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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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Potential Trade Deal – October 2019 Edition

Monday, October 14th, 2019

Increased optimism about a trade deal was negative for mortgage rates this week. The economic data and the news from the Fed had little impact, and mortgage rates ended the week higher.

The trade talks between the U.S. and China resumed on Thursday, and comments from officials have suggested that the two sides are close to reaching a limited agreement. Reports hinted that a deal might include increased agricultural purchases, curbs on currency manipulation, and delays in the implementation of new tariffs. Tougher issues such as the protection of intellectual property would be addressed in future talks. A key meeting between President Trump and Chinese Vice Premier Liu He is scheduled to take place on Friday afternoon.

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, the possibility of a trade deal was unfavorable for bonds, including mortgage-backed securities (MBS), causing mortgage rates to rise.

The latest data released this week revealed that core inflation held steady. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In September, Core CPI, which excludes the volatile food and energy components, was 2.4% higher than a year ago, the same annual rate of increase as last month.

This week’s comments from the Fed contained no significant new information. On Tuesday, Fed Chair Powell again explained that the Fed will allow its balance sheet to grow roughly in line with the size of the economy to provide adequate liquidity for the needs of financial institutions. The minutes from the September 17 Fed meeting released on Wednesday confirmed that officials remained divided about the appropriate path for future monetary, primarily due to uncertainty about the impact of increased trade restrictions on the economic outlook.

Looking ahead, Retail Sales will be released on Wednesday. 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. Housing Starts will come out on Thursday. In addition, news about the trade negotiations could influence mortgage rates. Mortgage markets will be closed on Monday in observance of Columbus Day.

Weekly Change
10yr Treasury rose 0.20
Dow rose 300
NASDAQ rose 100
Calendar
Wed 10/16 Retail Sales
Thu 10/17 Housing Starts
Thu 10/17 Industrial Prod.

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Economy Slows – October 2019 Edition

Monday, October 7th, 2019

The major economic data released this week was mostly weaker than expected, which reduced the outlook for future inflation. This was positive for mortgage rates, and they ended the week lower.

As expected, Friday’s key monthly Employment report was consistent with a slower pace of job creation from the very strong levels seen over the last couple of years. Against a consensus forecast of 145,000, the economy gained 136,000 jobs in September, and upward revisions added another 45,000 to the results for prior months. The unemployment rate, which is calculated based on surveys of workers, unexpectedly declined from 3.7% to 3.5%, which was the lowest level since 1969.

The other major component of the labor market report contained much less encouraging news, however. Average hourly earnings, an indicator of wage growth, were flat from August, far below the consensus for a substantial gain. They were 2.9% higher than a year ago, down from an annual rate of increase of 3.2% last month.

In addition to the disappointing wage data, two closely watched reports from the Institute of Supply Management (ISM) released this week revealed weaker than expected economic growth. The ISM national services index, which covers the bulk of U.S. economic activity, showed a sharp drop to 52.6, which was the lowest level since August 2016. The ISM national manufacturing index declined to just 47.8, which was the worst reading since June 2009.

Looking ahead, The JOLTS report, which measures job openings and labor turnover rates, will be released on Wednesday. Fed officials value this data to help round out their view of the strength of the labor market. The minutes from the September 17 Fed meeting also 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. The Consumer Price Index (CPI) will be released on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. In addition, news about the impeachment inquiry or the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.15
Dow fell 500
NASDAQ fell 50
Calendar
Wed 10/9 Fed Minutes
Wed 10/9 JOLTS
Thu 10/10 CPI

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Fed Eases – September 2019 Edition

Wednesday, September 25th, 2019

Wednesday’s Fed meeting overshadowed the other economic news this week, but it provided no surprises and had little net effect. Stronger than expected housing data also had just a minor impact, and mortgage rates ended the week a little lower.

The Fed cut the federal funds rate by 25 basis points, as expected, and its statement contained few changes from the prior one. The main takeaway from the meeting was that Fed officials remained divided about the outlook for the economy and appropriate monetary policy. While seven out of ten officials voted in favor of the cut, two preferred no change, and one supported a larger 50 basis point reduction. According to Fed Chair Powell, a number of potential risks have made the forecast for U.S. growth more uncertain. Most notably, global growth has been weakening, and trade tensions have been slowing manufacturing activity. Overall, the meeting provided little new information to cause investors to alter their outlook for future Fed policy.

