This week brings us the release of three pieces of monthly economic data that is relevant to mortgage rates in addition to two Treasury auctions and semi-annual Fed testimony. All of the economic data is set for release the latter part of the week while the other events will take place during the middle days. One of the economic reports is considered highly important to the markets, but the others are not likely to be market movers. Even with a lack of factual data the first half of the week though, we have other events that are likely to cause a fair amount of volatility in the markets and mortgage rates.
There is nothing of concern due Monday, leaving bond trading to be driven by the stock markets. If the major stock indexes move noticeably higher, we will probably see funds move away from bonds and into stocks. This would lead to higher mortgage rates as bond prices and yields move in opposite directions. Mortgage rates tend to follow bond yields, so we prefer to see bond prices go up, pushing yields and rates lower. On the other hand, stock selling could drive yields lower tomorrow, leading to a downward move in rates.
Newly appointed Fed Chairman Yellen will deliver the Fed's semi-annual testimony on the status of the economy late Tuesday and Thursday mornings. She will be speaking to the House Financial Services Committee Tuesday morning and the Senate Banking Committee Thursday. Market participants will watch her words very closely. The Fed is required to deliver this testimony twice a year, which is considered to be of extreme importance to the financial markets. We almost always see the markets move as a result of what is said during this testimony. Look for her to address our employment situation, inflation, global financial issues and possibly the Fed’s tapering of QE3 and their impact on the overall economy. Her testimony begins at 10:00 AM ET with a prepared statement which is then followed by Q & A with committee members. Her prepared words are expected to be released at 8:30 AM Tuesday, so we could see a reaction early Tuesday morning. I am expecting to see the markets fluctuate Tuesday morning, possibly affecting mortgage rates also. The first day of testimony usually causes the most volatility because the prepared statement made by the Chairman on the second day often differs little from that of the first day.
The two important Treasury auctions come 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 the days of the auctions. But 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 would likely result in upward afternoon revisions to mortgage rates.
This week's first release is one of the more important ones we get each month. The Commerce Department will post January's Retail Sales data early Thursday morning. This report 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 Thursday's report reveals weaker than expected retail-level sales, the bond market should thrive and mortgage rates will fall since it would be a sign that the economy is not as strong as many had thought. However, a stronger reading could lead to higher mortgage rates Thursday. Analysts are currently expecting to see no change from December’s level of spending.
Friday has the remaining two reports scheduled. January's Industrial Production data will be released mid-morning Friday. It gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities and can have a moderate impact on the financial markets. Analysts are expecting to see a 0.3% increase in production from December to January. A decline in output would be good news and should push bond prices higher, lowering mortgage rates Friday.
February's preliminary reading to the University of Michigan's Index of Consumer Sentiment will be released late Friday morning. This index measures consumer willingness to spend and also usually has a moderate impact on the financial markets. If it shows an increase in consumer confidence, the stock markets may move higher and bond prices could fall. It is currently expected to come in at 80.2, down from January's final reading of 81.2. That would indicate consumers were a little less optimistic about their own financial situations than last month and are less likely to make large a purchase in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, this would be considered slightly favorable news for bonds and mortgage pricing.
Overall, Tuesday or Thursday are likely to be the most important days for mortgage rates this week. The calmest will probably be Monday with it being the only day without something of relevance scheduled. The afternoon auctions and late morning starting times for the Fed testimony means there is a good likelihood of seeing intraday revisions to mortgage rates multiple days as the markets react to those events. Therefore, it would be a good idea to maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.