Mortgage Market Update

This week has six economic reports that are relevant to the bond market and mortgage pricing. Some of the data is considered to be highly important and all of it are set for release the latter days. In addition to the data, there are two Treasury auctions that we need to watch. There is nothing of importance scheduled for release today or Tuesday, but if Friday's rally extends into tomorrow's trading we should see further improvements to mortgage rates. The first economic report of the week will be posted early Wednesday morning when the Commerce Department will release December's Retail Sales data at 8:30 AM ET. This report measures consumer spending by tracking sales at U.S. retail level establishments. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched closely. Rising consumer sales fuels expectations for broader economic growth that makes long-term bonds less attractive to investors. Current forecasts are calling for a 0.1% increase December's sales. A decline in sales would be good news for bonds and mortgage rates because it would hint at weaker than thought economic growth. Also Wednesday, the Federal Reserve's Beige Book will be posted at 2:00 PM ET. This report is named simply after the color of its cover and details economic conditions throughout the U.S. by Fed region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises, particularly regarding inflation, unemployment or future hiring. Any reaction to the report though will come during afternoon trading. Thursday’s sole important report is December’s Producer Price Index (PPI) at 8:30 AM ET. The PPI is important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.4% decline in the overall reading and a 0.1% increase in the more important core reading that excludes volatile food and energy prices. A larger than expected increase in the core reading could mean higher mortgage rates Thursday since inflation is bad news for the bond market. It erodes the value of a bond's future fixed interest payments, making them less attractive to investors. Accordingly, they are sold at a discount to offset the drop in value, which drives their yields higher. And since mortgage rates follow bond yields, rising inflation usually translates into higher interest rates for borrowers. Friday has three reports set for release that has the potential to affect mortgage rates. The first is December's Consumer Price Index (CPI) at 8:30 AM. This is one of the more important monthly reports for the bond market each month since it measures inflationary pressures at the consumer level of the economy. As with the PPI, there are two readings in the release. The overall index is expected to increase 0.4% while the core data rose 0.1%. Weaker than expected readings would be favorable news and should lead to bond strength and lower mortgage rates Friday morning. December's Industrial Production report has a release time of 9:15 AM ET Friday. This data measures output at U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength or weakness. Current forecasts are calling for a decline in production of 0.1% from November's level. A weaker reading would be considered good news for bonds and could help lower mortgage rates as it would point towards a manufacturing sector that was softer than many had thought. The final report of the week is January's preliminary reading to the University of Michigan's Index of Consumer Sentiment. This index measures consumer willingness to spend and can usually have enough of an impact on the financial markets to slightly change mortgage rates. If consumers feel better about their own financial and employment situations, they are more apt to make a large purchase in the near future, fueling economic growth. Good news would be a reading weaker than December’s 93.6 that means consumers felt less confident this month and likely will avoid making a large purchase in the immediate future. There are Treasury auctions scheduled several days this week, but the two that are the most likely to affect mortgage rates will be held Tuesday and Wednesday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important of the two as it will give us a better indication for demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would result in upward revisions to mortgage rates. Results will be posted at 1:00 PM ET each day, so any reaction will come during early afternoon trading. Overall, I believe Wednesday is likely going to be the most active day for mortgage rates with Friday not far behind. The best candidate for calmest day is Tuesday, assuming the auction doesn’t create too much of a reaction.