slightly negative news for bonds and mortgage rates. Good news for mortgage shoppers would be a sizable decline in the index.

Overall, Friday appears to be the best candidate for most active day with two important reports being released, but Wednesday may also bring a noticeable change to rates. The calmest day will probably be Tuesday or Thursday, although stocks can change that if they rally or sell-off either day. The week is end-loaded with the most important events coming Friday and little the early days. However, it still would be prudent to keep an eye on the markets and maintain contact with your mortgage professional if still floating an interest rate and closing in the near future as circumstances can change at any time.

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