This week’s news from the housing sector was encouraging. In August, sales of existing homes increased more than expected from July to the strongest level since March 2018 and were modestly higher than a year ago. The national median existing-home price was up 5% from a year ago. The main trouble spot again was a lack of homes for sale in many regions. Inventory levels nationally were at just a 4.1-month supply and were 3% lower than a year ago.

Additional supply may be on the way, however. In August, housing starts jumped 12% from July to the strongest level since June 2007, with improvement in both the single-family and multi-family segments. Starts were 7% higher than a year ago. Similarly, building permits, a leading indicator of future construction, rose 8% from July to the best level since May 2007.

Looking ahead, New Home Sales will come out on Wednesday and Pending Home Sales on Thursday. The core PCE price index, the inflation indicator favored by the Fed, and Durable Orders will be released on Friday. In addition, news about the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.10
Dow fell50
NASDAQ rose25
Calendar
Wed 9/25 New Home Sales
Fri 9/27 Core PCE
Fri 9/27 Durable Orders

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Mixed Data – September 2019 Edition

Wednesday, September 11th, 2019

There was little change in mortgage rates this week, as investors looked ahead to major central bank meetings later in the month. The economic data released this week contained mixed results, and its net effect was small.

A small miss in job gains in Friday’s key Employment report was offset by wage gains which modestly surpassed expectations. Against a consensus forecast of 150,000, the economy added just 130,000 jobs in August. In addition, downward revisions subtracted 20,000 jobs from the results for prior months. The Unemployment Rate remained at 3.7%, as expected. Average hourly earnings, an indicator of wage growth, rose 0.4% from July, above the consensus of 0.3%.

Earlier in the week, the major data again reflected solid performance in most of the economy, with the glaring exception of the manufacturing sector. The ISM national services index posted much larger than expected gains to 56.4, but the ISM national manufacturing index missed to the downside with a decline to 49.1. Readings above 50 indicate an expansion, while readings below 50 indicate a contraction. Global manufacturing activity has been slowed in recent months by increased trade barriers such as tariffs.

On the trade front, the latest news about the negotiations between the U.S. and China indicated a willingness on both sides to continue to work toward a mutually beneficial deal. On Thursday, officials announced that the next round of trade talks will take place early in October.

Looking ahead, the next European Central Bank (ECB) meeting will take place on Thursday. In the U.S., the Consumer Price Index (CPI) will come out on Thursday. 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. The next U.S. Fed meeting will take place on September 18. In addition, news about the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury rose 0.05
Dow rose 400
NASDAQ rose 75
Calendar
Thu 9/12 CPI
Thu 9/12 ECB Meeting
Fri 9/13 Retail Sales

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Another Volatile Week – August 2019 Edition

Monday, August 19th, 2019

Increased concerns about the outlook for global economic growth and about numerous geopolitical events deflated global stock markets and benefited mortgage rates this week. However, the latest news on the trade talks between the U.S. and China mostly offset this, and rates ended another volatile week just marginally lower.

Investors face a lot of significant questions on a wide range of issues right now, and it’s no surprise that they have responded to the increased uncertainty by reducing the level of risk in their portfolios. As usual, their primary method to accomplish this has been to shift assets from stocks to bonds, including U.S. mortgage-backed securities (MBS).

The trade tensions between the U.S. and China remain one of the largest sources of concern for investors, because tariffs and other barriers to trade slow global economic activity. The biggest news on this front this week was the announcement that the U.S. will delay until December 15 tariffs on some goods that had been scheduled to be imposed on September 1.

The outlook for global economic growth is another big question mark for investors. Around the world, recent data clearly indicates that the manufacturing sector has taken a hit from trade issues, and business investment has fallen as companies hesitate to make long-term capital commitments. On the other hand, consumer spending has generally remained healthy. In the world’s second-largest economy, for example, Alibaba (“the Amazon of China”) just released strong earnings results.

In the U.S., the data released this week also demonstrated the continued strength of consumers. In July, Retail Sales surged 0.7% from June, which was well above the expected increase of just 0.3%. This marked the fifth straight month of solid gains, boosted in no small part by Amazon Prime Day and competing sales events at other retailers.

