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More Monetary and Fiscal Stimulus – March 2020 Edition

Tuesday, March 31st, 2020

Once again, the coronavirus dominated financial market news this week. Both the Fed and the government are taking unprecedented actions to support the economy. Daily volatility remained extremely high, but the net change in mortgage rates for the week was relatively small.

On Monday, the Fed announced that it will purchase bonds “in the amounts needed” to support the economy and the smooth operation of financial markets. In short, this means that there is no limit to the size of the Fed’s purchasing power. Since agency mortgage-backed securities (MBS) are on the list of types of bonds that it will buy, this was positive news for mortgage rates.

As of Friday morning, the Senate had passed a massive $2 trillion fiscal stimulus relief package and a vote in the House is expected soon. This will provide some much needed relief to individuals and businesses, especially in the hardest hit areas. The supply of Treasuries issued by the government will increase to fund the spending, though, so this was negative for mortgage rates, roughly offsetting the news from the Fed.

The latest report showed that core inflation has been holding steady below the Fed’s target rate of 2.0%, and slowing economic activity due to the epidemic is expected to cause further declines. In February, the core PCE price index, which excludes the volatile food and energy components, was just 1.8% higher than a year ago.

Looking ahead, the coronavirus will remain the main focus. Investors will be watching for news about additional Fed actions or government fiscal stimulus programs. The major economic data is expected to reflect the negative impact of the epidemic to a greater degree. The monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

Weekly Change
10yr Treasury fell 0.10
Dow rose 2,500
NASDAQ rose 700
Calendar
Tue 3/31 Consumer Confidence
Thu4/2 ISM Manufacturing
Fri4/3 Employment

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Central Banks Actions Expand – March 2020 Edition

Monday, March 23rd, 2020

Once again, the coronavirus dominated financial market news this week and caused extraordinary daily movements. For the second straight week, mortgage rates rose roughly one-half percent, meaning that they are now about one percent above the record low levels reached earlier this month.

Mortgage rates have increased over the last couple of weeks for two main reasons. First, many investors simply want to hold large amounts of cash during this period of uncertainty, so they are selling nearly every type of asset including mortgage-backed securities (MBS). The situation for MBS is amplified by the large amount of new issuance due to the recent surge in mortgage activity. The Fed has stepped in as a massive buyer, but supply still has been exceeding demand lately. In addition to bond purchases, global central banks have announced many other special operations to help address temporary strains in financial markets.

The second reason that investors may be reluctant to buy bonds is that government fiscal stimulus relief programs under consideration may add trillions of dollars to the budget deficit. This which would be funded by increased issuance of Treasury securities, and a larger supply of bonds would push yields higher.

The recently released economic data continued to show that the housing market had been performing very well prior to the epidemic. In February, sales of existing homes exceeded expectations with an increase of 7% from January to the highest level since February 2007. National median existing-home prices were up 8% from a year ago. The number of homes for sale was at just a 3.1-month supply nationally and was 10% lower than a year ago.

Looking ahead, the coronavirus will remain the main focus for investors. Daily announcements of special operations from the Fed and other global central banks are likely to continue, and investors will be watching for news about government fiscal stimulus relief programs. The major economic data will begin to reflect the negative impact of the epidemic to a greater degree.

Weekly Change
10yr Treasury rose 0.05
Dow fell 3,000
NASDAQ fell 700
Calendar
Tue3/24 New Home Sales
Wed3/25 Durable Orders
Fri3/27 Core PCE

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Historic Week – March 2020 Edition

Tuesday, March 17th, 2020

Once again, the coronavirus dominated financial market news this week and caused nearly unprecedented daily movements. While stocks posted enormous losses, bonds lost some of their appeal as an alternative, and mortgage rates rose roughly one-half percent from recent record low levels.

Since the outbreak of the coronavirus, investors generally have reduced risk in their portfolios by selling stocks and buying bonds, including mortgage-backed securities (MBS). This added demand for MBS helped mortgage rates decline. The heavy selling in the stock market continued this week, but it appears that many investors are hesitant to purchase bonds at current low yields and are instead choosing to let assets remain in cash. Part of the reluctance to buy them is due to expectations for additional government fiscal stimulus (see below), which would be funded by increased issuance of Treasuries. A larger supply of bonds would push yields higher.

Economists widely agree that the appropriate response to help offset the economic effects of the coronavirus involves both fiscal stimulus from governments and monetary stimulus from central banks. While the proposed government action will take some time to implement, global central banks quickly added monetary stimulus this week. The US Fed expanded its bond purchase program and provided much-needed liquidity. The European Central Bank (ECB) held rates steady at Thursday’s meeting but provided additional lending programs to support troubled businesses.

