Weekly Mortgage Market Commentary

January 11th, 2016

Stock market on touchscreen smartphoneThis week has five 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 is 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 Monday or Tuesday, so look for stock movement to help drive bond trading early in the week. If stocks open the week by extending last week's sell-off, we should see mortgage rates move lower.

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.

The first economic report of the week will be the Federal Reserve’s Beige Book Wednesday 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.

Friday has the remaining four reports set for release that has the potential to affect mortgage rates. The first is December’s Retail Sales data at 8:30 AM ET Friday. 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 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.

The second report of the day 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 0.1% 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 Friday since strengthening 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.

Next up is December’s Industrial Production report with 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 0.2% 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. However, the 8:30 AM reports are much more important to the markets than this data is and will likely have a heavier influence on mortgage rates.

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 92.6 that means consumers felt less confident this month and likely will avoid making a large purchase in the immediate future.

Overall, I see Friday as the key day of the week with Wednesday afternoon also worthy of plenty of attention. Monday could also bring more movement in rates if stocks are in selling mode again or decide to rebound from last week's significant losses. On paper, we can expect to see the most movement in rates Friday, but the truth is that there is a decent chance of seeing noticeable changes in mortgage rates multiple days this week. Therefore, please maintain contact with your mortgage professional if still floating an interest rate.

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