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  • Writer's pictureJenny Phung

Mortgage Market Update

This week brings us the release of five monthly and quarterly economic reports for the markets to digest in addition to another FOMC meeting. There is at least one item scheduled every day of the week except Tuesday. We start the week with a very important economic release and close it with arguably the single most influential monthly report. In between, there is also plenty scheduled to drive the markets and mortgage pricing.

The Institute for Supply Management (ISM) will start this week's calendar at 10:00 AM ET tomorrow morning with the release of their manufacturing index for October. This index measures manufacturer sentiment about business conditions. It is important because it gives us an indication of manufacturing sector strength and is often the first release each month that tracks the preceding month. Tomorrow's report is expected to show a reading of 60.5, meaning that manufacturer sentiment softened from September's 61.1. That equates to fewer surveyed manufacturing executives feeling business improved this month than in September. A smaller than expected reading would be good news for bonds and likely lead to lower mortgage rates as the new week begins.

Wednesday has the first of this week's two monthly employment-related reports that we will be watching. The less important of the two is the ADP Employment report before the markets open Wednesday. It has the potential to cause some movement in the markets if it shows much stronger or weaker numbers than expected. This report tracks changes in private-sector jobs, using ADP's clients as a base. While it does draw attention, it is my opinion that it is overrated and 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 often see a reaction to the report, we should be watching it. Analysts are expecting it to show that 370,000 new private sector payrolls were added back to the economy. Favorable news for rates would be a lower number of jobs.

September's Factory Orders data will also be posted Wednesday, but at 10:00 AM ET. This report is similar to the Durable Goods Orders release that came last week except it includes orders for both durable and non-durable goods, giving us another sign of manufacturing strength. It is expected to show a 0.1% decline from August's level. A larger decline would be good news for the bond market and mortgage rates.

This week's FOMC meeting is a two-day meeting that begins Tuesday and adjourns Wednesday afternoon. There is little chance that the Fed will raise key short-term interest rates at this meeting, but there is plenty of speculation regarding a change to their current monthly bond purchases. Many analysts are convinced the Fed will start to taper their $120 billion monthly purchases before the end of the year. That leaves this week or mid-December since those are the only remaining 2021 meetings. It is quite possible an announcement will come from this meeting that they will start purchasing fewer securities starting soon. However, I would not be surprised if that move didn’t come this week either.

While the economy has come a long way since the start of the pandemic, there are some Fed-preferred benchmarks that have not been met yet. Of particular interest or concern is the still soft employment sector. The Employment report will come Friday, after the Fed decision, meaning they won’t have October’s data to use at this meeting. It appears that the speculation tapering will start now is being fueled by the current inflation situation. Some Fed members have addressed this topic in recent speaking engagements, supporting the theory the Fed needs to act. Although, there are still FOMC members that believe inflation is still temporary and will ease on its own. This is why I would not be surprised if they decided to wait for the December meeting before starting the tapering process.

Generally speaking, a reduction in monthly Fed purchases is bad news for the bond market and mortgage rates. Their buying program helps provide liquidity to the bond market, allowing mortgage rates to remain low. A significant buyer reducing their purchases creates less demand and more supply in the market each month. Because the Fed is widely expected to make this move in the immediate or near future, the size of the reduction is likely to have a bigger influence than the announcement itself. A minimal reduction in monthly purchases may have little or a slightly positive impact on rates this week, while a large change could cause a sell-off in bonds and a spike in mortgage pricing.

The meeting will adjourn at 2:00 PM ET while the press conference with Chairman Powell will start at 2:30 PM, making these mid-afternoon events for the markets. This meeting does not include revised economic projections.

3rd Quarter Productivity data will be released at 8:30 AM ET Thursday. It is expected to show a 1.5% decline in worker productivity during the quarter. A noticeable increase would be good news for the bond market because higher levels of employee productivity allow the economy to expand without inflationary pressures being a concern. A secondary reading that tracks labor costs is expected to show a 5.8% rise in costs. This report is considered to be of relatively low importance, so it will take a significant variance from forecasts for it to directly affect mortgage rates.

The week closes with the release of the almighty Employment report for October at 8:30 AM ET Friday. This report is comprised of many statistics and readings, but the most important ones are the unemployment rate, the number of new jobs added or lost during the month and average hourly earnings. Current forecasts call for the unemployment rate to have slipped from 4.8% to 4.7%. It is also expected to show an increase in payrolls of 400,000. The third headline number is average earnings that is forecasted to have risen 0.4%. Weaker than expected readings should raise concerns about the labor market and rally bonds enough to improve mortgage rates noticeably.

Overall, Wednesday is the most important day for rates due to the afternoon FOMC events, but Friday is a good choice also because of the influence the Employment report has on the markets. Tomorrow’s report carries enough importance to heavily affect the markets too. No day stands out as the least important. Even though Tuesday has nothing of importance scheduled, we should still see active markets as traders prepare for the FOMC results Wednesday afternoon. With so much going on this week, it would be prudent to keep an eye on the markets if still floating an interest rate and closing in the near future.

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