• Jenny Phung

Mortgage Market Update


This week brings us six monthly economic reports for the markets to digest, including two very important releases that will draw more attention than the others. In addition to the data, there are also a couple of Treasury auctions that could influence mortgage rates during afternoon trading those days. The week starts off light with nothing of importance scheduled tomorrow, the only day with nothing on the daily calendar that we need to watch.


The drama at the Capital last week didn’t influence the markets much and don’t expect a potential impeachment vote this week to do so either. Now that the elections should be behind us, the markets can focus on factual data and the pandemic. It is interesting to see where they are currently, compared to 10 months ago. The benchmark 10-year Treasury Note yield is above 1.10% for the first time since the pandemic started. Stocks are setting new record highs frequently. One could argue that the markets are priced as if the pandemic never happened. Yes, there is reason to be optimistic about the future with vaccines now being distributed. However, there are still over three quarter of a million new people filing for unemployment benefits every week and there are still 10 million jobs here in the U.S. that have not been recovered yet.


If the markets are accurately reflecting the current status of the economy, it makes you wonder where they would have been at this time if there was no pandemic or shutdown. That leads me to believe there is a correction of some sorts coming relatively soon. Even though bonds weakened, and rates moved higher recently because the Georgia Senate election results now make another stimulus package very likely in the immediate future, don’t be surprised to see another negative move once Congress actually takes up the matter in a couple weeks. That said, the economy is still far from where it was before the pandemic started and after that knee-jerk reaction does come and pass, it may be time for the markets to reflect the current economic situation. In other words, look for stocks to retreat and bonds to rally after the new Congress passes the package, leading to lower mortgage rates in the near 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 those days. On the other hand, 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 could lead to upward revisions to mortgage rates. Results will be posted at 1:00 PM ET each day, making these early afternoon events for rates.


December's Consumer Price Index (CPI) is the week’s first piece of economic data that we need to be concerned with. It will be released early Wednesday morning and is one of the more influential monthly reports for the bond market each month since it measures inflationary pressures at the consumer level of the economy. There are two readings in the release, the overall and the core data that excludes volatile food and energy prices. The overall index is expected to rise 0.4% from November while the more important core data is forecasted to rise 0.1%. Weaker than expected readings would be favorable news since it would signal inflation is softer than thought at the consumer level and should lead to bond strength and lower mortgage rates Wednesday morning.


Also Wednesday will be the release of the Federal Reserve's Beige Book 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 this info during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises. Of particular interest is information regarding inflation, unemployment and the effects of the pandemic. If there is a reaction to the report, it will come during mid-afternoon trading Wednesday.


Thursday’s only relevant data is last week’s unemployment update. There are no monthly reports scheduled for that day. However, Friday makes up for that with four reports scheduled, including one that is extremely important.


The day will start with that particularly important release- December’s Retail Sales report at 8:30 AM ET. This data tracks consumer spending, which makes up over two-thirds of the U.S. economy. Current forecasts are calling for a 0.1% decline in sales, hinting at weaker economic activity. Analysts are also calling for the same decline in sales in more volatile auto transactions are excluded. Stronger than expected sales would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate economic growth. Favorable news for rates would be a larger decline.


Next up is December's Producer Price Index (PPI), also early Friday morning. The PPI is the sister release to Wednesday’s CPI but measures inflation at the producer or manufacturing level of the economy. Market participants are expecting to see a 0.3% rise in the overall reading and a 0.2% rise in the core reading. A larger than expected increase in the core reading could mean higher mortgage rates 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 appealing to investors and also allows the Fed to be more aggressive with rate hikes once the economy recovers.


December's Industrial Production report is scheduled for 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 0.4% from November's level. A decline in output 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 that measures consumer willingness to spend. It can usually have enough of an impact on the financial markets to slightly change mortgage rates. By theory, 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. Forecasts are calling for a reading of 80.0, down from November's 80.7. The lower the reading, the better the news it is for bonds and mortgage rates.


Overall, Friday is the best candidate for most active day for rates, but Wednesday could bring a noticeable move also. The calmest day should be Thursday unless the weekly unemployment update shows a significant surprise. Also worth noting are a high number of Fed member speaking engagements this week that always carry the potential to affect the markets and possibly mortgage pricing. The immediate future is still concerning for rates in my opinion. After the new Congress passes the stimulus package, that should change. There is no reason to believe that this month’s economic reports are going to show overly strong results, allowing that shift addressed above, to begin in a few weeks. Until then, it would be prudent to watch the markets closely though, especially if floating an interest rate and closing in the near future.

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