This Week's Market Commentary

This week brings us the release of seven economic reports to be concerned with in addition to some very important testimony from Fed Chairman Bernanke and two potentially relevant Treasury auctions. One of the reports is considered to be very important, but nearly all of the week's releases have the potential to affect mortgage rates. There is nothing scheduled for release Monday, so we can expect to see the stock markets and talks of the upcoming automatic budget cuts drive bond trading and changes to mortgage rates until we get to the week’s major events Tuesday.

The first piece of data is January's New Home Sales report at 10:00 AM ET Tuesday morning. This is the least important report of the week, and is the sister report to last week's Existing Home Sales data. They measure housing sector strength and mortgage credit demand, but usually do not have a significant impact on bond trading or mortgage rates unless they show significant surprises. This report is expected to show an increase in sales, hinting at strength in the new home portion of the housing sector. Ideally, the bond market would prefer to see housing sector weakness because it makes a broader economic recovery more difficult.

Tuesday also brings us the release of February's Consumer Confidence Index (CCI) during late morning trading. This Conference Board index measures consumer confidence in their personal financial situations, giving us a measurement of consumer willingness to spend. If consumers are feeling good about their own financial situations, they are more apt to make large purchases in the near future. Since consumer spending makes up over two-thirds of the economy, related data is considered important in terms of gauging economic activity. It is expected to show an increase in confidence from 58.6 in January to 62.0 this month. A lower reading would be considered good news for bonds and mortgage rates since it would indicate consumers are less likely to make a large purchase in the near future.

Fed Chairman Bernanke will deliver the Fed's semi-annual testimony on the status of the economy late Tuesday and Wednesday mornings. He will be speaking to the Senate Banking Committee Tuesday morning and the House Financial Services Committee Wednesday. Market participants will watch his words very closely. He is required to deliver this testimony twice a year, which is considered to be of extreme importance to the financial markets. We almost always see the markets move as a result of what he says during this testimony. Look for him to address the unemployment and housing sectors along with our budget stalemate and their impact on the overall economy. His testimony begins at 10:00 AM ET with a prepared statement then is followed by Q & A with committee members. I am expecting to see the markets fluctuate greatly Tuesday morning, possibly affecting mortgage rates also. The first day of testimony almost always causes the most volatility because the prepared statement made by the Chairman on the second day usually differs little from that of the first day.

January's Durable Goods Orders data will be released early Wednesday morning. This report gives us an important measurement of manufacturing sector strength by tracking orders at U.S. factories for items expected to last three or more years. Products such as electronics, refrigerators and autos are examples of these big-ticket items. A larger decline than the 4.0% that is expected would be good news for the bond market and mortgage rates as it would point towards manufacturing sector weakness. This data is known to be quite volatile from month-to-month, so large swings are fairly normal. A small variance from forecasts would not cause much concern or joy in the markets.

The first of two revisions to the 4th Quarter GDP reading is scheduled for release Thursday morning. Analysts' forecasts currently call for an annual rate of growth of 0.5%, up from the initial estimate of a 0.1% decline that was posted last month. It will be interesting to see where this figure falls and what its impact on the markets will be. Generally speaking, higher levels of activity are bad news for the bond market, while no change or a downward revision would be good news for bonds and could lead to improvements in mortgage pricing Thursday.

Friday has three economic reports scheduled. January's Personal Income and Outlays data will be released at 8:30 AM ET, which gives us an indication of consumer ability to spend and current spending habits. Current forecasts call for a decline in income of 2.4% while spending is expected to rise 0.2%. The expected sizable decline in income is a result of the 2.6% spike we saw last month in December’s data that was attributed to Fiscal Cliff worries. Many large companies paid dividends and bonuses in December instead of January as they traditionally do in case the Fiscal Cliff issue did not get resolved. This allowed those payments to be taxed at the expected lower rates of 2012 instead of the 2013 rates that would have kicked in had there been no resolution. This means that we will see income fall sharply from December’s inflated level. Lower levels of income men consumers have less money to spend. And weaker levels of consumer spending helps limit overall economic growth, making long-term securities, such as mortgage-related bonds, more attractive to investors.

The University of Michigan's revision to their Index of Consumer Sentiment for February will be announced just before 10:00 AM ET Friday. Current forecasts show this index unchanged from its preliminary estimate of 76.3. This index is fairly important because it helps us measure consumer confidence that translates into consumer willingness to spend, but is not considered to be a major market mover. This means it will probably not have a significant impact on mortgage rates, especially with other important data being released Friday morning.

The Institute for Supply Management (ISM) will release their manufacturing index for February late Friday morning. This index measures manufacturer sentiment and can have a pretty large impact on the financial and mortgage markets if it varies from forecasts. It is expected to show a small decline from January's 53.1 to 52.4 this month. This is important because a reading above 50.0 means more surveyed manufacturers felt business improved during the month than those who felt it had worsened, meaning growth is likely in the manufacturing sector. If we see a weaker than expected reading, the bond market could rally. But, a higher than forecasted reading could lead to major selling in bonds, causing mortgage rates to rise Friday morning. One of the reasons this data is considered so important is the fact that it is usually the first monthly report posted that covers the preceding month. Its posting data is the first business day of the month, allowing for a current snapshot of economic conditions.

In addition to this week's economic reports, there are two relatively important Treasury auctions that may also influence bond trading enough to affect mortgage rates. There will be an auction of 5-year Notes Tuesday and 7-year Notes on Wednesday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. However, strong sales usually make bonds more attractive to investors and bring more funds into bonds. The buying of bonds that follows usually translates into lower mortgage rates.

