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  • Writer's pictureJenny Phung

Mortgage Market Update

This week is extremely busy with eight economic reports for the markets to digest, including two highly important releases. In addition to the data, there is also an FOMC meeting that definitely has the potential to disrupt the markets. We have something of importance set for each day of the week, making it likely that we will see plenty of movement in mortgage rates. The first report comes early tomorrow morning when December's Personal Income and Outlays data is posted at 8:30 AM ET. It gives us an indication of consumer ability to spend and current spending habits, making it relevant to the bond market and mortgage rates. Current forecasts call for an increase in income of 0.4% meaning consumers had more money to spend in December than they did in November. The spending reading is expected to also rise 0.4%, indicating consumers spent more. Stronger readings would be good news for the stock markets and could hurt bond prices, driving mortgage rates higher. Weaker than expected increases or declines would be considered good news for the bond market and mortgage rates as it would hint that consumer spending is weaker than thought, limiting economic growth. Tuesday has two reports scheduled, starting the 4th Quarter Employment Cost Index (ECI) at 8:30 AM ET. This index measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. If wages are rising, consumers have more money to spend and businesses usually need to charge more for their products and services. The report is considered moderately important and usually has more of an impact on the bond market than the stock markets. Current forecasts are showing an increase of 0.6%. A lower than expected reading would be favorable to bonds and mortgage rates Tuesday, but unless we see a large variance from forecasts, I am not expecting this report to have much of an influence on rates. January's Consumer Confidence Index (CCI) is the second report of the day, coming at 10:00 AM ET. This report is also considered to be of moderate importance to the bond market and therefore can move mortgage rates if it shows any surprises. It is an indicator of consumer sentiment, which is important because waning confidence in their own financial situations usually means that consumers are less willing to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, market participants are very attentive to related data. Analysts are expecting to see a small rise from December's reading, indicating consumer confidence was a little stronger than last month. A reading much smaller than the expected 112.5 would be ideal for the bond market and mortgage rates. A higher reading than forecasts would hint that consumers are more likely to spend in the immediate future, fueling economic growth and possibly pushing mortgage pricing higher Tuesday. Next up is Wednesday's ADP Employment report at 8:15 AM ET. This release has the potential to cause some movement in the markets if it shows much stronger or weaker numbers. It tracks changes in private-sector jobs of the company's clients that use them for payroll processing. While it does draw attention, it is my opinion that it is overrated and also is not a true reflection of the broader employment picture. It also is not accurate in predicting results of the monthly government report that follows a couple days later. Still, because we see a reaction to its results, it is included in this week's calendar. Analysts are expecting to see 165,000 new jobs. Good news would be a much smaller number of jobs. Also set for release Wednesday is the Institute of Supply Management's (ISM) manufacturing index for January. This index tracks manufacturer sentiment by rating surveyed trade executives' opinions of business conditions. It is usually the first economic data released each month and is one of the very important reports we get monthly. Current forecasts are calling for a reading in the neighborhood of 55.0, which would be a slight increase from December's reading of 54.7. The lower the reading, the better the news for the bond market and mortgage rates because weaker sentiment indicates a slowing manufacturing sector. This year's first FOMC meeting that begins Tuesday will adjourn Wednesday at 2:00 PM ET. The general consensus is that Fed Chair Janet Yellen and friends will not follow up last month’s bump to key short-term interest rates with another move this week. Another rate hike is still possible though, so we need to be prepared in case it does happen. Afternoon volatility in the markets Wednesday is a possibility following the post-meeting statement release. This meeting will not include economic projections or a Fed press conference. Employee Productivity and Costs data for the 4th quarter will be released early Thursday morning. It can cause some movement in the bond market, but should have a minimal impact on mortgage pricing. This is especially true considering all of this week’s more important data and related events. Good news would be the productivity reading showing a much stronger increase than the 1.0% that is forecasted. That is because higher levels of worker productivity allow the economy to expand while keeping inflation subdued. Friday has the big news of the week. The Labor Department will release the almighty monthly Employment report for January at 8:30 AM ET Friday. Some of the important portions of the report will give us the unemployment rate, number of new jobs added or lost and the average hourly earnings reading. The best combination for the bond market and mortgage rates would be an increase in the unemployment rate, a much smaller increase in payrolls than expected and little or no increase in earnings. Current forecasts are calling for no change in the unemployment rate of 4.7% and approximately 170,000 new jobs added to the economy. I am paying close attention to the average hourly earnings reading also as it is trending upward. Stronger than expected readings will likely fuel a stock market rally and selling in bonds that would cause a sizable upward revision to mortgage rates. On the other hand, disappointing numbers would raise concerns about the strength of economy and would likely lead to a sizable improvement in mortgage pricing. December's Factory Orders data is also scheduled to be posted Friday morning but at 10:00 AM ET. It is similar to last week's Durable Goods Orders release in giving us a measurement of manufacturing sector strength, but this data includes new orders for both durable and non-durable goods. It is not one of the more important reports we get each month, however, it can influence mortgage pricing if it varies greatly from forecasts. Analysts are expecting a 1.4% rise in new orders, indicating a strengthening manufacturing sector. The bond market would like to see a large decline, meaning that manufacturing activity was weaker than many had thought. Overall, Friday is the best candidate for most important day of the week as long as the FOMC meeting doesn’t yield any surprises, although we could see plenty of movement in the markets and mortgage rates Wednesday also. The calmest day will probably be Tuesday. I am fully expecting to see another very active week for mortgage rates, so please maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.

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