MARKET COMMENT Mortgage bond prices started the week in negative territory. The ADP employment report was significantly stronger than expected sending rates higher. There were few data releases. Stocks started the New Year generally stronger, which added to the losses in bonds. The employment report was mixed and the initial reaction Friday morning was muted.
Mortgage bonds ended the week negative by about 1/8 of a discount point.
The US Treasury will auction $32b in 3-year notes on Tuesday, $21b in 10-year notes on Wednesday, and $13b in 30-year bonds on Thursday. These auctions along with the inflation data this week are likely to set the tone for trading.
- Fed “Beige Book”; Jan. 12; None; Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
- Weekly Jobless Claims; Jan. 13; Consensus Estimate 420k; Important. An indication of employment. Higher claims may result in lower rates.
- Producer Price Index; Jan. 13; Consensus Estimate Up 0.7%, Core up 0.1%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
- Trade Data; Jan. 13; Consensus Estimate $40b deficit; Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
- Consumer Price Index; Jan. 14; Consensus Estimate Up 0.4%, Core up 0.1%; Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
- Retail Sales; Jan. 14; Consensus Estimate Up 0.9%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
- Industrial Production; Jan. 14; Consensus Estimate Up 0.4%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
- Capacity Utilization; Jan. 14; Consensus Estimate 75.3%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower mortgage interest rates.
- U of Michigan Consumer Sentiment; Jan. 14; Consensus Estimate 75; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
EMPLOYMENT RESULTS The December employment report came in mixed with the headline rate surprising lower and the jobs figure also lower. Fortunately we had some gains heading into the release and rates were able to improve following the report. Unemployment came in at 9.4%, considerably better than the 9.7% rate and not bond friendly. However, the payrolls component showed jobs increased 103,000 compared to the 150,000 increase expected by analysts. The mortgage bond market had a positive reaction to the report.
The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor compiles data from two different surveys that they conduct, the household survey and the establishment survey, in order to complete the employment report. This explains why sometimes there is an unexpected divergence between the unemployment rate and payrolls figures each month. The payrolls figure usually receives the greater weight from analysts but the headline figure covers the news headlines.