Overall, I am expecting Tuesday to be the most important day with a couple of economic reports, the first relevant Treasury auction of the week and the first day of Chairman Bernanke’s testimony all scheduled. Friday’s data is considered highly important, so we may see a fair amount of movement in the markets and mortgage pricing that day also. We will also be watching progress on the automatic budget cuts that are scheduled to take effect Friday (March 1st) and the major stock indexes (Dow at 14,000) for direction of mortgage rates. There is little doubt that this will be an extremely active week in the markets and likely mortgage rates too. Therefore, please proceed cautiously if still floating an interest rate and closing in the near future.

This Week's Market Commentary

This week brings us the release of only three pieces of monthly economic data that is relevant to mortgage rates in addition to two Treasury auctions. One of the economic reports is considered highly important to the markets, but the others are not likely to be market movers. We still could see a fair amount of movement in mortgage rates though, especially if stocks make a sizable move upward or downward.

Nothing of concern is due Monday or Tuesday morning, leaving bond trading to be driven by the stock markets the first part of the week. If the major stock indexes move higher, we will probably see funds move away from bonds and into stocks. This would lead to higher mortgage rates as bond prices and yields move in opposite directions. Mortgage rates tend to follow bond yields, so we prefer to see bond prices go up, pushing rates lower.

The week's first release is one of the more important ones we get each month. The Commerce Department will post January's Retail Sales data early Wednesday morning. This report is very important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched quite closely. If Wednesday's report reveals weaker than expected retail-level sales, the bond market should thrive and mortgage rates will fall since it would be a sign that the economy is not as strong as many had thought. However, a stronger reading than the 0.1% increase that is expected could lead to higher mortgage rates Wednesday.

January's Industrial Production data will be released mid-morning Friday. It gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities and can have a moderate impact on the financial markets. Analysts are expecting to see a 0.2% increase in production from December to January. A decline in output would be good news and should push bond prices higher, lowering mortgage rates Friday.

February's preliminary reading to the University of Michigan's Index of Consumer Sentiment will be released late Friday morning. This index measures consumer willingness to spend and also usually has a moderate impact on the financial markets. If it shows an increase in consumer confidence, the stock markets may move higher and bond prices could fall. It is currently expected to come in at 73.5, down slightly from January's final reading of 73.8. That would indicate consumers were a little less optimistic about their own financial situations than last month and are less likely to make large a purchase in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, this would be considered slightly favorable news for bonds and mortgage pricing.

The two important Treasury auctions come 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 an 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 the days of the auctions. 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 likely result in upward afternoon revisions to mortgage rates.

Overall, I believe we will see the most movement in rates the middle part of the week. There is a small improvement waiting for Monday's open if your lender did not improve pricing Friday afternoon when the bond market strengthened during late trading. The Dow closed just under 14,000 Friday, so we will also be watching it for an indication of bond movement. I believe that failure to break above that level could mean a downward leg in stocks that would boost bond prices and improve mortgage rates. I see Wednesday as the likely candidate for the most important day and Tuesday being the least active, assuming stocks remain calm most of the week. However, despite it being a relatively light week in terms of economic releases, I still recommend maintaining contact with your mortgage professional of still floating an interest rate. 

This Week's Market Commentary

There are only three pieces of monthly economic data scheduled for release this week. None of them are considered to be highly important, so we don't have much to pin our hopes on or to be concerned with this week. This could help give the mortgage market a chance to breathe a little. While that would normally not be something to look forward to, it should be welcomed news following the beating mortgage rates have taken over the past couple weeks.

December's Factory Orders data is the first piece of data, scheduled to be posted at 10:00 AM ET tomorrow. It is similar to last week's Durable Goods Orders release in giving us a measurement of manufacturing sector strength, but this data includes new orders for both durable and non-durable goods. It is not one of the more important reports we get each month, however, it can influence mortgage pricing if it varies greatly from forecasts. Analysts are expecting a 2.4% increase in new orders, indicating manufacturing sector strength. The bond market would like to see a much smaller increase, meaning that manufacturing activity was not as strong as many had thought.

Employee Productivity and Costs data for the 4th quarter will be released early Thursday morning. It can cause some movement in the bond market, but should have a minimal impact on mortgage pricing. If the productivity reading varies greatly from analysts' forecasts of a 1.2% decline, we may see some movement in mortgage rates. Higher levels of worker productivity is good news for the bond market because it allows the economy to expand while keeping inflation subdued. On the other hand, bond traders would prefer to see the labor costs reading decline to limit wage inflation concerns.

The third and final report of the week is December's Goods and Services Trade Balance data early Friday morning. This report measures the U.S. trade deficit and can affect the value of the U.S. dollar versus other currencies, but it usually does not cause enough movement in bond prices to affect mortgage rates. It is expected to show a $45.4 billion trade deficit.

Overall, I am expecting a much calmer week in the mortgage market than we have seen the past couple. With little economic data to drive bond trading, look for the stock markets to play a major role in bond movement and mortgage rate changes. If the major stock indexes extend their recent rally that closed the Dow above 14,000 Friday for the first time since Oct 2007, we could see bond prices fall and their yields move further above 2.00%. Since mortgage rates tend to follow bond yields, this would be bad news for mortgage shoppers. However, if stocks fall from current levels, we should see bond prices rise and mortgage rates move lower this week.