The most significant economic report released this week indicated that core inflation has remained stable in recent months, as expected. The Consumer Price Index (CPI) is a widely followed monthly indicator that looks at the price change for goods and services. In February, core CPI, which excludes the volatile food and energy components, was 2.4% higher than a year ago, up from an annual rate of increase of 2.3% as last month.

Looking ahead, the coronavirus will remain the main focus for investors. The next Fed meeting will take place on Wednesday and investors expect a rate cut. The biggest economic report will be Retail Sales on Tuesday. In addition, news about the US elections could have an influence.

Weekly Change
10yr Treasury rose 0.10
Dow fell 4,000
NASDAQ fell 1,300
Calendar
Tue 3/17 Retail Sales
Wed 3/18 Fed Meeting
Fri 3/20 Existing Home Sales

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Stocks Plunge on Virus Concerns – February 2020 Edition

Friday, February 28th, 2020

Concerns about the coronavirus caused a massive shift to less risky assets this week, while the economic data caused little reaction. As a result, the stock market posted enormous losses, and mortgage rates reached the lowest levels in years.

The reason that the coronavirus has been positive for mortgage rates is pretty straightforward. People have scaled back a wide range of activities such as going to work and traveling, which has slowed global economic activity and reduced the outlook for future inflation. Since no one knows how much more the disease will spread, it is still extremely difficult to forecast the extent of its economic impact. In response to the uncertainty, investors have continued to reduce the level of risk in their portfolios, which has been favorable for relatively safer assets such as mortgage-backed securities (MBS).

The latest report on inflation revealed that it already was holding steady at low levels even before the emergence of the coronavirus. In January, the core PCE price index, which excludes the volatile food and energy components, was just 1.6% higher than a year ago. This is the inflation indicator favored by the Fed, and Fed officials have stated that they would like to see it rise to an annual rate of 2.0%. Low current inflation and the uncertain economic impact of the disease have significantly raised investor expectations for the Fed to cut rates as soon as the next meeting on March 18.

The housing sector was a rare source of good news this week. Helped by the substantial decline in mortgage rates, sales of new homes in January rose far more than expected to the highest level since 2007. Since new home sales measure contracts signed, they are viewed as the most current indicator of housing market activity.

Looking ahead, the coronavirus will remain the main focus for investors. The monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will come out on Monday and the ISM national services index on Thursday. In addition, news about the US elections could have an influence.

Weekly Change
10yr Treasury fell 0.30
Dow fell 4,000
NASDAQ fell 1,200
Calendar
Mon 3/2 ISM Manufacturing
Thu 3/5 ISM Services
Fri 3/6 Employment

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Steady Fed Policy – January 2020 Edition

Monday, February 3rd, 2020

While there was a wide range of important economic news this week, there were no significant surprises. The major economic growth and inflation data came in right on target, and Wednesday’s Fed meeting was in line with expectations. Since it’s still too early to judge the extent of the effects of the coronavirus, a small shift to safer assets helped mortgage rates end near the lowest levels since 2016.

Investors were closely watching the news about the spread of the dangerous new coronavirus this week. For mortgage rates, the main question is how much global economic growth will slow due to decreased travel and other activities. There still is far too much uncertainty to forecast the outcome with a high degree of accuracy, however, so investors generally have continued to reduce the level of risk in their portfolios.

Gross domestic product (GDP), the broadest measure of economic activity, increased 2.1% during the fourth quarter, which was the same growth rate as the third quarter. Early estimates for the first quarter of this year are a little lower, partly due to an expected slowdown from the coronavirus.

The PCE price index, the inflation indicator favored by the Fed, revealed that core inflation was 1.6% higher than a year ago, which was the same annual rate of increase as last month.

As widely expected, the Fed held the federal funds rate steady and its statement released after the meeting was very similar to the prior one. In short, the message still is that Fed policy is unlikely to change any time soon, barring any major new developments to shift the economic outlook. When asked about the coronavirus, Fed Chair Powell reassured investors that officials are closely monitoring the situation but that it is too soon to forecast its ultimate economic impact.

Looking ahead, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will be released on Monday. The ISM national services index also will come out on Friday. In addition, news about the coronavirus, the US elections, or the trade negotiations with China could have an influence.

Weekly Change
10yr Treasury fell 0.15
Dow fell 500
NASDAQ fell 100
Calendar
Mon 2/3 ISM Manufacturing
Fri 2/7 Employment
Fri 2/7 ISM Services

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Focus on New Virus – January 2020 Edition

Monday, January 27th, 2020

The primary influence on mortgage rates this week came from a very unexpected source. Concerns about a new virus spreading in China had a positive impact on rates, while the reaction to the economic data was small. As a result, rates ended the week a little lower.

