THE EFFECT OF ECONOMIC NEWS ON
"What do you think will happen to interest rates" is the most
often asked question when borrowers initiate the loan process. The amusing
response is that over any given time period the "interest rates will go
up, go down, or stay the same". All joking aside, it has been nearly
impossible to predict the direction of interest rates on any given day.
Many market factors combine to affect the direction of interest rates. Some
economic news is viewed as good news while other events cause major gyrations
in rates. In today's economy, interest rates are influenced by news reporting,
business activity and Federal Reserve Board policy. Generally, rates fall amid
signs of a slowing economy since a sluggish economy reduces credit demand.
Conversely, a strong economy increases credit demand which tends to force rates
Long term interest rates are mostly influenced by the 10 year bond. Since
changes in the economy impact financial markets, including the bond market,
understanding the economic indicators will allow one to anticipate interest
rate adjustments. One thing to remember is that the bond market does not
appreciate "inflationary" news and rates typically increase when
inflationary fears exist. For tracking purposes, the daily yield quote for the
10 year bond can be found on a number of various finance web sites. As an
example, let us say that the bond yield is 3.2 and over a several day period of
time the yield reduces to 3.0. This downward trend would typically suggest that
long term interest rates will also trend downward. Conversely, when the bond
yield is increasing, it could forecast the upward trending in long term
Obviously, this is not fool proof as it is generally recognized that we are
now in a "global market" and the above indicators can be greatly
influenced, not only domestically, but by global events. This makes it
difficult to predict with any accuracy the direction of long term interest
Provided below is a quick reference to various news events, along with what
generally happens to interest rates when they are announced. It may be of
interest as you attempt to predict the direction of rates.
+ = interest rates typically rise
- = interest rates typically fall
Consumer Price Index Rises + Indicates rising inflation
Durable Goods Orders Rise + Pick up in business activity usually leads to increased credit demand.
Falls - Reflects
slowing economy. Fed may loosen money
supply sending rates down.
Housing Starts Rise + Shows growth and increased credit demand. Fed
starts to worry about inflation
Producer Price Index Rises + Reflects rising
inflation. Demand for goods rises with prices. Investors want higher
rate of return, pushing rate up
Inventories Up - Indicates slowing economy as sales are not keeping
up with production
Leading Indicators Up + Signals strength accompanied by greater
Oil Prices Fall - Reduces upward pressure on rates
Personal Income Rises
+ Consumption goes up with higher incomes.
Prompts increased demand and higher prices and contributes to inflation.
Retail Sales Rise + Indicates growth/Fed may want to tighten
Unemployment Rises - Shows slow growth/Fed may ease credit
Fed Lowers Discount Rate - Signals slow growth.
Fed intervention to stimulate
Fed Raises Discount Rate + An increase in borrowing rate for
banks/results in higher rates to bank customers. This action slows credit
For a bit more detail regarding some of the above economic impacts, see
EMPLOYMENT SITUATION REPORT: Usually released the first Friday of
each month, this report measures activity in the nation's labor markets. Among
the statistics reported is the nationwide unemployment rate, total civilian
employment, non-farm payrolls and hours worked. While an increase in these
measurements can be a positive sign for the economy, it can also be viewed as
"inflationary" by the bond marketeers as
increases in wage levels and employment are usually accompanied by increases in
CONSUMER PRICE INDEX (CPI): Usually released in the second week of the
month, the CPI measures the average price change for a mixed group of goods and
services, including food, clothing, fuel, transportation, housing, medical
care, etc. As this increases above expectations, the bond market can view it as
inflationary in nature.
PRODUCER PRICE INDEX (PPI): Usually released in the third week of the
month, the PPI reports on the prices received by the U.S. for crude materials,
intermediate goods and finished goods. Bond buyers focus on the finished goods
category to determine if there exists any inflationary
GROSS DOMESTIC PRODUCTION (GDP): This is the broadest measure of
economic activity, reporting the market value of the nation's total output of
goods and services over a period of time. Again, if this grows beyond
expectations, it can be considered inflationary by the bond marketeers.
Inflation can be defined as "price escalation" . . . since each
dollar buys less in a period of rising prices, inflation
reduces the "purchasing power" of the dollar. The PPI, CPI and GDP
all measure price increases and therefore, also measure inflation. While the
bond markets pay particular attention to these indicators there are several
others that also affect the economy.
RETAIL SALES: This report identifies consumer purchases of food,
gasoline, clothes, cars, etc. Usually reported in the second week of the month,
this is an indication of consumer confidence in the economy. Again, an increase
in consumer spending can be viewed as inflationary by the bond markets.
HOUSING STARTS: Released in the third week of the month, this measures
the total number of private single and multi-family homes on which construction
began in the prior month. Wage levels and mortgage interest rates are the key
factors influencing new home construction. The number of new building permits,
also contained in this report, can be an indicator of future construction. If
this indicator is above expectations, it can be considered inflationary by the
For educational purposes only .
. . Not meant to be used for investment decisions