Market Commentary for the Week of Christmas

This week brings us the release of four pieces of monthly economic data that are considered relevant to mortgage rates. It is a holiday-shortened week with the financial markets closing early Tuesday and remaining closed Wednesday in observance of Christmas. None of the week’s data is considered key, but some of it does carry enough importance to affect mortgage pricing. All of the important reports come the first part of the week, so we should see the most movement before the holiday.

The first report of the week is November’s Personal Income and Outlays data at 8:30 AM ET Monday. It will give us an important measurement of consumer ability to spend and current spending habits. Since consumer spending makes up over two-thirds of the U.S. economy, any related data usually has a noticeable impact on the financial markets and mortgage rates. Current forecasts are calling for a 0.5% increase in income and a 0.5% increase in spending. If this report reveals weaker than expected readings, we should see the bond market improve and mortgage rates drop slightly Monday morning. We already have an improvement of approximately .125 – .250 of a discount point waiting if your lender did not revise lower Friday afternoon. So even a miss in this data likely will not be enough for rates to come in higher than Friday’s morning pricing.

Monday also has the revised University of Michigan Index of Consumer Sentiment for December just before 10:00 AM ET. Current forecasts are calling for an upward revision from the preliminary reading of 82.5. This is a fairly important index because rising consumer confidence indicates that consumers feel better about their own financial and employment situations, meaning they be more apt to make large purchases in the near future. A reading above the 83.3 that is forecast would be negative for bonds and mortgage rates while a large decline would be favorable.

The remaining two monthly reports are set for release Tuesday morning. November’s Durable Goods Orders is the first at 8:30 AM ET. This data gives us an important measurement of manufacturing sector strength by tracking orders for big-ticket items or products that are expected to last at least three years such as appliances, airplanes and electronics. Analysts are expecting the report to show a 2.2% rise in new orders. A decline in new orders would indicate that the manufacturing sector was weaker than many had thought. This would be good news for the bond market and should drive mortgage rates lower. However, a much larger jump in orders could lead to mortgage rates moving higher early Tuesday morning. This data is known to be quite volatile from month-to-month though, so it is not unusual to see large headline numbers on this report.

November’s New Home Sales data is the second report of the day and the final monthly report we need to watch this week. It will give us a measurement of housing sector strength and mortgage credit demand. It is the sister report of last week’s Existing Home Sales report, but covers a much smaller portion of the housing market than that one did. A weakening housing sector is considered good news for the bond market and mortgage rates because broader economic growth is less likely in the immediate future. Since bonds tend to thrive in weaker economic conditions, a large decline would be considered favorable for bond prices and mortgage rates. Current forecasts are calling for a decline in sales of newly constructed homes. Ideally, we would like to see a large drop in sales.

Overall, I believe we saw an important move in bonds Friday morning that could be a good sign for mortgage shoppers. As predicted, the 10-year Treasury Note yield finally hit 2.95% Friday before moving away and closing at 2.89%. It appeared that the 2.90 – 2.95% levels were important in predicting mortgage rate direction and needed to be hit before we could expect a noticeable downward move in yields and rates. With the next two weeks including trading holidays, we cannot necessarily rely on movement some of those days to be an accurate reflection of longer-term trends. However, we will be watching trading closely for any sign of concern that would alter that prediction. Stay tuned for further updates on rate direction.