Last weekend, news stories emerged about the spread of the dangerous new coronavirus in China. As the number of reported cases increased, investors grew more concerned that global economic growth could slow due to decreased travel and export activity in the region. Since slower growth reduces future inflationary pressures, this was positive for mortgage rates.

The most significant economic data released this week came from the housing sector, and lower mortgage rates have helped boost sales activity. In December, sales of previously owned (existing) homes increased more than expected from November and were 11% higher than a year ago. National median existing-home prices were up 8% from a year ago.

A lack of inventory remained a headwind in many regions, as the number of homes for sale fell to just a 3.0-month supply nationally, well below the 6.0-month supply which is considered a healthy balance between buyers and sellers. Inventory is now at the lowest levels since tracking began in 1982.

Thursday’s European Central Bank (ECB) meeting was in line with investor expectations and had little impact on US mortgage rates. As expected, European benchmark rates were held steady. The ECB announced that it will launch the first strategic review of its policy objectives and tools since 2003.

Looking ahead, New Home Sales will be released on Monday. The next Fed meeting will take place on Wednesday. Investors expect that there will be little change in the Fed’s guidance about future policy, but any surprises could affect mortgage rates. First-quarter gross domestic product (GDP), the broadest measure of economic activity, will come out on Thursday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Friday. In addition, news about the coronavirus, the US elections, or the trade negotiations with China could have an influence.

Weekly Change
10yr Treasury fell 0.10
Dow fell 200
NASDAQ rose 25
Calendar
Mon 1/27 New Home Sales
Wed 1/29 Fed Meeting
Thu 1/30 GDP

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Manufacturing Weakens – January 2020 Edition

Tuesday, January 7th, 2020

After dropping more than a full point from the end of October in 2018 to the end of October in 2019, mortgage rates barely changed during November and December. Several factors have affected rates over the past year, including economic data, Fed policy, and the trade negotiations with China.

Overall, recent economic data has suggested that growth in 2020 will continue at a moderate pace, despite some weakness in the manufacturing sector. It has been repeatedly emphasized by Fed officials that Fed policy likely is on hold for a while and that it would take a significant change in economic conditions to adjust the federal funds rate. On the trade front, the US and China have reached a limited “phase one” agreement and appear to have begun the lengthy negotiations over the more difficult issues which remain.

The first significant economic report released this year was a bit disappointing, as the ISM national manufacturing index unexpectedly fell to 47.2, the lowest level since June 2009. Readings below 50 signal a contraction of the sector, and this was the fifth straight month below that level. However, the manufacturing sector has been suffering due to the elevated tariffs and other restrictions resulting from the trade dispute with China, and most investors do not feel that its weakness signals much about the strength of the overall economy.

The biggest surprise for investors in a while was an unexpected increase in tensions with Iran. On Friday, the US launched a drone strike which killed a top Iranian military commander. As usual, investors responded by shifting to relatively safer assets such as bonds while they watch to see if the situation will escalate.

Looking ahead, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national services index and Factory Orders will come out on Tuesday. In addition, news about Iran or the trade negotiations with China could have an influence.

Weekly Change
10yr Treasury fell 0.05
Dow fell 50
NASDAQ rose 25
Calendar
Tue 1/7 ISM Services
Tue 1/7 Factory Orders
Fri 1/10 Employment

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Trade Talks Face Hurdles – November 2019 Edition

Saturday, November 16th, 2019

The trade negotiations with China were the main influence on mortgage rates again this week, but this time they had a favorable impact. The major economic data came in close to the expected levels and caused little reaction. As a result, rates ended the week lower.

Last week, it seemed like the U.S. and China were close to signing a limited “phase one” trade agreement, which reportedly would contain some of the easier concessions for each side to make. This week, however, both sides appear to be dragging their feet over the precise terms of the deal. In particular, China is hesitant to commit to specific levels of U.S. agricultural purchases, while the U.S. seeks better protection of intellectual property. Since tariffs and other restrictions imposed in the trade war have slowed global economic activity, this week’s lack of progress in reaching a deal was positive for mortgage rates.

Friday’s report on retail sales revealed that consumer spending has rebounded from a brief slowdown last month heading into the important holiday shopping season. In October, retail sales rose a solid 0.3% from September, which was slightly stronger than expected and were 3.1% higher than a year ago. The shift in favor of internet shopping continued as online spending showed large gains, while purchases at department stores declined.

