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Our Weekly Mortgage Market Commentary

February 13th, 2017

This week brings us the release of six monthly economic reports that have the potential to influence mortgage pricing. Some of those releases are considered to be highly important to the financial and mortgage markets. In addition to the data, we also have a couple of Fed congressional events that will draw much attention. Therefore, we can expect to see an active week for mortgage rates, particularly the middle days.

The week's calendar starts early Tuesday morning when the Labor Department releases their Producer Price Index (PPI) for January. This index measures inflationary pressures at the producer level of the economy and is considered to be one of the key measures of inflation we see each month. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. It is expected to show an increase of 0.3% in the overall reading and a 0.2% 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.

Fed Chair Janet Yellen will deliver the Fed’s semi-annual testimony on the status of the economy late Tuesday and Wednesday mornings. She will be speaking to the Senate Banking Committee Tuesday morning and the House Financial Services Committee Wednesday. Market participants will watch her words very closely. The Fed 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 is said during this testimony. Look for her to address our employment situation, inflation, stock gains and global political/financial issues and their impact on our economy. Her testimony begins at 10:00 AM ET with a prepared statement which is then followed by Q & A with committee members. Her prepared words are expected to be released prior to her appearance, so we could see a reaction early Tuesday morning. I am expecting to see the markets fluctuate Tuesday morning, possibly affecting mortgage rates also. The first day of testimony usually causes the most volatility because the prepared statement made by the Chairperson on the second day often differs little from that of the first day.

Besides day two of the Fed testimony, Wednesday also has three economic reports that are likely to affect mortgage rates. The first is one of the more important ones we get each month. The Commerce Department will post January’s Retail Sales data early Wednesday morning. It 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 morning.

Also at 8:30 AM ET will be the release January’s Consumer Price Index (CPI. The difference between the CPI and PPI is that the CPI measures inflationary pressures at the more important consumer level of the economy. Its results can have a significant impact on the financial markets, especially on long-term securities such as mortgage-related bonds. Inflation isn’t exactly a concern currently, but there are many that feel the Fed’s monetary policy decisions are going to fuel rapid inflation down the road, so analysts still track the readings closely. Current inflation readings will also influence the Fed’s decisions regarding rate increases. The report is expected to show a 0.2% increase in the overall index and a 0.2% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall, assuming the Retail Sales report doesn't show surprise results.

January’s Industrial Production data will be released mid-morning Wednesday. It helps us measure 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 no change in production levels from December to January. A decline in output would be good news and should help push bond prices higher, helping to lower mortgage rates Wednesday.

Next up is January’s Housing Starts early Thursday morning. This report gives us an indication of housing sector strength and mortgage credit demand by tracking new housing construction starts. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for little change 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.

The final report of the week will be January's Leading Economic Indicators (LEI) at late Friday morning. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.5% increase, meaning that economic activity should expand 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.

Overall, Tuesday is the most important day of the week due to day one of the Fed's semi-annual testimony to congress and the PPI. Wednesday also has a good chance of being an overly active day for mortgage rates because of the importance of the data being released. The calmest day could be Friday. With so many highly important events scheduled this week, it would prudent to maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.

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