In addition, several geopolitical events around the world are concerning. The list includes large scale protests in Hong Kong, trade tensions between Japan and North Korea, serious economic troubles in Argentina, the British exit from the European Union, and upcoming elections in Italy.

It’s worth noting that mortgage rates have not dropped nearly as quickly as long-term Treasury yields. This is not uncommon during periods of rapid declines in bond yields due to prepayment characteristics inherent only in MBS.

Looking ahead, it will be a very light week for economic data. Existing Home Sales will be released on Wednesday and New Home Sales on Friday. The minutes from the July 31 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. In addition, news about the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.15
Dow fell 400
NASDAQ fell 75
Calendar
Wednesday 8/21 Existing Home Sales
Wednesday 8/21 Fed Minutes
Friday 8/23 New Home Sales

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Focus on Trade – August 2019 Edition

Thursday, August 15th, 2019

Trade negotiations with China completely dominated the other economic news this week. Mortgage rates dropped to the lowest levels in about three years early in the week, but later reversed direction. After very large swings, rates ended just a little lower.

Last Thursday, President Trump announced that the U.S. will impose additional tariffs of 10% on $300 billion of goods imported from China beginning on September 1 because trade officials feel that China has not followed through on prior commitments. Over the weekend, China responded by allowing its currency to weaken to gain an edge in selling goods to other countries (see below). The response on Monday to the apparent escalation in the trade war was massive declines in global stock markets and bond yields, including U.S. mortgage rates. Over the course of the week, however, investors gravitated toward the view that these latest developments likely will not have much impact on the ultimate outcome of the trade negotiations, and the stock and bond markets reversed most of their movement.

Prior to this week, the primary tool used by the U.S. and China to gain leverage in the trade talks has been raising tariffs on imports. U.S. tariffs act like a tax on consumer goods from China, and the resulting higher prices reduce demand. This latest increase would be particularly influential because companies will be planning where to source goods for the holiday shopping season. Since tariffs slow the outlook for economic activity, they are positive for mortgage rates.

The effect on mortgage rates of China’s weakening currency (the yuan) is a bit more complex. As anyone from the U.S. who travels to another country has experienced, a stronger dollar makes foreign purchases cheaper. Similarly, the weaker yuan means that imports from China are less expensive for U.S. consumers, so this partially offsets the higher tariffs. In short, a stronger dollar allows U.S. consumers to purchase Chinese goods at a better price, but the downside is that it leads to more imports from China and fewer exports to China. This hurts the U.S. manufacturing sector and displeases U.S. trade officials.

The services sector accounts for about 85% of U.S. GDP growth, while the manufacturing sector is responsible for the remaining 15%. The primary monthly report for the services sector is the ISM national services index, and the latest reading was not encouraging. Rather than an expected small increase, the index declined to 53.7, the lowest level in the three years. Even with this month’s weaker results, though, the reading above 50 indicates that the sector is still expanding.

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 Thursday. 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. Housing Starts will come out on Friday. In addition, news about the trade negotiations could influence mortgage rates.

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

Rising Inflation – July 2019 Edition

Friday, July 12th, 2019

Stronger than expected inflation data was unfavorable for mortgage rates this week. Highly anticipated testimony from Fed Chair Powell caused some volatility, but its net effect was small. As a result, rates ended the week higher.

In June, the Core Consumer Price Index (CPI), which excludes the volatile food and energy components, rose 0.3% from May, above the expected increase of 0.2%. Core CPI was 2.1% higher than a year ago, up from an annual rate of increase of 2.0% last month. Since higher inflation erodes the future buying power of money, it is negative for bonds, including mortgage-backed securities (MBS).

Twice a year, the head of the Federal Reserve provides an update to Congress and then answers questions from lawmakers. During this week’s testimony to the Finance Committee, Fed Chair Powell reinforced the investor outlook for a rate cut at the next meeting on July 31. According to Powell, second quarter U.S. economic growth “appears to have moderated” and potential risks include slowing business investment, uncertainty about global economic activity, and trade tensions. He said that the Fed will “act as appropriate” to sustain the current expansion. Overall, his comments were in line with expectations, and the main question for investors going forward is whether there will be additional rate cuts later in the year.

Looking ahead, Retail Sales will be released on Tuesday. 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. Industrial Production, another important indicator of economic growth, also will come out on Tuesday. Housing Starts will be released on Wednesday. In addition, news about the trade negotiations may influence mortgage rates.

