Weekly Market Outlook

[Adam in CO]

This week brings us six pieces of economic data for the bond market to digest. The first report is scheduled for release early Tuesday morning with the release of July's Producer Price Index (PPI). This index is considered to be an indicator of inflation at the producer level of the economy. There are two readings in the report- the overall index and the core data reading. The core data is more important because it excludes more volatile food and energy prices that can change significantly from month to month. Current forecasts call for an increase of 0.3% in the overall and 0.2% in the core data reading. A larger increase may raise inflation concerns and push mortgage rates higher Tuesday morning. If it reveals a smaller than expected increase, we could see mortgage rates improve as a result.

There are three reports due to be posted Wednesday. The most important of the three is July?s Consumer Price Index (CPI) at 8:30 AM. The CPI is one of the most important reports we see each and every month. It measures inflation at the consumer level of the economy. As with Tuesday?s PPI, there are two readings in the report- the overall index and the core data reading. Current forecasts call for an increase of 0.4% in the overall and 0.3% in the core data reading. Smaller than expected increases should lead to a bond rally and lower mortgage rates. However, stronger than expected readings will likely cause a spike in mortgage pricing.

At 9:15 AM, Industrial Production data for July will be posted. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be of fairly high importance and may cause movement in mortgage rates. Analysts are currently expecting to see a 0.5% increase in production. A higher level of output could lead to higher mortgage rates Wednesday, while a weaker than expected figure should help push rates lower, assuming the CPI doesn?t reveal any surprises.

Also scheduled for release Wednesday is July?s Housing Starts data. This report gives us an indication of housing sector strength and mortgage credit demand. However, it isn't considered to be of high importance to the bond market or mortgage pricing and usually doesn't cause much movement in mortgage rates unless it varies greatly from forecasts. This report is the least important of the week?s six reports.

The Conference Board will release its Leading Economic Indicators (LEI) for July at 10:00 AM Thursday. This index attempts to measure economic activity over the next three to six months. A higher than expected reading is bad news for the bond market because it indicates that the economy may be strengthening. However, a weaker than expected reading means that the economy may slow in the near future, making stocks less appealing to investors. This also eases inflation concerns in the bond market and should lead to lower mortgage rates Thursday.

Friday morning, the University of Michigan will release its Index of Consumer Sentiment for August at 9:45 AM. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending and economic growth. A drop in confidence will probably boost bond prices, leading to lower mortgage rates. If the index rises, indicating that confidence is rising and spending is likely to continue, we may see mortgage rates move higher Friday.

Overall, look for the most movement in bond prices and mortgage rates Tuesday or Wednesday due to the importance of the PPI and CPI reports. We have seen bond prices fall from recent highs, pushing the yield on the benchmark 10-year Note back near 5.00% (currently 4.97%). I still feel there is more likelihood of the bond market moving lower than much higher (pushing yields and mortgage pricing higher). This makes it prudent to consider locking an interest rate if closing in the immediate future. If we get stronger than expected results in the PPI and CPI releases, I fear that we may see mortgage rates test recent highs fairly quickly. If those reports do ease inflation concerns, I will likely be shifting to a float recommendation. But, the risk versus reward comparison still heavily favors the risk side in my opinion, therefore, I am holding the lock recommendations for the time being.