Updated on January 14, 2021 10:11:24 AM EST
Yesterday’s 30-year Treasury Bond auction followed suit of Tuesday’s 10-year Note sale, drawing a strong demand from investors. That helped to fuel another afternoon rally in bonds and some lenders to revise rates lower before closing. Those intraday revisions were not nearly as widespread as Tuesday afternoon, but the move was enough for some lenders to make a move. The others will reflect those gains in this morning’s pricing.
Also yesterday afternoon was the release of the Federal Reserves Beige Book that revealed modest economic growth the last part of the year. Contacts reported the spike in COVID cases and restrictions related to it led to a slowdown. None of this came as a surprise to the markets though. Accordingly, it didn’t have a heavy impact on bond trading or mortgage pricing.
This morning’s release of last week’s unemployment figures showed that new claims for benefits jumped to 965,000, up from the previous week’s revised 784,000 and much higher than expectations. The increase is a sign that the employment sector is weakening further, casting doubt on progress of the economic recovery. Because bonds tend to thrive in weaker economic conditions, we can consider this data favorable for the bond market and mortgage rates.
Tomorrow closes the week with four economic reports for the markets to digest, including one that is extremely important. The day will start with that particularly important release- December’s Retail Sales report at 8:30 AM ET. This data tracks consumer spending, which makes up over two-thirds of the U.S. economy. Current forecasts are calling for a 0.2% decline in sales, hinting at weaker economic activity. Analysts are also calling for the same decline in sales in more volatile auto transactions are excluded. Stronger than expected sales would be considered bad news for bonds and likely lead to an increase in mortgage pricing since it would indicate economic growth. Favorable news for rates would be a larger decline.
Next up is Decembers Producer Price Index (PPI), also at 8:30 AM ET. The PPI is the sister release to yesterday’s CPI but measures inflation at the producer or manufacturing level of the economy. Market participants are expecting to see a 0.3% rise in the overall reading and a 0.2% rise in the core reading. A larger than expected increase in the core reading could mean higher mortgage rates since strengthening inflation is bad news for the bond market. It erodes the value of a bonds future fixed interest payments, making them less appealing to investors and also allows the Fed to be more aggressive with rate hikes once the economy recovers.
Decembers Industrial Production report is scheduled for 9:15 AM ET tomorrow. This data measures output at U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength or weakness. Current forecasts are calling for an increase in production of 0.4% from Novembers level. A decline in output would be considered good news for bonds and could help lower mortgage rates as it would point towards a manufacturing sector that was softer than many had thought.
The final report of the week is Januarys preliminary reading to the University of Michigans Index of Consumer Sentiment at 10:00 AM ET that measures consumer willingness to spend. It can usually have enough of an impact on the financial markets to slightly change mortgage rates. By theory, if consumers feel better about their own financial and employment situations, they are more apt to make a large purchase in the near future, fueling economic growth. Forecasts are calling for a reading of 80.0, down from Novembers 80.7. The lower the reading, the better the news it is for bonds and mortgage rates.
©Mortgage Commentary 2021