September 16th, 2009 10:40 AM by Mel Samick
Tuesday's bond market initially opened well in negative territory after this morning's economic data revealed stronger than expected results but has since recovered a good portion of those losses. The stock markets are showing gains with the Dow up 57 points and the Nasdaq up 11 points. The bond market is currently flat, but well above earlier levels. This will likely push this morning's mortgage rates higher .The Commerce Department announced this morning that sales at retail level establishments rose 2.7% last month, greatly exceeding analysts' forecasts of a 1.9% increase. Even when volatile auto transactions are excluded, sales were well above forecasts. This means that consumers spent much more last month than many had thought. That is bad news for bonds and mortgage rates because consumer spending makes up two-thirds of the U.S. economy.The second important piece of data posted this morning also did not do much good for bonds. The Labor Department reported that August's Producer Price Index (PPI) rose 1.7%, more than twice the increase that was expected. The more important core data reading that excludes more volatile food and energy prices came in up 0.2% when it was expected to rise 0.1%. This means that prices at the producer level of the economy rose more rapidly than analysts had thought. That is also bad news for bonds because rising inflation erodes the value of a bond's future fixed interest payments and makes them less appealing to investors. The result of rising inflation is usually higher mortgage rates. In addition, today's PPI reading raises concern about tomorrow's CPI report that is even more important than this morning's release.August's Consumer Price Index (CPI) will be released early tomorrow morning. The CPI is one of the most important reports we see each and every month. It is the sister report of today's PPI and is considered to be a key indicator of inflation at the consumer level of the economy. As with the PPI, there are two readings in the report- the overall index and the core data reading. Current forecasts are calling for a 0.3% increase in the overall reading and a 0.1% rise in the core data reading. A larger increase in the core data would likely lead to higher mortgage rates tomorrow morning. Also scheduled for tomorrow morning is August's Industrial Production data. 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 moderately important but could help change mortgage rates if there is a significant difference between forecasts and the actual reading. Analysts are currently expecting to see a 0.7% increase in production. A higher level of output could lead to higher mortgage rates, while a weaker than expected figure would be considered good news for bonds and rates .