weeks commentary

This Week’s Market Commentary
This week is packed with economic reports and other events that are relevant to bond trading and mortgage rates. There are eight pieces of monthly or quarterly economic data scheduled with at least one being posted each day. In addition to those reports, there is also a two-day FOMC meeting and a couple of Treasury auctions that have the potential to affect bond trading enough to slightly move rates.

The first report of the week is December’s Durable Goods Orders at 8:30 AM ET Monday morning. This data helps us measure manufacturing strength by tracking new orders at U.S. factories for products that are expected to last three or more years, also known as big-ticket items. The data is known to be quite volatile from month- to-month, but is currently expected to show an increase in orders of approximately 1.6%. A smaller than expected increase would be considered good news for bonds and mortgage rates, but a slight variance likely will have little impact on Monday’s mortgage pricing.

Tuesday also has only one report scheduled for release that is relevant to mortgage rates. That would be January’s Consumer Confidence Index (CCI) at 10:00 AM ET. This report is considered to be of moderate to high importance to the bond market and therefore can move mortgage rates if it shows any surprises. It is an indicator of consumer sentiment, which is important because waning confidence in their own financial situations usually means that consumers are less willing to make large purchases in the near future. Because consumer spending makes up over two-thirds of the U.S. economy, market participants are very attentive to related data. Analysts are expecting to see little change from December’s reading, indicating consumer confidence was flat. A reading much smaller than the expected 65.1 would be ideal for the bond market and mortgage rates. A higher reading than forecasts would hint that consumers are more likely to spend in the immediate future, fueling economic growth and possibly pushing mortgage pricing higher Tuesday.

Wednesday brings us one of the most important economic reports we regularly see in addition to the FOMC meeting results. The 4th Quarter Gross Domestic Product (GDP) will be posted early Wednesday morning. This data is so important because it is considered to be the best measurement of economic activity. The GDP itself is the total sum of all goods and services produced in the United States. Its results usually have a major impact on the financial markets and can cause significant changes in mortgage rates. There are three readings to each quarter’s activity, each released approximately one month apart. Last quarter’s first reading, which usually carries the most significance, is expected to be an increase of 1.0%. A noticeably weaker reading would be great news for the bond market, questioning the pace of the economic recovery. That would likely fuel stock selling and a rally in bonds that would push mortgage rates lower Wednesday morning. However, a stronger than expected reading should fuel bond selling and lead to higher mortgage rates.

This year’s first FOMC meeting that begins Tuesday will adjourn Wednesday at 2:15 PM ET. It is expected to yield no change to short-term interest rates, but as is often the case, traders will be looking for any indication of the Fed’s change in sentiment about the economy and when a potential change to short-term rates will be made or an adjustment to their current stimulus programs. There has been some rumors and talk of the Fed possibly ending or easing their bond buying programs earlier than previously thought. That is a topic that traders will be looking for in the post-meeting statement and could cause volatility in the markets during afternoon trading if it is addressed by Mr. Bernanke and friends.

Thursday morning is the first day of the week with multiple economic reports scheduled that are expected to influence mortgage rates. The first is December’s Personal Income and Outlays data early Thursday morning, which gives us an indication of consumer ability to spend and current spending habits. As with Tuesday’s CCI, this report is important because it is related to consumer spending. Current forecasts call for an increase in income of 0.7% meaning consumers had more money to spend in December than they did on November. The spending reading is expected to rise 0.3%, indicating consumers spent a little more last month than the previous month. Larger increases would be good news for the stock markets and could hurt bond prices, driving mortgage rates higher. Smaller than expected increases would be considered good news for the bond market and mortgage rates.

The second release of the day will be the 4th Quarter Employment Cost Index (ECI). This index measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. If wages are rising, consumers have more money to spend and businesses usually need to charge more for their products and services. The report is considered moderately important and usually has more of an effect on the bond market than the stock markets. Current forecasts are showing an increase of 0.5%. A lower than expected reading would be favorable to bonds and mortgage rates Thursday, but unless we see a large variance from forecasts I am not expecting this report to cause much movement in rates.

And that leaves Friday. The week closes with the final three pieces of economic data on this week’s calendar, two of which are considered extremely important to the financial and mortgage markets. It begins with the release of the almighty monthly Employment report at 8:30 AM ET. The Labor Department will post January’s Employment data, giving us the U.S. unemployment rate and the number of jobs added or lost during the month among other related statistics. Analysts are expecting to see the unemployment rate slip 0.1% to 7.7% and that approximately 183,000 new jobs were added to the economy. An increase in unemployment and a much smaller increase in payrolls would be great news for the bond market. It would probably create a bond rally, leading to lower mortgage rates Friday morning. However, if Friday’s report reveals stronger than expected results, indicating a stronger than thought employment sector, we can expect to see stocks rally and mortgage rates move noticeably higher.

The second report of the day is the revised reading to the University of Michigan’s Index of Consumer Sentiment just before 10:00 AM ET Friday. This index is another measurement of consumer confidence that is thought to indicate consumer willingness to spend. I don’t see this data having much of an impact on the markets or mortgage rates due to the importance day’s other reports.

Friday’s final report is also extremely important to the markets. It will be released at 10:00 AM when the Institute of Supply Management (ISM) posts their manufacturing index for January. This index tracks manufacturer sentiment by rating surveyed trade executives’ opinions of business conditions. It is usually the first economic data released each month and is one of the very important reports we get each month. Current forecasts are calling for a reading in the neighborhood of 50.5, which would be a slight decline from December’s reading. The lower the reading, the better the news for the bond market and mortgage rates because weak sentiment indicates a slowing manufacturing sector.

And if we didn’t have enough to watch already, there are two relatively important Treasury auctions for the markets to digest. The Fed will auction 5-year and 7-year Treasury Notes Tuesday and Wednesday, respectively. If they are met with a strong demand from investors, the broader bond market may improve during afternoon hours those days. If the sales draw a lackluster interest, they could lead to bond selling and higher mortgage rates mid-afternoon Tuesday and Wednesday.

Overall, it is difficult to say exactly which day will probably have the most movement in mortgage rates, but Wednesday and Friday are certainly the best candidates. Wednesday has the GDP and FOMC meeting while Friday’s agenda includes two highly important releases in the Employment and ISM reports. Monday, Tuesday and Thursday are all equally important for mortgage rates. Mondays are often calmer than other days many weeks. However, with last Friday’s bond selling extending into the close of trading, you have approximately a .250 of a discount point increase in rates waiting before Monday’s open if your lender did not revise pricing higher Friday afternoon. That, coupled with a fairly important manufacturing report being released means we can’t automatically label it as the least important day by default. There is little doubt that we will see plenty of volatility in the financial markets and mortgage rates the next five days, so I highly recommend maintaining contact with your mortgage professional if still floating an interest rate.