This Labor Day Weekend Brings It's Own Set Of Challenges to the Mortgage Market

As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.

Today could be a difficult day to shop for mortgage rates. Expect volatility.

This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.

There has to be a buyer and a seller at a specific price to make a deal.

With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers. This can cause mortgage prices rise or fall faster than on a "normal" day, directly leading to mortgage rate volatility.

For a light-volume trading day, there is a lot of information for markets to digest, including:

* The weather reports on Tropical Storm Gustav.
* Reports that inflation is rising.
* Reports that Consumer Spending is slowing.

* Ongoing political tension between the U.S. and Russia.

By themselves, each of these points can move markets. Together, however -- and aided by Labor Day -- they can move markets a lot.

Mortgage bond pricing is fluid, changing every minute of every day. Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.

Where Are Rates Heading

Mortgage rates edged higher for the fifth straight week and the benchmark 30-year fixed-rate mortgage is now at a 10 month high.

One reason why rates are spiking is because the temporary jolt from higher energy and food costs is starting to look like a longer-term trend.

For example, high energy prices get a lot of press, but its 19.4 percent increase since last year is dwarfed by the 64 percent increase in the price of grains over the same period of time.

Eventually, as businesses spend more because of these rising costs, they have no choice but to pass those costs on to consumers.

This very topic figures to loom large this week as the Federal Open Market Committee gets together for a 2-day meeting, adjourning Wednesday. The overwhelming expectation is that the Federal Reserve will hold the Fed Funds Rate steady at 2.000 percent.

However, it won't be what the Fed does that should impact mortgage rates this week, but what it says. The Fed's press release will hit the wires at precisely 2:15 P.M. ET and markets will look for clues about how Ben Bernanke & Co are viewing inflation and its impact on the sagging U.S. economy.

If the Fed indicates that fighting inflation is its primary goal, expect that mortgage rates will fall because inflation and mortgage rates tend to go in opposite directions.

Conversely, if the Fed says it promoting growth in the economy is paramount and that the country can sustain additional inflationary pressures for now, expect that mortgage rates will rise.

There is other data hitting the wires this week including:
Consumer Confidence (Tuesday)
New Home Sales (Wednesday)
Existing Home Sales (Thursday)
Personal Consumption Expenditures (Friday)

Of all of these data points, only Personal Consumption Expenditures should have a major impact on rates. PCE is the Federal Reserve's preferred inflationary measurement.