Weekly Market Outlook

[Adam in CO]

This week brings us the release of three pieces of economic data, but one of them is not considered to be of high importance. The biggest event of the week will be the Federal Open Market Committee (FOMC) meeting Tuesday. With so much uncertainty surrounding this Fed meeting, expect to see plenty of volatility after its results are announced. We may also see some pressure in bonds tomorrow as investors prepare for the meeting, but most traders will make their moves post-meeting Tuesday.

There is no relevant data scheduled for release tomorrow. The first piece of economic data of interest this week will be posted Tuesday morning. Employee Productivity and Costs data for the second quarter will give us an indication of employee output. 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 pricing, especially since it is the same day as the FOMC meeting. Analysts are currently expecting to see an increase in productivity of 1.1%. A higher than expected reading could help improve bonds, but until we get the results of the FOMC meeting, we will likely see little movement in mortgage rates.

The FOMC meeting will adjourn at 2:15 PM Tuesday. Usually, the post-meeting comments seem to have more of an influence on the markets than the rate adjustments themselves as the rate changes are quite often expected. However, this meeting is likely to be different. Many analysts are currently expecting the Fed to leave key short-term interest rates unchanged for the first time after 17 straight increases. There is a pretty good chance of this happening in my opinion, but just how the markets will react may surprise many. Any hint of a possible pause by the Fed has led to rallies in stocks and bonds over the past few months. If the Fed was to make that move at this meeting, the initial reaction will likely be positive for stocks and bonds. However, I believe that once reality sets in, stocks may have a negative reaction because the pause would underscore the concern that the economy is indeed slowing. Slower economic growth means weaker consumer spending and corporate earnings, which leads to stock market losses.

Bond traders will likely be relieved that the Fed is, at least temporarily, at ease with inflation concerns. Since inflation erodes the value of a bond’s future fixed interest payments and drives bond prices lower (pushing mortgage rates higher), this news will likely be taken positively in the bond market. But traders will also be looking at the post-meeting statement for any indication of whether this is a temporary pause by the Fed or if more increases are likely in the near future. Generally speaking, a hint of more rate hikes in the future will be construed as an indication that inflation is still a concern and would likely drive bond prices lower and mortgage rates higher Tuesday afternoon and Wednesday.

There is also a possibility of Mr. Bernanke and friends making another quarter point rate hike. Unless they were to follow that move with an announcement that it would be the last increase for the immediate future, I would expect the markets to drop considerably and mortgage rates to spike higher. The Fed will eventually have to stop raising rates, but many already think they have gone too far. The goal of the rate hikes is to slow economic activity and control inflationary pressures. But there is also a need for a "soft landing" meaning that the effects of the increases come slowly rather than a "hard" slowdown that could put the economy into a recession. The jury cannot start debating that issue until the rate increases have stopped.

The big economic report of the week comes Friday morning with the release of July’s Retail Sales report. This data is very important to the financial markets and mortgage rates because it helps us measure consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, any data related to it can cause a fair amount of movement in the markets. A smaller than expected increase would indicate that consumers are spending less than previously thought, potentially slowing the economy. This is good news for the bond market and mortgage rates as it eases inflation concerns and makes long-term securities such as mortgage-related bonds more attractive to investors. Current forecasts are calling for an increase of 0.6%.

Also worth noting are two important Treasury auctions this week. The sale of 10-year Notes will be held Wednesday while 30-year Bonds will be sold Thursday. We often see some weakness in bonds ahead of the sales as the firms participating prepare for them. However, as long as they are met with decent demand from investors, the firms usually buy them back. This tends to help recover any presale losses. But, if the sales are met with a lackluster interest from investors- particularly international buyers, the bond market may move lower after the results are posted. Those results will be announced at 1:00 PM each sale day. If there will be revisions to mortgage rates because of the results, look for them to be made during afternoon trading Wednesday and/or Thursday.

Overall, expect to see plenty of movement in the financial markets and mortgage pricing this week. The bond market is really at a difficult point to try and predict, especially with 10-year and 30-year auctions this week. The Fed meeting will have the biggest influence on bond trading and mortgage rates, but Friday’s sales data can also lead to significant changes in mortgage pricing.

[DennisAJC]

Cuncur.

[KenP]

I don't like the raising of the rates.

Many signs of a nervous economy.

S.

[Adam in CO]

Stay tuned....

The Fed announces again soon...

[KenP]

You didn't mention any oil pipeline troubles.