This week brings us the release of five pieces of economic data for the bond market to digest along with the minutes from the most recent FOMC meeting. Making things a little more interesting is the fact that all of the week's events take place over only three days. The financial markets will be closed tomorrow in observance of the President's Day holiday, so don't expect to see new mortgage pricing until Tuesday morning.
There is nothing of relevance scheduled to be posted Tuesday. The Labor Department will release their Producer Price Index (PPI) for January early Wednesday morning. It measures inflationary pressures at the producer level of the economy and is considered to be one of the key measures of inflation we see each month. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. It is expected to show an increase of 0.2% in the overall reading and a 0.1% rise in the core data. Good news for bonds would be a decline in both readings, particularly the core data as it would ease concerns about future inflation that make long-term securities less attractive to investors.
January's Housing Starts will also be posted early Wednesday morning, giving us an indication of housing sector strength and mortgage credit demand by tracking new housing construction starts. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for a small decline in construction starts of new housing. That would be favorable news for the bond market and mortgage rates because it would point towards economic weakness. A weak housing sector makes broader economic growth less likely in the near future, which makes bonds more attractive to investors.
Wednesday also brings us the release of the minutes from the most recent FOMC meeting. Traders will be looking for any indication of the Fed's next move regarding monetary policy, particularly any discussion about the pace of reducing the Fed's current bond buying programs and concerns about economic growth. They will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading. These minutes may lead to afternoon volatility Wednesday, or they may be a non-factor. However, they do carry the potential to influence mortgage rates so they should be watched.
The sister report to Wednesday’s PPI will be posted early Thursday morning when January's Consumer Price Index (CPI) is released. The difference between the two is that the CPI measures inflationary pressures at the more important consumer level of the economy. With exception to maybe the Employment report, the CPI is the single most important report that we see each month. Its results can have a significant impact on the financial markets, especially on long-term securities such as mortgage-related bonds. Inflation isn’t exactly a concern currently, but there are many that feel the Fed’s stimulus programs are going to fuel rapid inflation down the road, so analysts still track the readings closely. The report is expected to show a 0.1% increase in the overall index and a 0.1% rise in the more important core data that excludes food and energy costs. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall Thursday morning.
Late Thursday morning will be the release of the Leading Economic Indicators (LEI) for January. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.4% increase, meaning that economic activity may rise in the near future. A smaller than expected increase would be good news for the bond market and mortgage rates, but the CPI draws much more attention than the LEI. Therefore, for this report to influence mortgage pricing, it will have to show a sizable variance from forecasts and the CPI will have to match estimates.
The final report of the week will be January's Existing Home Sales report by the National Association of Realtors late Friday morning. This data tracks home resales throughout the country, giving us a 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 because weak housing makes broader economic growth more difficult. 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, I am expecting Wednesday to be the most active day for mortgage rates, but Thursday's data is also enough to cause noticeable movement. Just because Tuesday has nothing scheduled for release does not necessarily mean we will have a calm day in terms of mortgage rate movement. Following the three day weekend, we could see the U.S. markets react to Monday’s overseas trading that is not affected by our holiday closures. Still, we will likely see the most movement in rates the middle trading days and the least amount either Tuesday or Friday. With a busy schedule the last three days, I recommend maintaining contact with your mortgage professional if still floating an interest rate as the threat of rates moving higher remains elevated in my opinion.