MARKET COMMENT Mortgage bond prices got crushed last week pushing mortgage interest rates significantly higher. News that tax cuts would be extended sent stocks higher Tuesday at the expense of bonds. Market participants remained concerned about the cost of the tax cuts. We saw a slight reprieve Thursday afternoon following a strong 30-year Treasury bond auction. However, this was short-lived and Friday brought more losses for bonds, as consumer sentiment data was stronger than expected. Unfortunately interest rates were worse by about a full discount point for the week.
Look for the inflation data and the Fed meeting to take center stage this week. Producer inflation estimates are higher than the prior month. Inflation, real or perceived, generally erodes the value of fixed income investments causing prices to fall and rates to rise.
- Producer Price Index; Dec. 14; Consensus Estimate Up 0.5%, Core up 0.3%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
- Retail Sales; Dec. 14; Consensus Estimate Up 0.8%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
- Business Inventories; Dec. 14; Consensus Estimate Up 0.6%; Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
- Consumer Price Index; Dec. 15; Consensus Estimate Up 0.2%, Core up 0.1%; Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
- Industrial Production; Dec. 15; Consensus Estimate Up 0.3%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
- Capacity Utilization; Dec. 15; Consensus Estimate 75%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
- Housing Starts; Dec. 16; Consensus Estimate 540k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
- Philadelphia Fed Survey; Dec. 16; Consensus Estimate 14 Moderately; Important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
- Leading Economic Indicators; Dec. 17; Consensus Estimate Up 1.2%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
VOLATILITY LIKELY The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases.
Each piece of data has the ability to cause volatility in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates.
We are really in uncharted territory here with the huge market swings as of late. The important thing is to remain cautious during these times of uncertainty.