The other major economic report released this week indicated that core inflation eased slightly from last month, as expected. In October core CPI was 2.3% higher than a year, down from an annual rate of increase of 2.4% in September.

In testimony to Congress this week, Chair Powell didn’t change the Fed’s recent message that monetary policy likely is on hold for a while. Powell said that there will be no further rate adjustments if the economy performs as expected with modest growth and inflation near the Fed’s target level.

Looking ahead, Housing Starts will be released on Tuesday. The minutes from the October 30 Fed meeting will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. Existing Home Sales will be released on Thursday. In addition, news about the trade negotiations with China could have an influence.

Weekly Change
10yr Treasury fell 0.10
Dow rose 200
NASDAQ rose 50
Calendar
Tue 11/19 Housing Starts
Wed 11/20 Fed Minutes
Thu 11/21 Existing Home Sales

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Increased Optimism on Trade – November 2019 Edition

Wednesday, November 13th, 2019

The trade negotiations with China dominated the economic news this week. Unexpected signs of progress in reaching a deal were unfavorable for mortgage rates. Stronger than expected economic data also was negative, and rates climbed to the highest levels since late July.

On Thursday, a Chinese trade official said that both sides have agreed to simultaneously remove some existing tariffs. This caused investors to grow more optimistic that a limited “phase one” trade agreement will be signed. The phase one deal reportedly contains some of the easier concessions for each side to make. More difficult issues such as the protection of intellectual property will be addressed in future discussions. Even the phase one deal is not a sure thing, however, as later reports indicated that some U.S. officials are opposed to any tariff reductions until an agreement has been reached in a wider range of areas.

The tariffs and other restrictions imposed this year in the trade war have slowed global economic activity. This has reduced the outlook for future inflation, which has been positive for bonds. As a result, this week’s news which indicated progress in reaching a trade deal was unfavorable for bonds, including mortgage-backed securities (MBS), causing mortgage rates to rise.

The most significant economic report released this week was the survey of the services sector from the Institute of Supply Management, and its strength also was negative for mortgage rates. After falling to the lowest level in over three years last month, the ISM national services index rose more than expected to 54.7. The services sector accounts for over two-thirds of U.S. economic activity, and readings above 50 signal an expansion.

Looking ahead, The Consumer Price Index (CPI) will come out on Wednesday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Friday. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. In addition, speeches by Fed officials or news about the trade negotiations with China could have an influence. Mortgage markets will be closed on Monday in observance of Veterans Day.

Weekly Change
10yr Treasury rose 0.20
Dow rose 300
NASDAQ rose 75
Calendar
Wed 11/13 CPI
Fri 11/15 Retail Sales
Fri 11/15 Industrial Prod.

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Home Sales Slip – October 2019 Edition

Friday, October 25th, 2019

A light batch of economic data caused little reaction this week, and Thursday’s European Central Bank meeting also had just a minor impact. As a result, mortgage rates ended the week nearly unchanged.

The most significant economic data released this week came from the housing sector. In September, sales of previously owned (existing) homes, which make up about 90% of the market, fell a little more than expected from August but still were 4% higher than a year ago. National median existing-home prices were up 6% from a year ago. Inventory levels remained the primary trouble spot, as the number of homes for sale was at just a 4.1-month supply nationally, well below the 6.0-month supply which is considered a healthy balance between buyers and sellers.

September new home sales, which account for the remaining 10% of the market, also fell a bit from August. Unlike existing home sales, which are based on actual closings, new home sales measure contracts signed during the month. The decline suggests that new home sales in September were more heavily affected by an increase in mortgage rates, which were almost 0.5% higher at their peak than at the beginning of the month. Despite the recent weakness, new home sales still were 16% higher than a year ago.

This week, investors were watching a couple of events in Europe as well, but neither had much effect on U.S. mortgage rates. As expected, the European Central Bank (ECB) kept benchmark rates unchanged at its meeting on Thursday, and comments from ECB President Draghi provided little reason for investors to alter their outlook for future policy. The latest proposed plan for the British exit from the European Union (Brexit) was rejected by the British Parliament over the weekend, and there is not enough time to attempt to reach a new deal before the scheduled departure date of October 31. British and EU officials now are negotiating another extension to the deadline.

Looking ahead, it will be a busy week. The next Fed meeting will take place on Wednesday, and investors expect a 25 basis point rate cut. The monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, third quarter GDP, the broadest measure of economic growth, will come out on Wednesday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Thursday. In addition, news about Brexit, the impeachment inquiry, or the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury rose 0.01
Dow rose 150
NASDAQ rose 100
Calendar
Wed 10/30 Fed Meeting
Wed 10/30 GDP
Fri 11/2 Employment

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