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  • Writer's pictureJenny 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 and an appearance by Fed Chairman Powell. The week starts off light with nothing of importance scheduled tomorrow, the only day that doesn’t have at least one item for us to watch.

Tuesday doesn’t have any relevant economic data to influence the markets, but there is something of interest taking place. Fed Chairman Powell was nominated by President Biden for another four year term as head of the Federal Reserve. His nomination hearing is being held Tuesday, at which he will speak at 10:00 AM ET. As with any other congressional appearance, his words will be watched closely. We can expect Senators to drill him about the economy and inflation, both hot topics for the bond market and mortgage rates. Accordingly, we may see volatility in the financial and mortgage markets Tuesday morning.

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 0.5%. 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.

There are Treasury auctions scheduled several days this week, but the two that are the most likely to affect mortgage rates will be held Wednesday and Thursday 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.

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 through the eyes of their business contacts. Since the Fed relies heavily on this info during their FOMC meetings, its results can have an impact on the financial markets and mortgage rates if it reveals any surprises. Of particular interest is information regarding inflation, unemployment and the supply chain issues. If there is a reaction to the report, it will come during mid-afternoon trading Wednesday.

Next up is December's Producer Price Index (PPI) early Thursday 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 0.4% rise in the overall reading and the same in the core reading. A larger than expected increase in the core reading could mean higher mortgage rates since high inflation is already a concern 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.

Friday has three monthly economic reports scheduled, including one of the highly important releases- 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 no change in overall sales, hinting at flat contributions to the economy from consumers. Analysts are also expecting to see a 0.2% rise in sales if 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 decline.

December's Industrial Production report is scheduled for 9:15 AM ET Friday. It 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 0.3% 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 65.5, down from November's 70.6. 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. Tuesday morning could be interesting also. No day stands out as calmest. With so much going on this week, it would be prudent to watch the markets closely if floating an interest rate and closing in the near future.

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