Wednesday’s bond market has opened up sharply after this morning’s key economic data showed surprisingly weak results. The stock markets are reacting negatively to the data, pushing the Dow lower by 158 points and the Nasdaq down by 17 points. The bond market is currently up 24/32 (1.82%), which with yesterday’s afternoon strength should improve this morning’s mortgage rates by approximately .250 – .375 of a discount point if comparing to Tuesday’s morning pricing.
The Commerce Department gave us this morning’s big news with the release of December’s Retail Sales report at 8:30 AM ET. They announced that retail-level sales fell a whopping 0.9% last month compared to analysts’ expectations of a 0.1% increase. Even a secondary reading that excludes more volatile auto transactions came in much weaker than forecasts (-1.0% vs +0.1%). This means consumers spent much less last month than many had thought and down considerably from November’s levels. That is clearly favorable news for the bond and mortgage markets because it points towards a softening economy here in the U.S.
We have two events that have the potential to affect afternoon bond trading and mortgage rates later today. The first is the results of today’s 30-year Bond auction at 1:00 PM ET. Yesterday’s 10-year Note sale went fairly poorly with several indicators we use to gauge investor demand showing a weak level of interest in the securities. That doesn’t give us much to be optimistic about in today’s sale, although the bond market still seemed to improve after results were posted yesterday. This may mean we could be buffered if today’s sale draws similar results, especially with this morning’s major economic data working heavily in our favor.
The Federal Reserve’s Beige Book will also be posted during afternoon hours. 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. Any reaction to the report though will come after its 2:00 PM ET posting.
Tomorrow has two pieces of economic data set for release at 8:30 AM ET, but one is much more important than the other. December’s Producer Price Index (PPI) is the first and more likely to affect mortgage rates than the second. The PPI is important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. Analysts are expecting to see a 0.4% decline in the overall reading and a 0.1% increase in the more important core reading that excludes volatile food and energy prices. A larger than expected increase in the core reading could mean higher mortgage rates tomorrow since inflation is bad news for the bond market. It erodes the value of a bond’s future fixed interest payments, making them less attractive to investors. Accordingly, they are sold at a discount to offset the drop in value, which drives their yields higher. And since mortgage rates follow bond yields, rising inflation usually translates into higher interest rates for borrowers.
The second release is the weekly unemployment update that is expected to show 290,000 new claims for unemployment benefits were filed last week. That would be a small decline from the previous week’s 294,000 initial claims, indicating the employment sector strengthened slightly last week. The higher the number of new claims, the better the news it is for bonds and mortgage rates because rising claims indicates a softening employment sector.