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Wednesday’s bond market has opened in negative territory again due to another round of stronger than expected economic data. The stock markets are showing strong gains with the Dow up over 100 points and the Nasdaq up 27 points. The bond market is currently down 8/32, which with yesterday’s afternoon weakness should push this morning’s mortgage rates higher by approximately .250 – .375 of a discount point over yesterday’s morning pricing. Many lenders revised rates higher Tuesday afternoon, so if your lender did repost rates, you may see a small increase this morning.
The Labor Department announced early this morning that December’s Producer Price Index (PPI) rose 0.4% while the core data rose 0.3%. The core reading is the more important of the two because it excludes more volatile food and energy prices. Both readings were higher than expected as analysts were calling for increases of 0.3% and 0.1% respectively. That indicates inflationary pressures at the producer level of the economy were stronger than thought, although a large portion of the rise in the core reading was caused simply by a spike in tobacco costs. Still, the data is negative for the bond market and mortgage rates because it points towards rising inflation that devalues long-term securities such as mortgage-related bonds.
We also have the Federal Reserve’s Beige Book report to watch for this afternoon. This report is named simply after the color of its cover and details economic conditions throughout the U.S. by Fed region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises, particularly regarding inflation, unemployment or future hiring. It also could be a non-factor in the markets if it shows little changes from its last update. Since it won’t be released until 2:00 PM ET, any reaction to the report will come during afternoon trading.
Tomorrow has two pieces of economic data set for release, but one is much more important to the markets than the other. The very important report is December’s Consumer Price Index (CPI) at 8:30 AM. This is one of the most important monthly reports for the bond market each month since it measures inflationary pressures at the consumer level of the economy. As with today’s PPI, there are two readings in the release. The overall index is expected to increase 0.3% while the core data rose 0.2%. Weaker than expected readings would be favorable news and could lead to bond strength and lower mortgage rates tomorrow morning.
The second report is the weekly unemployment update from the Labor Department, also at 8:30 AM ET. They are expected to announce that 333,000 new claims for unemployment benefits were filed last week, up a little from the 330,000 of the previous week. The higher the number of initial claims, the better the news for the bond market and mortgage rates as it would indicate employment sector weakness. Although, it usually takes a large variance from expectations for the report to directly influence mortgage rates since it tracks only a single week’s worth of new claims.