This week brings us the release of five pieces of relevant economic data for the bond market to digest, including two that are considered highly important. We will also get the minutes from the most recent FOMC meeting. Making things a little more interesting is the fact that all of the week's events take place over only three days and most of them come on a single day. The financial markets will be closed tomorrow in observance of the President's Day holiday, so don't expect to see new mortgage pricing until Tuesday morning.
The first report is January's Producer Price Index (PPI) at 8:30 AM ET Wednesday. It is the sister report to last week's Consumer Price Index but measures inflationary pressures at the producer level of the economy. As with the CPI, there are two headline readings. The core data is more important to market participants than the overall reading because it excludes more volatile food and energy prices. They are expected to show an increase of 0.4% in the overall reading and a 0.2% rise in the core data. Good news for bonds would be smaller increases, particularly the core data as it would ease concerns about future inflation that make long-term securities less attractive to investors.
January's Retail Sales report will also be posted early Wednesday morning. This report is very important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched quite closely. If Wednesday's report reveals weaker than expected retail-level sales, the bond market should thrive and mortgage rates will fall since it would be a sign that the economy is not rebounding as quickly as many had thought. However, a stronger reading than the 0.9% increase that is forecasted could lead to higher mortgage rates.
The third report of the day will be January's Industrial Production data at 9:15 AM ET that helps us measure manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Analysts are expecting to see a 0.6% increase in production levels from December to January. A smaller gain in output would be good news for bonds and mortgage pricing.
Wednesday also brings us the release of the minutes from last month’s FOMC meeting. Traders will be looking for any indication of the Fed's next move regarding monetary policy, which is currently expected to keep key short-term interest rates close to zero for the foreseeable future. Comments and discussion amongst Fed members could be helpful to shape trader opinions on when the Fed may act next. The Fed’s next move may not be raising short-term rates. It could be making changes to their balance sheet and the amount of bonds they buy each month. The minutes will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading Wednesday. These minutes may lead to afternoon volatility, or they may be a non-factor. However, they do carry the potential to influence mortgage rates, so they should be watched.
Next up is January's Housing Starts early Thursday morning. This report gives us an indication of housing sector strength and mortgage credit demand by tracking new housing groundbreakings. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for little change in construction starts of new housing. A weak housing sector makes broader economic growth less likely in the near future, which makes bonds more attractive to investors. That is why the smaller the number of starts, the better the news it is for mortgage rates.
January's Existing Home Sales report by the National Association of Realtors will close out this week’s calendar late Friday morning. Because this data tracks home resales throughout the country, it gives us another measurement of housing sector strength. It is expected to show a decline in sales of existing homes, meaning the housing sector softened last month. Ideally, the bond market would like to see a sizable decline in sales. Since long-term securities such as mortgage bonds tend to thrive during weaker economic conditions, weak housing numbers would be good news for mortgage rates.
Overall, Wednesday is the best candidate for most important day of the week for mortgage rates. The calmest day may be Thursday due to the possibility of seeing movement Tuesday following the long weekend. Corporate earnings season is winding down, removing one heavy influence on stocks that can cause bonds to react. After Friday’s unexpected strong sell-off, it will be interesting to see if bonds can recover some of those losses when trading opens Tuesday. Or, will the selling continue, driving yields and mortgage rates higher? That question, combined with the week’s economic releases, means we could have another very active week for mortgage rates. If floating an interest rate and closing in the near future, it would be prudent to keep a close eye on the markets this week.