This week has five monthly economic reports scheduled for release in addition to a couple of Treasury auctions and some key Fed events that should significantly affect the financial and mortgage markets. There is something of importance coming every day, meaning it will likely be another active week for the markets and mortgage rates.
The first events we need to deal with are the two Treasury auctions tomorrow and Tuesday. There is no relevant economic data scheduled for either day, so the auctions may have a heavier influence on the bond market and mortgage pricing than usual. Tomorrow's 10-year Note sale is the more important one and will likely have a bigger influence on mortgage rates. Results of both will be posted at 1:00 PM ET each day. If they are met with a strong demand from investors, particularly international buyers, we should see strength in the broader bond market and improvements to mortgage pricing during afternoon hours those days. On the other hand, a weak interest in the auctions could lead to upward revisions to rates.
Wednesday is clearly the most important day of the week. It has three morning economic releases, two of which are highly important. The first of the batch is November's Retail Sales report at 8:30 AM ET. This report will give us a key measurement of consumer spending by tracking sales at retail level establishments. This data is highly important to the markets because consumer spending makes up over two-thirds of the U.S. economy. Rapidly rising consumer spending raises the possibility of seeing solid economic growth. Since long-term securities such as mortgage bonds are usually more appealing to investors during weaker economic conditions, a large increase in retail sales will likely drive bond prices lower and mortgage rates higher Wednesday. Current forecasts are calling for an increase of 0.3% in November's sales.
The second relevant report will be November's Producer Price Index (PPI), also early Wednesday morning. It shows inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices, giving a more stable reading for analysts to consider. If Wednesday's release reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively. That would drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market could respond by pushing mortgage rates slightly lower. Analysts are expecting a 0.1% increase in the overall index and a 0.2% rise in the core data. 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. It is worth noting that the two early reports will draw more attention than this one will.
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 a quarter point upward bump to key short-term interest rates. This would be the first move since this time last year and only the second in the past 10+ years. 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. Expect a very active afternoon in the financial and mortgage markets Wednesday.
Thursday’s sole monthly report will be November's Consumer Price Index (CPI) at 8:30 AM ET. It is the sister release to Tuesday's Producer Price Index, except it tracks inflationary pressures at the important consumer level of the economy. It is expected to show a 0.2% rise in both the overall and core data readings. 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.
The final report of the week will be November's Housing Starts at 8:30 AM ET Friday 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 a drop in new home starts, indicating weakness 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 Friday morning.
Overall, Wednesday is the key day of the week due to three morning economic reports followed by the FOMC meeting adjournment, Fed economic projections and press conference. The calmest day could be Friday. This week is key for bonds and mortgage rates after the benchmark 10-year Treasury Note yield closed last week at 2.46%. I have been warning about this crossroad ever since we broke above 2.25%. If this is a bad week for bonds and the 10-year breaks above 2.50%, there is little to prevent moving into the mid-2.6’s in the immediate future. And since mortgage rates track bond yields, this would equate to higher rates for mortgage shoppers.