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Updated:         June 4, 2018

"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 higher.

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 interest rates.

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 rates.

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.

Gross Domestic Product 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 credit demand

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 expansion

For a bit more detail regarding some of the above economic impacts, see below.

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 spending.
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 influences.
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 bond market.

For educational purposes only . . . Not meant to be used for investment decisions

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