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  • Writer's pictureJenny Phung

Mortgage Market Update

This week brings us the release of only two monthly economic reports in addition to a couple of Treasury auctions midweek. It starts off light with nothing scheduled tomorrow or Tuesday that are likely to affect rates.

The calendar begins early Wednesday afternoon with the first of two important Treasury auctions set for this week. 10-year Treasury Notes will be sold Wednesday, followed by 30-year Bonds Thursday. These sales will give us an indication of demand for long-term securities, such as mortgage-related bonds. If the sales are met with a strong demand from investors, we should see the bond market move higher during early afternoon trading those days. But a lackluster interest from buyers, particularly international investors, will likely lead to broader bond selling. The selling in bonds would result in upward afternoon revisions to mortgage rates.

January's Consumer Price Index (CPI) will be posted early Thursday morning. This index measures inflationary pressures at the consumer level of the economy. Its results can have a significant impact on the financial markets, especially on long-term securities such as mortgage-related bonds. Therefore, all related data is watched very closely. Inflation is a hot topic and a major concern for the markets currently. The report is expected to show a 0.5% increase in the overall index and a 0.5% rise in the more important core data that excludes volatile food and energy prices. If we see weaker than expected readings, bond prices should rise and mortgage rates will likely fall.

The only other monthly report of the week will be February's preliminary reading to the University of Michigan's Index of Consumer Sentiment late Friday morning. This index tracks consumer willingness to spend and usually has a moderate impact on the financial markets because consumer spending is such a large part of the U.S. economy. It is currently expected to show a 67.5 reading, up from January's final reading of 67.2. That would indicate consumers are slightly more optimistic about their own financial situations than last month, meaning they are more likely to make a large purchase in the near future that fuels economic growth. Good news for rates would be a large decline in this reading.

Overall, Thursday is the most important day of the week for rates due to the CPI, but Wednesday may bring some volatility also.The calmest day may be Tuesday unless something unexpected happens. Despite the lack of a high number of economic releases, there is enough scheduled to make this another fairly active week for the markets. It would be prudent to watch them closely if still floating an interest rate and closing in the near future. This week is likely to be another volatile one for the markets and mortgage rates. We have some important economic data scheduled, including the Producer Price Index (PPI) and monthly Retail Sales data. In addition to the data, we also have a Treasury auction set midweek and a potentially major event taking place tomorrow.

Starting the week is not an economic release, but an emergency FOMC meeting with the only topic listed being the Fed’s short-term interest rates.These type of last-minute meetings are not totally unheard of, but after last week’s stronger than expected inflation data, it seems to be more than just a coincidence to have one set for tomorrow. There is a high probability of getting an increase in key short-term interest rates from this meeting, maybe even a half-point. If they do make a strong initial move, it would be the first time the Fed made a .500 hike in these rates since May 2000. There are justifications for bonds to react negatively and positively to a rate hike tomorrow, meaning there is no way to predict what the markets will do. If they do not make a move tomorrow and do not issue a statement about future plans, there is a possibility of bonds reacting favorably and mortgage rates moving lower. The meeting is expected to start at 11:30 AM ET with no announced adjournment time.

While the current situation has bond traders spooked and worried about rampant inflation, it is important to remember that the long-term goals and preferences of the Fed and bond market actually align when it comes to inflation. One of the Fed’s mandates is to keep inflation under control. Lower inflation makes mortgage-related bonds more attractive to investors, leading to lower yields and mortgage rates. In other words, the Fed’s action now will help keep mortgage rates lower in the future. Barring another catastrophic event to the economy, there is a good possibility that the low point for mortgage rates is behind us. Still, there is also a decent chance that rates will eventually be lower than they are today.

The first economic report is January's Producer Price Index (PPI) at 8:30 AM ET Tuesday. It is the sister report to last week's Consumer Price Index that caused chaos in the bond market, 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 0.5% in the overall reading and a 0.4% rise in the core data. Good news for bonds would be smaller increases, particularly in the core data.

Another big report will be January's Retail Sales early Wednesday morning. This data 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 could rally, improving mortgage rates. Forecasts are calling for an increase of 2.0% in sales after December’s 1.9% decline. Favorable results for the bond market and mortgage rates would be a much smaller rise.

Also being released Wednesday morning is 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 0.4% increase in production levels from December to January. A smaller gain in output would be good news for bonds and mortgage pricing.

We also have two afternoon events for Wednesday, starting with the 20-year Treasury Note auction. Results will be posted at 1:00 PM ET. A strong demand from investors usually boosts the broader bond market and may cause a slight improvement to rates during early afternoon trading.

The second afternoon event Wednesday is the 2:00 PM ET 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 during this high-inflation economy. However, these minutes will likely become moot if the Fed does make a move tomorrow. Whatever was discussed at the last meeting can be thrown out the window if Chairman Powell and friends feel they need to make an emergency change in short-term rates to control inflation that has reached 40-year highs.

Next up on the calendar is January's Housing Starts release 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.

Friday has two moderately important reports scheduled, both at 10:00 AM ET. January's Leading Economic Indicators (LEI) is one. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.2% increase, meaning that economic activity should expand modestly in the near future. A decline would be good news for the bond market and mortgage rates. Although this data is not considered to be highly important, a sizable variance from forecasts can directly affect 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, tomorrow is a good candidate for the most important day of the week. Tuesday and Wednesday both bring us data that can heavily influence the markets also. The calmest day could be Thursday. If still floating an interest rate and closing in the near future, it would be prudent to keep a close eye on the markets since they are likely to be quite volatile this week.

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