This week has only three monthly economic reports that are relevant to the bond market and mortgage pricing, but one is considered to be extremely important to all of the markets. In addition to the data, there are two Treasury auctions that we need to watch also. There is nothing of importance being released tomorrow, so look for stock movement and geopolitical news (Iran) to help drive bond trading early in the week.
The calendar starts late Tuesday morning with November's Factory Orders data at 10:00 AM ET. This report is similar to the Durable Goods Orders release that came the week before last except it includes orders for both durable and non-durable goods. It is expected to show a 0.8% decline from October's level. A larger decline would be good news for the bond market and mortgage rates while an unexpected rise could lead to slightly higher rates since that would be a sign of economic strength.
The second release of the week is the ADP Employment report before the markets open Wednesday, which has the potential to cause some movement in the markets if it shows much stronger or weaker numbers. This report tracks changes in private-sector jobs, using the company's clients that use them for payroll processing as a base. While it does draw attention, it is my opinion that it is overrated and is not a true reflection of the broader employment picture. It also is not very accurate in predicting results of the monthly government report that follows a couple days later. Still, because we sometimes see a noticeable reaction to the report, it is on our calendar. Forecasts are calling for an increase of 155,000 new payrolls. Good news for mortgage rates would be a much smaller increase in payrolls.
There are Treasury auctions scheduled several days this week, but the two that are the most likely to affect mortgage rates will be held 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 those days. 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 result in upward revisions to mortgage rates. Results will be posted at 1:00 PM ET each day, so any reaction will come during early afternoon trading.
The biggest news of the week will come at 8:30 AM Friday when the Labor Department will post December's employment figures. The Employment report is arguably the single most important monthly release we see. It gives us the national unemployment rate, the number of jobs added or lost during the month and average hourly earnings, which is a key measure of wage inflation. Rising unemployment, a decline in payrolls and flat earnings would be ideal news for the bond market. Current forecasts call for no change in the unemployment rate of 3.5% while 160,000 new jobs added to the economy and an increase in earnings of 0.3%. If we see weaker than expected results, the bond market should rally and stocks should fall, improving mortgage rates noticeably Friday. However, stronger than expected readings will likely raise optimism about the economy, pushing stocks and mortgage rates higher.
Overall, Friday is the most important day of the week due to the significance of the Employment report. Tomorrow may be interesting also as the markets continue to react to the situation with Iran and any new escalations or retaliation that may come. The calmest day for rates is likely to be Thursday unless something unexpected happens. The Iran situation has oil prices spiking higher, which can negatively affect stocks. Generally speaking, what is bad news for stocks is good news for bonds and mortgage rates. That means we should not be surprised to see stock selling that helps push bond yields and mortgage rates lower this week.