 

Weekly Change
10yr Treasury rose 0.08
Dow rose 250
NASDAQ rose 50

 

Calendar
Tue 7/16 Retail Sales
Tue 7/16 Industrial Prod.
Wed 7/17 Housing Starts

 

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Strong Job Gains – July 2019 Edition

Thursday, July 11th, 2019

As is common, thin trading conditions helped make the week containing the July Fourth holiday very volatile again. A decline in global bond yields was positive for U.S. mortgage rates early in the week, but stronger than expected job gains had the opposite effect on Friday, and mortgage rates ended with little change.

Following weak results of under 100,000 in May, the economy added a powerful 224,000 jobs in June, which was above the consensus forecast of 160,000. This made the three-month average pace of job growth a solid 171,000. The unemployment rate unexpectedly increased from 3.6% to 3.7%, but this was primarily due to additional people entering the labor force, which is a sign of strength.

Average hourly earnings, which is an indicator of wage growth, fell slightly short of expectations in June. They were 3.1% higher than a year ago, the same annual rate of increase as last month.

The strong labor market report was negative for mortgage rates in a couple of ways. First, faster economic growth raises the outlook for future inflation. In addition, the data reduced investor expectations for the pace of Fed rate cuts this year.

After a lengthy period with few new developments, the trade talks between the U.S. and China resumed at the G20 summit over the weekend. The result was that the two sides agreed to a truce during which they will hold off on imposing additional tariffs. The goal is to allow more time to negotiate a long-term deal.

Looking ahead, the JOLTS report, which measures job openings and labor turnover rates, will be released on Tuesday. Fed officials value this data to help round out their view of the strength of the labor market. The minutes from the June 19 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. The Consumer Price Index (CPI) will be released on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. In addition, Treasury auctions, speeches by Fed officials or news about the trade negotiations may influence mortgage rates.

 

Weekly Change
10yr Treasury rose 0.05
Dow rose 200
NASDAQ rose 100

 

Calendar
Tue 7/9 JOLTS
Wed 7/10 Fed Minutes
Thu 7/11 CPI

 

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Job Gains Fall Short – June 2019 Edition

Tuesday, June 11th, 2019

Weaker than expected labor market data and dovish comments from central bank officials were favorable for mortgage rates this week. News on the trade negotiations with Mexico and China caused some volatility but had little net impact. Rates ended at their lowest levels in about two years.
Friday’s highly anticipated monthly Employment report revealed a significant downside miss. Against a consensus forecast of 180,000, the economy added just 75,000 jobs in May. In addition, downward revisions subtracted 75,000 jobs from the results for prior months. Average hourly earnings, an indicator of wage growth, also fell short of expectations. They were 3.1% higher than a year ago, down from an annual growth rate of 3.2% last month.

There were many speeches by Fed officials this week covering a wide range of topics. Regarding future monetary policy, the Fed’s Bullard seemed to capture the prevailing sentiment that a rate cut “may be warranted soon” due to low levels of inflation and the risks to the economy from the ongoing trade disputes. Along with Friday’s labor market data, these comments reinforced the widely held view among investors that at least one rate cut will take place before the end of the year.

At Thursday’s meeting, the European Central Bank (ECB) also edged toward looser monetary policy. To help stimulate economic activity, the ECB said it will hold rates at the current record low levels “at least through the first half of 2020,” a shift from its prior guidance of “at least until the end of 2019.” The ECB outlook for European economic growth is just 1.2% this year and 1.4% in 2020. This contrasts with forecasted growth rates above 2.0% for the U.S. over the next couple of years.

On the trade front, investors were more focused on Mexico than China. Following last Friday’s unexpected threat by the Trump administration to impose a 5% tariff on all imports from Mexico beginning June 10, the two sides have not yet reached an agreement, but many sources have indicated that substantial progress has been made. Most investors expect that the tariffs either will be delayed or will be in place for only a short time. There was little fresh news on the negotiations with China this week.

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, Treasury auctions on Wednesday and Thursday could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.08
Dow rose 1,200
NASDAQ rose 300

 

Calendar
Wed 6/12 CPI
Wed 6/12 10yr Auction
Fri 6/14 Retail Sales

 

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