This week brings us the release of only four pieces of relevant 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.
The first report is January's Producer Price Index (PPI) at 8:30 AM ET Wednesday. It is the sister report to last week's Consumer Price Index but measures inflationary pressures at the producer level of the economy. As with the CPI, there are two headline readings. The core data is more important to market participants than the overall reading because it excludes more volatile food and energy prices. They are expected to show an increase of 0.1% 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.
Next up is January's Housing Starts, also early Wednesday morning. This report gives us an indication of housing sector strength and mortgage credit demand by tracking new housing groundbreakings. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for a large decline in construction starts of new housing. A weak housing sector makes broader economic growth less likely in the near future, which makes bonds more attractive to investors. Therefore, the smaller the number of starts, the better the news it is for mortgage rates.
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, which is currently expected to keep key short-term interest rates unchanged for the foreseeable future. Comments and discussion amongst Fed members could be helpful to shape trader opinions on when the Fed may act next. The Fed’s next move may not be adjusting short-term rates. It could be making changes to their balance sheet and the amount of bonds they buy each month or let roll off when the security matures. The minutes will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading Wednesday. These minutes may lead to afternoon volatility, or they may be a non-factor. However, they do carry the potential to influence mortgage rates, so they should be watched.
Thursday’s sole monthly release will be January's Leading Economic Indicators (LEI) at 10:00 AM ET. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.3% increase, meaning that economic activity should expand moderately in the near future. A smaller increase would be good news for the bond market and mortgage rates. This data is not considered to be highly important, so a sizable variance from forecasts is needed for it to directly affect mortgage rates.
January's Existing Home Sales report by the National Association of Realtors will close out this week’s calendar late Friday morning. Because this data tracks home resales throughout the country, giving us another 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, Wednesday is the best candidate for most important day of the week for mortgage rates. The calmest day may be Thursday due to the possibility of seeing movement Tuesday following the long weekend. Corporate earnings season is winding down, removing one heavy influence on stocks that can cause bonds to react. The coronavirus headlines are getting repetitive from the market’s perspective, at least until its impact on the global economy becomes clearer. These factors should keep bonds a bit calmer for the immediate future than we have seen recently. That doesn’t mean that we won’t see movement in rates this week, just that the chance of seeing a volatile week is minimal unless something unexpected happens.