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  • Writer's pictureJenny Phung

Mortgage Market Update

There are seven relevant monthly and quarterly economic reports scheduled this week that may influence mortgage pricing, in addition to two Treasury auctions and an FOMC meeting. A couple of the reports are considered to be highly important while others are of moderate or low importance. We have something worth watching scheduled every day except tomorrow, creating the possibility that we could see another week with plenty of movement in rates.

January's Consumer Confidence Index (CCI) is the first economic report of the week, coming at 10:00 AM ET Tuesday. This report is considered to be of moderate importance to the bond market and therefore, can move mortgage rates if it shows any big surprises. It is an indicator of consumer sentiment, which is important because waning confidence in their own financial situations is a sign that consumers are less willing to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, market participants are very attentive to related data. Analysts are expecting to see a decline from December's reading, indicating consumer confidence was weaker this month than last month. A reading much smaller than the expected 112.0 would be ideal for the bond market and mortgage rates. A higher reading would mean that consumers are more likely to spend in the immediate future, fueling economic growth and possibly pushing mortgage pricing higher Tuesday.

December's New Home Sales report will be posted late Wednesday morning. This is the least important report of the week and is the sister release to last week's Existing Home Sales data. It also measures housing sector strength and mortgage credit demand, but usually does not have a significant impact on bond trading or mortgage rates unless it comes out with a significant surprise because it covers such a small part of all home sales. Wednesday's report is expected to show an increase in sales of newly constructed homes, hinting at strength in the new home portion of the housing sector. The smaller the number of sales, the better the news it is for bonds and mortgage rates.

This year's first FOMC meeting will begin Tuesday and adjourn Wednesday at 2:00 PM ET. There is a strong consensus that Fed Chairman Powell and friends will leave key short-term interest rates unchanged at this meeting. Still, there is a high likelihood of seeing volatility in the markets Wednesday afternoon. Traders will be looking at the post-meeting statement for clarification of the Fed's plans, particularly regarding when they will start raising short-term rates. Many analysts think that the March meeting is the timetable they will follow. Any indication of it coming sooner should be taken as bad news for bond and mortgage rates. A later date should help boost bonds and lower rates during afternoon trading. This meeting will be followed by a press conference with Chairman Powell but does not include revised economic projections. This is an afternoon event that could have a big impact on the financial and mortgage markets Wednesday afternoon and Thursday morning.

Thursday has a couple of very important economic reports set for release, starting with one that is arguably the most important that we see regularly. This would be the initial quarterly Gross Domestic Product (GDP) reading. Thursday's release is the first of three we will get for the 4th quarter. This data is so important because it is considered to be the best measurement of economic activity. The GDP itself is the total sum of all goods and services produced in the United States and its’ results usually have a major impact on the financial markets, leading to noticeable changes in mortgage rates. This initial reading will be followed by two revisions, each released approximately one month apart. Last quarter's first reading usually carries the most significance. It is expected to show the economy grew at an annual rate of 5.6%. A noticeably weaker reading would be great news for the bond and mortgage markets. However, a larger than expected increase, indicating the economy was stronger than thought, will probably fuel bond selling and lead to higher rates Thursday.

Next is the important Durable Goods Orders report for December, also at 8:30 AM ET Thursday. It helps us measure manufacturing strength by tracking new orders at U.S. factories for products that are expected to last three or more years. These are also known as big-ticket items and include things such as airplanes, appliances and electronics. The data is known to be quite volatile from month-to-month, so a large headline number isn't necessarily a concern. Forecasts are calling for a decline in orders of 0.5%. Even though this an important report, a slight variance likely will have little impact on Thursday's mortgage pricing because of the large swings that are common in the data. A much larger decline would indicate weakness in the manufacturing sector and be good news for mortgage rates.

Friday has three reports that we will be watching. The first comes at 8:30 AM ET with the release of December's Personal Income and Outlays data. It gives us an indication of consumer ability to spend and current spending habits, making it relevant to the bond market and mortgage rates. Forecasts are calling for an increase in income of 0.5%, signaling consumers had more money to spend in December than they did in November. The spending reading is expected to decline 0.6%. Stronger readings would be good news for the stock markets and could hurt bond prices, driving mortgage rates higher. Weaker than expected numbers would be considered favorable news for the bond market and mortgage rates. Adding to the importance of this report is the fact it includes the Fed’s preferred inflation index.

Also early Friday morning will be the release of the 4th Quarter Employment Cost Index (ECI). This index measures employer costs for employee wages and benefits, giving us insight into wage inflation pressures. If wages are rising, consumers have more money to spend and businesses usually need to charge more for their products and services. The report is considered moderately important and usually has more of an impact on the bond market than the stock markets. Current forecasts are showing an increase of 1.1%. A reading lower than expected would be favorable to bonds and Friday's mortgage rates, but unless we see a large variance from forecasts, I am not expecting this report to have much of an influence on rates.

The final economic report of the week is the revised January reading to the University of Michigan's Index of Consumer Sentiment at 10:00 AM ET Friday. This index is another measurement of consumer confidence that is thought to indicate consumer willingness to spend. Analysts are expecting to see little change from the preliminary reading of 68.6. A large increase would mean consumers are more likely to make a large purchase in the near future, fueling economic growth. The lower the reading, the better the news for rates.

In addition to the above referenced data, there are also two Treasury auctions that have the potential to slightly influence mortgage rates. 5-year Notes will be sold Tuesday, followed by 7-year Notes Thursday. A strong demand for the securities could lead to slightly lower rates. Results will be posted at 1:00 PM ET, so if there is a reaction it will come during early afternoon trading those days.

Overall, Wednesday is the best candidate for most active day for rates, but we may see a noticeable move in pricing Thursday also. With so much going on this week, it is hard to label any day as least important. Don't be surprised to see multiple days with intraday changes in pricing due to morning and afternoon events scheduled three of the days. Accordingly, 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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