News/Blog

Another Volatile Week – August 2019 Edition

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

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.

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Rising Inflation – July 2019 Edition

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

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

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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Trade Tensions Rise – May 2019 Edition

The economic data took a back seat to the news on trade this week. Investors hoping for signs of progress in the negotiations between the U.S. and China were disappointed each day. On top of this, investors were blindsided Friday when the Trump administration shifted its focus and threatened to impose a 5% tariff on all imports from Mexico beginning June 10. Since tariffs and other barriers to trade slow global economic activity, these events were favorable for mortgage rates and bad for the stock market.

The latest data revealed that inflation remains at low levels. In April, the core PCE price index, the indicator favored by the Fed, was just 1.6% higher than a year ago, down from an annual rate of increase of 2.0% at the end of 2018. The recent tame inflation readings and the uncertainty on the trade front have had a significant impact on the outlook for Fed policy. Most investors now expect that a rate cut will take place before the end of the year.

As expected, first quarter GDP, the broadest measure of economic growth, was revised slightly lower from 3.2% to 3.1%. More notable, though, is that two months into the second quarter the early forecasts for Q2 GDP growth generally are close to just 1.0%. Part of the explanation for the sharp slowdown is that certain volatile components such as inventories were unexpectedly strong during the first three months of the year (a buildup in inventories means less production will be needed in the future). This is not the whole story, however, as it appears that the effects of the trade dispute are taking a more meaningful toll on global economic activity.

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 and the ISM national services index on Wednesday. The next European Central Bank (ECB) meeting will take place on Thursday. In addition, news about the trade negotiations could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.15
Dow fell 600
NASDAQ fell 150

 

Calendar
Mon 6/3 ISM Manufacturing
Thu 6/6 ECB Meeting
Fri 6/7 Employment

 

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Retail Sales Fall Short – May 2019 Edition

Weaker than expected economic data was modestly positive for mortgage rates this week. Headlines about the trade negotiations between the U.S. and China caused some volatility but had little net effect. The latest figures released this week on retail sales for April were a good deal weaker than expected with a small decline from March. Excluding the volatile auto component, the shortfall compared to the consensus was even greater. Since slower economic growth reduces the outlook for future inflation, this data was favorable for mortgage rates.

The data from the housing sector was more encouraging. In April, housing starts rose 6% from March, which was well above the expected levels. Both single-family and multi-family units posted solid gains. Since sales activity in many regions has been constrained by a lack of inventory, this was welcome news for the housing market.

Headlines about the trade talks caused a reaction on several days this week, but the effects were roughly offsetting. The primary takeaway for many investors was that the Trump administration is willing to apply increased pressure on China to speed up the negotiations but wants to concentrate the focus solely on China and not other trading partners. On Monday, China retaliated for an increase in tariffs from the U.S. by imposing higher tariffs on U.S. goods. Later in the week, U.S. officials announced that they likely will delay raising tariffs on autos, which mainly impact countries other than China, for up to six months.

Looking ahead, Existing Home Sales will be released on Tuesday and New Home Sales on Thursday. The minutes from the May 1 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. Durable Orders, an important indicator of economic growth, will come out on Friday. In addition, news about the status of the trade negotiations between the U.S. and China could influence mortgage rates.

Weekly Change
10yr Treasury fell 0.03
Dow fell 100
NASDAQ fell 50

 

Calendar
Tue 5/21 Existing Home Sales
Wed 5/22 Fed Minutes
Fri 5/24 Durable Orders

 

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

Focus on Trade Talks – May 2019 Edition

The two main influences on mortgage rates this week, a lack of progress in the trade talks and weak inflation data, both were modestly positive for mortgage rates. As a result, rates ended a little lower.

Last week, senior administration officials suggested that a trade deal between the U.S. and China could be close, so investors were caught off guard on Tuesday when President Trump threatened to increase tariffs on Chinese goods. Trump also said that a good deal was a higher priority than a quick deal. Some analysts feel that this is an attempt by the Trump administration to apply pressure on China to speed up the negotiations, but investors are worried that Chinese officials will not back down and that an agreement may not be reached any time soon. Since trade restrictions such as tariffs slow global economic activity, which reduces the outlook for future inflation, the lack of progress was positive for mortgage rates.

