Ali Vafai

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Wage Inflation Picks Up

Jan 09 2017

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Mortgage rates showed some nice improvement following Wednesday's release of the Fed Minutes. Friday's key Employment report caused a reversal, however, and mortgage rates ended the week with little change.

From the presidential election until the last few days of the year, the trend in yields was upward, and this kept many potential bond buyers on the sidelines. Buyers finally stepped in at the end of the year and then paused early this week. It appears that they were waiting until a major risk, the Minutes from the December 14 Fed meeting, was out of the way. When there were no surprises in the Minutes, investors felt comfortable purchasing bonds again. The rush to buy intensified on Thursday, pushing mortgage rates to the best levels in a month, but Friday's economic data halted the rally.

MortgageNews_1-9.pngThe most notable aspect of Friday's closely watched monthly Employment report was an upside surprise in wage growth in December. Average hourly earnings were 2.9% higher than a year ago, up from 2.5% last month, and the highest level since 2009. Job gains in December came in right on target. The unemployment rate increased to 4.7%, as expected.

Another important economic report released earlier in the week also hinted at higher future inflation. Manufacturers reported that they expect a large increase in the prices to be paid for producing goods. Since it reduces the value of future cash flows, inflation is negative for mortgage rates. Already wary about inflation due to the manufacturing report, investors pushed mortgage rates higher after the wage data.

Looking ahead, the most significant economic report will be Retail Sales on Friday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Before that, the JOLTS report will come out on Tuesday. JOLTS measures job openings and labor turnover rates. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday, and there will be many Fed officials speaking during the week. 

Topics: mortgage news

Positive Outlook for Housing

Dec 29 2016

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On little news and light trading, mortgage rates ended the last few days of 2016 a little lower, reversing some of their recent rise. The economic data released this week had little impact.

Despite the rise in mortgage rates since the election, there are many reasons to be optimistic about the housing market and overall economic activity heading into 2017. This week's release by the Conference Board of the consumer confidence index is the latest.

MortgageNews_12-29.pngOn Monday, the index revealed that consumers are more confident about their future than at any time in the last 15 years. Low unemployment, rising wages, record stock market values, home price appreciation, and expectations of growth-friendly policies from the Trump administration are contributing factors.

Even though inventories of homes available for sale are at very low levels, home sales are ending 2016 at the highest levels since the 2008 recession, and demand from home buyers remains high. In addition, there is reason to be optimistic that home builders may pick up their pace of construction next year. A December survey of home builders showed a surge in optimism since the election. Single-family housing starts and building permits are near multi-year highs. Confident consumers and home builders are solid reasons to look for continued improvement in housing market activity next year. 

Looking ahead, the ISM national manufacturing index will be released on Tuesday. The Minutes from the December 14 Fed meeting will come out on Wednesday. The ISM national services index will be released on Thursday. The next Employment report will come out on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Mortgage markets will be closed on Monday in observance of New Years.

Topics: mortgage news

Home Sales Rise

Dec 22 2016

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The economic data released this week had little impact on mortgage rates. Tuesday's Bank of Japan meeting also caused little reaction in U.S. markets. Mortgage rates ended the week lower.

MortgageNews_12-22.pngWhile it had little market impact, Wednesday's report on sales of previously owned homes exceeded expectations and reached another multi-year high. November existing home sales increased a little from October to the highest level since February 2007. Existing home sales were 15% higher than a year ago.

This figure is inflated somewhat, though, since sales in November of last year were depressed by the implementation of new closing disclosure requirements. Total inventory of existing homes available for sale fell to a 4-month supply, and it was 9% lower than a year ago. The median existing-home price was 7% higher than a year ago. Since sales of previously owned homes measure closings, the November data was not affected much by the increase in mortgage rates seen since the election.

Thursday's report on orders for durable goods contained mixed news. Durable goods are products which are expected to last more than three years. The overall figure revealed that orders for durable goods in November declined 4.6% from October, which was close to the expected levels. The decline was mostly due to a drop in aircraft orders. Since certain products such as aircraft tend to be very volatile from month to month, investors generally prefer to look at a core reading to get a better sense of the underlying trend. This core indicator of business investment, nondefense capital goods excluding aircraft, showed a healthy increase of 0.9% from October. 

Looking ahead, it will be a light week for economic data. Pending Home Sales will come out on Wednesday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. During the last couple of weeks in December, trading volume tends to be lighter than usual, which can lead to exaggerated price swings. Mortgage markets will be closed on Monday in observance of Christmas. 

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

Topics: mortgage news

Fed Projects Faster Pace of Hikes

Dec 16 2016

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Wednesday's Fed meeting turned out to be negative for mortgage rates. Recent economic data had little impact. As a result, mortgage rates ended the week higher.

As widely expected, the Fed raised the federal funds rate by 25 basis points. Unfortunately for MBS, Fed officials also raised their outlook for the pace of future rate hikes. They now forecast three rate hikes in 2017, one more than previously projected. The faster pace was viewed as negative for mortgage rates. But why? The purpose for raising the federal funds rate is to keep inflation from rising above the Fed's target of 2%. This should be a good thing for mortgage rates. 

Part of the reason for the adverse reaction stems from a more direct effect the Fed has on mortgage rates. The Fed owns over $1.7 trillion of the agency mortgage-backed securities (MBS) that it purchased during its quantitative easing (QE) days. The Fed keeps the balance of MBS around that level by buying new MBS to replace that which pays off. The Fed is currently the buyer of approximately 25% of all newly issued MBS. This added demand from the Fed drives MBS prices higher and mortgage rates lower. The Fed says that it will not allow its holdings of MBS to decline until "normalization of the level of the federal funds rate is well under way." When that will be is hard to say, but the faster they raise the federal funds rate, the sooner their demand for new MBS will be removed.

