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.
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