This week has only four monthly economic reports scheduled for release in addition to some key Fed events that should significantly affect the financial and mortgage markets. All of the week’s events take place over the three middle days of the week, so we should see plenty of movement in rates during that time frame.
November's Consumer Price Index (CPI) will start the week’s activities at 8:30 AM ET Tuesday. It is similar to last Friday's Producer Price Index, except it tracks inflationary pressures at the important consumer level of the economy. Current forecasts show no change in the overall reading and an increase of 0.2% in the core data that excludes more volatile food and energy prices. This data is one of the most watched inflation indexes, which is extremely important to long-term securities such as mortgage related bonds. Rising inflation erodes the value of a bond's future fixed interest payments, making them less appealing to investors. That translates into falling bond prices and rising mortgage rates. Therefore, weak readings would be favorable for the bond market and mortgage shoppers.
Next up is November's Housing Starts at 8:30 AM ET Wednesday morning. This data isn't known to be highly influential on bonds or mortgage pricing, but it does give us an indication of housing sector strength by tracking new home groundbreakings. Analysts are expecting to see an increase in new starts, indicating strength in the new home portion of the housing sector. Slowing starts would be favorable for the bond market, although a wide variance is likely needed for the data to cause noticeable movement in the markets or mortgage rates Wednesday morning.
November's Industrial Production report will be posted mid-morning Wednesday. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Forecasts are calling for a 0.1% decline in output, indicating manufacturing softness. A larger than expected decline would be good news for bonds, while a stronger reading would show manufacturing strength and be considered bad news for rates.
Wednesday also has some significant FOMC events that can be highly influential on the financial and mortgage markets. The two-day FOMC meeting that began Tuesday will adjourn at 2:00 PM ET Wednesday. This is where the general consensus expects Fed Chair Janet Yellen and friends to make the Fed’s first hike to key short-term interest rates since 2006. At the same time their post-meeting statement is made, they will also release revised economic projections. That will be followed by a press conference with Chair Yellen at 2:30 PM ET.
Many are expecting a rate hike Wednesday afternoon, although there is still a chance that the Fed will wait for the next meeting to make a move. The markets certainly have a .25% bump built in right now, so what can we expect after the announcement? Let’s tackle the easy one first. That would be the Fed not making a move yet. I am fairly certain that the bond market would rally and we would see a sizable improvement in mortgage rates. The more complicated scenario is if the Fed does announce a .25% rate increase. If this is what happens, I believe that there is a good chance of seeing an initial negative knee-jerk reaction in bonds that would push rates higher. However, shortly after we may see a reversal that would lead to rates starting a downward trend. This is obviously all speculation at this point. I am leaning towards the Fed making the rate hike this week and am expecting an interesting couple of days once the meeting adjourns.
The final economic release of the week be November’s Leading Economic Indicators (LEI) from the Conference Board late Thursday morning. This release attempts to measure or predict economic activity over the next three to six months. It is expected to show a 0.2% increase, meaning that it is predicting slight economic growth over the next several months. This probably will not have much influence on bond prices or affect mortgage rates unless it shows a much stronger reading than forecasts. The weaker the reading, the better the news it is for bonds and mortgage pricing.
Overall, Wednesday is the key day of the week due to the Fed schedule, but Tuesday could be a bit active also. The calmest day will likely be tomorrow or Friday. It is highly probable that this will be a highly volatile week for the mortgage market.