The latest news on current inflation also was good for rates. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services, and it increased less than expected in April. Core CPI, which excludes the volatile food and energy components, was just 2.1% higher than a year ago. Despite solid economic growth, Core CPI has held steady close to this level for over a year.

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. Industrial Production, another important indicator of economic growth, also will come out on Wednesday. Housing Starts will be released on Thursday. Investors also will be watching for news about the trade negotiations between the U.S. and China.

Weekly Change
10yr Treasury fell 0.08
Dow fell 900
NASDAQ fell 400

 

Calendar
Wed 5/15 Retail Sales
Wed 5/15 Industrial Production
Thu 5/16 Housing Starts

 

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

 

GDP Jumps – April 2019 Edition

The big news this week was Friday’s GDP report, and it was favorable for mortgage rates. As a result, rates ended a little lower, ahead of several major economic releases next week.

While the headline figure for first quarter GDP, the broadest measure of economic growth, was much stronger than expected, mortgage rates declined after its release. This was due to the details of the report. First quarter GDP increased 3.2%, which was far above the consensus forecast of 2.3%, and was up from 2.2% growth during the fourth quarter. This was the best reading for Q1 since 2015, and it took place despite an estimated 0.3% loss in growth resulting from the government shutdown.

However, a closer look revealed a couple of factors which were much more positive for mortgage rates. First, the broad measure of inflation contained in the report was much lower than expected during the first quarter. In addition, the surprising strength was seen in inventories and exports, which are volatile from quarter to quarter and thus are viewed by investors as less informative. The “core” components such as consumer spending and business investment, which better reflect the underlying trend in the economy, showed slower growth than during the previous quarter, and the housing sector again was weak.

The other news from the housing sector released this week was mixed. In March, sales of previously owned (existing) homes were weaker than expected and 5% lower than a year ago. On the other hand, sales of new homes surprised to the upside and were at the highest level since November 2016. Since new home sales represent signed contracts, while existing home sales are based on actual closings, the new home sales report is a more forward-looking indicator of housing market activity.

Looking ahead, it will be a packed week. The next Fed meeting will take place on Wednesday. No change in rates is expected, and investors will be looking for guidance about future monetary policy. The monthly Employment report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, the core PCE price index, the inflation indicator favored by the Fed, will be released on Monday. The ISM national manufacturing index will come out on Wednesday and the ISM national services index on Friday.

Weekly Change
10yr Treasury fell 0.06
Dow fell 100
NASDAQ rose 100
Calendar
Mon 4/29 Core PCE
Wed 5/1 Fed Meeting
Fri 5/3 Employment

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

Steady Inflation – March 2019 Edition

It was a light week for economic news with few surprises, and mortgage rates ended nearly unchanged.

One big reason that mortgage rates have improved in recent weeks, and that the Fed has shifted toward looser monetary policy, is that inflation has held steady. Despite a very tight labor market by historical standards, wage growth has been moderate, and overall inflation levels in the economy have been constrained.

This trend continued in January, as the core PCE price index, the inflation indicator favored by the Fed, was just 1.8% higher than a year ago. The Fed’s stated target for annual core inflation is 2.0%, and core PCE has held in a narrow range at or just below this level for the past year.

The latest figures on home construction were not encouraging, although unusually bad weather influenced the results. In February, overall housing starts fell 9% from January, which was far below expectations. Single-family starts posted an even larger decline of 17% from January to the lowest level since May 2017. Permits to build single-family homes, a leading indicator, were roughly unchanged. Builders point to rising land, labor, and materials costs, as well as high regulatory standards, as obstacles to additional construction.

Looking ahead, the important monthly Employment report will be released on Friday. As usual, 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, Retail Sales will be released on Monday. 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 ISM national manufacturing index will come out on Monday and the ISM national services index on Wednesday. In addition, news about the British exit (Brexit) from the European Union could affect mortgage rates.

Weekly Change
10yr Treasury fell 0.02
Dow rose 300
NASDAQ rose 75
Calendar
Mon 4/1 ISM Manufacturing
Mon 4/1 Retail Sales
Fri 4/5 Employment

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