Wednesday, September 15, 2010

Market Update

Wednesday's bond market has opened fairly flat with stocks showing little movement and the day's only economic data failed to reveal a significant surprise. The stock markets are showing minor gains with the Dow up 14 points and the Nasdaq up a single point. The bond market is currently up only 2/32, but we will likely see a slight improvement in this morning's mortgage rates due to strength late yesterday.

Today's only relevant data was August's Industrial Production. It showed a 0.2% increase in output at U.S. factories, mines and utilities. This was slightly below the 0.3% that was expected, indicating manufacturing activity was weaker than thought. However, since this data is considered to be of only moderate importance to the markets, its impact on trading and mortgage rates has been minimal. It usually takes a wide variance from forecasts for this report to have a noticeable influence on rates.

Tomorrow morning brings us the release of an important inflation reading that is likely to affect the markets and mortgage pricing. The Labor Department will give us August's Producer Price Index (PPI) early tomorrow morning. It measures inflationary pressures at the producer level of the economy. The overall reading is expected to show a 0.3% increase, while the more important core data reading is expected to rise only 0.1%. The core data is the more important of the two since it excludes more volatile food and energy prices, giving us a more stable snapshot of inflation at the producer level. Larger than expected readings would be bad news for bonds and mortgage rates because inflation is the number one nemesis of the bond market. It erodes the value of a bond's future fixed interest payments, causing bonds to be sold at a discount to offset that loss. As bond prices fall, their yields move higher and mortgage rates follow bond yield trends.

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