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  • Writer's pictureJenny Phung

Mortgage Market Update

This week brings us the release of only four monthly economic reports that may affect mortgage rates but two of them are considered to be of high importance. In addition to the data, we also have the last FOMC meeting of the year that may create afternoon volatility midweek. The week begins and ends light with nothing of importance scheduled tomorrow or Friday.

November's Producer Price Index (PPI) will start this week’s activities at 8:30 AM ET Tuesday. This release is the sister index to last week’s CPI, tracking inflationary pressures at the producer or manufacturing level of the economy instead of the consumer level. There are two readings of the index that are widely used- the overall reading and the core data reading. If they are announced stronger than expected, indicating that inflationary pressures are rising faster than thought, the bond market will probably react negatively. That would drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market should respond by pushing mortgage rates slightly lower. Forecasts are calling for a 0.5% increase in the overall reading and a 0.4% rise in the more important core data.

The second big economic report of the week will be November's Retail Sales report at 8:30 AM ET Wednesday that will give us insight into consumer spending. This data is highly important to the markets because consumer spending makes up over two-thirds of the U.S. economy. Rapidly rising spending raises the possibility of seeing solid economic growth and stronger inflation. Since long-term securities such as mortgage bonds are usually more appealing to investors during weaker economic conditions, a larger than predicted increase in sales will likely drive bond prices lower and mortgage rates higher. Analysts are expecting to see a 0.8% increase in November's sales, meaning consumers spent more last month than in October. Favorable results for mortgage rates would be a much smaller rise that shows weaker than thought economic activity.

There are also some significant FOMC events Wednesday that can be highly influential on the financial and mortgage markets. The two-day FOMC meeting that begins Tuesday will adjourn at 2:00 PM ET Wednesday. There is a wide consensus that Fed Chairman Powell and friends will leave key short-term interest rates unchanged at this meeting. Market participants will be focused on what the Fed may say about their plans to tackle inflation. Hot topic items are the rate of their bond buying tapering and if the timetable for them to start key short-term interest rate increases has changed.

At the same time their post-meeting statement is made, they will also release revised economic projections. Those will be followed by a press conference with Chairman Powell at 2:30 PM ET. This meeting may cause a very active afternoon for mortgage rates Wednesday, especially if the Fed starts a more aggressive plan to fight inflation.

Besides weekly unemployment figures, we also have a relatively minor monthly economic report also scheduled for early Thursday morning. November's Housing Starts data isn't known to be highly influential to bonds or mortgage pricing, but it does give us an indication of housing sector strength by tracking new home groundbreakings. Analysts are expecting to see a rise in new home starts, pointing to minor growth last month in the new home portion of the housing sector. Slowing starts would be favorable for the bond market, although a wide variance is likely needed for the data to cause noticeable movement in the markets or mortgage rates Thursday morning.

Also Thursday morning will be the release of November's Industrial Production report at 9:15 AM ET. This moderately important report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Forecasts are calling for a 0.7% rise in output. A decline will be good news for bonds and mortgage rates, while a stronger reading would show manufacturing strength and be considered unfavorable.

Overall, Wednesday is clearly the most important day of the week because of the sales data and the FOMC events. The calmest day for rates should be Friday. Despite the lack of a high number of scheduled economic releases, we still could see significant movement in the markets and mortgage pricing this week. Therefore, it would be prudent to watch them closely if still floating an interest rate and closing in the near future.

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