Weekly Mortgage Commenary-January 13, 2014

This week has seven economic reports that are relevant to the bond market and mortgage pricing. Some of the data is considered to be highly important and we have reports set for release four of the five days. In addition to the data, there are also a relatively high number of public speaking engagements for Federal Reserve members. There is nothing of importance scheduled for release Monday, but if Friday’s strong rally extends into Monday’s trading we should see further improvements to mortgage rates.

The first economic report of the week will be posted early Tuesday morning when the Commerce Department will release December’s Retail Sales data at 8:30 AM ET. This Commerce Department 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 no change from November’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.

Wednesday has two reports scheduled for release that have the potential to influence mortgage rates. The first and more important is the Labor Department’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 0.3% rise 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 Wednesday since inflation is the number one nemesis of 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.

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 monthly report is December’s Consumer Price Index (CPI) at 8:30 AM. This is one of the most 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 0.3% while the core data rose 0.3%. Weaker than expected readings would be favorable news and should lead to bond strength and lower mortgage rates Thursday morning.

The remaining three reports are all set for Friday morning. The first data of the day is December’s Housing Starts at 8:30 AM. It helps us measure housing sector strength and future mortgage credit demand by tracking construction starts of new homes. It is not considered to be one of the more important releases each month, so I don’t see it causing much movement in mortgage rates Friday but does carry the potential to affect trading and rates if it shows a significant surprise. Analysts are expecting to see a decline in new home starts between November and December.

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 an increase in production of 0.3% 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 the 83.0 that is expected and even better would be lower than December’s 82.5.

There also are speaking engagements by current Fed members each day, with some days having multiple appearances scheduled. The topics of some of them appear to be directly related to economic growth, so their words can also influence the markets enough affect mortgage rates. Their speaking times range from early morning to post-closing, so we could see markets react at different times of the day. Fed Chairman Bernanke is due to speak late morning Thursday.

Overall, Tuesday or Thursday will probably be the most active day for mortgage rates with some key economic data being posted both days. The least active day will likely be Monday, although we could see last Friday’s afternoon strength extend into Monday’s early trading. That would be good news for mortgage rates as many lenders already improved rates during afternoon trading Friday. The stock markets, which I believe are due for a pullback, also can be a big influence on bond trading and mortgage pricing any day (stock weakness should equate to bond strength). I still like what I see in bonds right now even after the recent rally and would not be surprised to see further gains that drive the benchmark 10-year Treasury Note yield and mortgage rates lower. However, this week’s data is important enough to reverse last week’s downward move, so while the overall tone in the bond market is positive, you should still maintain contact with your mortgage professional if still floating an interest rate in case that changes.

Weekly Mortgage Commentary-January 6, 2014

This week brings us the release of only two monthly reports that are relevant to the bond market and mortgage rates, but one of them is considered to be extremely important. In addition to those reports, we also will get the minutes from the last FOMC meeting and two Treasury auctions that have the potential to influence the bond market and quite possibly mortgage rates.

The Commerce Department will post November’s Factory Orders data late Monday morning. This data gives us a fairly important measurement of manufacturing sector strength. It is similar to the Durable Goods Orders release that was posted just before Christmas, except this report includes orders for both durable and non-durable goods. Durable goods are items that are expected to last three or more years such as appliances, electronics and autos. Examples of non-durable goods are food and clothing. Analysts are expecting to see an increase of 1.7% in new orders. This report generally does not have a huge impact on the bond market or mortgage rates, but it can influence bond trading enough to create a minor change in rates if it shows a sizable variance from forecasts. The smaller the increase, the better the news it is for mortgage pricing.

November’s Goods and Services Trade Balance will be posted early Tuesday morning. It measures the size of the U.S. trade deficit and is expected to show a $40.4 billion deficit. This data usually does not directly affect mortgage rates, but it does influence the value of the U.S. dollar versus other currencies. A stronger dollar makes U.S. securities more attractive to international investors because they are worth more when sold and converted to the investor’s domestic currency. But unless we see a significant variance from forecasts, I don’t believe this data will lead to a change in mortgage rates Tuesday.

There are Treasury auctions scheduled several days this week, but the two that are the most likely to affect mortgage rates will be held Wednesday and Thursday 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.

Also Wednesday is the release of the minutes from the last FOMC meeting. They will give market participants insight to the Fed’s thinking and concerns regarding the economy, inflation and monetary policy. It is one of those pieces of information that may cause a great deal of volatility in the markets or be a non-factor, depending on what the minutes show. They will be released at 2:00 PM ET, so they won’t affect the markets or mortgage rates until afternoon hours. I don’t suspect this particular set of minutes will cause too much concern or excitement because the last FOMC meeting was followed by revised Fed forecasts and a press conference by Chairman Bernanke. Although, the meeting did yield the first reduction in the Fed’s current bond buying program (QE3). Therefore, analysts will be looking for any tidbits that could help predict when the next reduction will be made.

The big news of the week will come at 8:30 AM Friday when the Labor Department will post December’s employment figures. The Employment report is arguably the single most important monthly release we see. It gives us the national unemployment rate, the number of jobs added or lost during the month and average hourly earnings, which is a key measure of wage inflation. Rising unemployment, a decline in payrolls and flat earnings would be ideal news for the bond market.
Current forecasts call for no change from November’s unemployment rate of 7.0%, 197,000 new jobs added to the economy and an increase in earnings of 0.2%. If we see weaker than expected results, the bond market should rally and stocks should fall, improving mortgage rates noticeably Friday. However, stronger than expected readings will likely raise optimism about the economy, pushing stocks and mortgage rates sharply higher.

Overall, Friday is the key day of the week with the almighty Employment report being posted, but Wednesday afternoon also has a chance to be pretty active. The least active day will likely end up being Tuesday and Thursday doesn’t have too much to be concerned about either. The benchmark 10-year Treasury Note yield closed just below 3.00% last week. I will be watching it very closely for mortgage rate direction over the next several weeks. It has been in a tight range between 2.95% and 3.00%. If we could get enough favorable news to push it below 2.95%, we should see a noticeable downward move. Since mortgage rates follow bond yields, that would be good news for mortgage shoppers. On the other hand, breaking above 3.00% and staying above could indicate a sharp upward move in rates over the next couple weeks. Therefore, please keep an eye on the markets and maintain contact with your mortgage professional if still floating an interest rate.