MortgageNews_12-6.pngOn Thursday, the December National Association of Home Builders (NAHB) housing index showed that home builder confidence jumped from 63 to 70, far above the consensus, and the highest level since 2005. According to the NAHB, home builders are optimistic that the Trump administration will "reduce costly regulatory burdens." 

Looking ahead, there will be a meeting of the Bank of Japan on Tuesday which could influence U.S. mortgage rates. In the U.S., Existing Home Sales will be released on Wednesday. Durable Orders and Core PCE will come out on Thursday. Core PCE is the inflation indicator favored by the Fed. New Home Sales will be released on Friday. Mortgage markets will close early on Friday in observance of Christmas. 

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

Topics: mortgage news

ECB Scales Back

Dec 09 2016

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Over the past week, volatility in mortgage rates was at the lowest level since the election. The main market mover was the European Central Bank (ECB) meeting. Sunday's referendum vote in Italy had little impact on U.S. markets, and the U.S. economic data also caused little reaction. While it was another good week for the stock market, mortgage rates ended the week with little change.

On Wednesday, global bond yields, including U.S. mortgage rates, declined on hopes of good news from Thursday's ECB meeting. The outcome was not as favorable as hoped, however, and the improvement was reversed on Thursday. Ahead of the meeting, investors generally expected that the ECB would extend its bond purchase program for another six months. On this front, investors were pleased, as the ECB extended the program by nine months through December 2017. The disappointment came from the unexpected news that the monthly purchases will decrease from 80 billion euros to 60 billion euros beginning in April. The reduction in the level of stimulus removed some expected future demand for bonds, causing yields to rise, offsetting the prior day's decline.

MortgageNews_12-9.pngThe most significant U.S. economic data released over the past week revealed another sign that the economy is ending the year on a stronger note. The November ISM national services index increased more than expected to 57.2, which was the highest level in a year. The service sector employs the vast majority of U.S. workers.

Readings above 50 indicate that the sector is expanding. This follows last week's reading of 53.2 for the November ISM national manufacturing index, which also exceeded expectations.

Looking ahead, the next U.S. Fed meeting will take place on Wednesday. It is widely expected that the Fed will raise the federal funds rate, so investors mainly will be looking for guidance about the pace of future tightening. Also on Wednesday, Retail Sales will be released. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. The Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Thursday. CPI looks at the price change for goods and services which are sold to consumers. Housing Starts will be released on Friday. 

Topics: mortgage news

Volatile Week

Dec 05 2016

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It was a volatile week for mortgage rates. A wide range of factors, including Italian politics, OPEC, and U.S. economic data, caused significant reactions. The net effect was small, however, and mortgage rates ended the week with little change.

On Sunday, Italians will vote on a referendum presented by Prime Minister Matteo Renzi. If successful, the referendum would simplify the process in Italy for passing laws. The most recent polls suggest that it may be a very close vote. If the referendum fails to pass, critical reforms for the Italian banking sector likely would be postponed. This would put some banks in Italy and in other European countries at risk of failing. In addition, Renzi has said that he will step down if the referendum fails. This would likely lead to a period of political uncertainty in Italy. Early in the week, investors began to noticeably react to the uncertainty by shifting to safer assets, including U.S. mortgage-backed securities (MBS), which was good for mortgage rates.

On Wednesday, however, OPEC representatives announced an agreement to cut oil production. This caused oil prices to surge over 9%. Since higher oil prices raise the outlook for future inflation, this was negative for mortgage rates. The increase in rates on Wednesday more than offset the improvement seen earlier in the week. 

MortgageNews_12-5.pngIn contrast to the OPEC news, a shortfall on wage gains in Friday's key Employment report reduced inflationary pressures, which was positive for mortgage rates. In November, average hourly earnings were far below the consensus with a small decline from October. They were 2.5% higher than a year ago, down from the multi-year high of 2.8% last month.

Job growth was right on target. Against a consensus forecast of 170K, the economy added 178K jobs in November. The unemployment rate declined from 4.9% to 4.6%, well below the consensus for a flat reading, and the lowest level since August 2007. The unexpected decline in the unemployment rate was mostly due to workers leaving the labor force, however, which is not positive news for the economy. 

The next big event will be the European Central Bank (ECB) meeting on Thursday. Investors are divided about what the ECB will decide. In the U.S., the most significant economic report will be ISM Services on Monday. The next U.S. Fed meeting will take place on December 14. 

Topics: mortgage news

Another Rough Week

Nov 18 2016

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It has been another rough week for mortgage rates. Volatility has been high. The market action was driven almost entirely by expected policy changes under the Trump administration. Mortgage rates rose during the week to the highest levels of the year.

Investors expect that the policy changes under a Trump administration will be good for stocks and negative for bonds. Expectations of greater fiscal stimulus are good for stocks, but they also raise the outlook for future inflation. This is bad for bonds because investors judge the value of bonds based on their future cash flow. An increase in inflation reduces the value of future cash flows, so investors demand a higher yield when the outlook for inflation rises. Since mortgage rates are set based on the value of mortgage-backed securities (MBS), higher yields for MBS lead to higher mortgage rates. 

While it had little market impact, the report on housing starts was very encouraging. In October, total housing starts rose a massive 26% from September to an annual rate of 1.32 million, far above the consensus of just 1.17 million, and the fastest pace since August 2007.

MortgageNews_11-18.pngStrong gains were seen in both single-family and multi-family units. Single-family starts, which make up about 60% of the market, increased 11% to the highest level since October 2007. Building permits for single-family homes also rose in October, which is a positive sign for future activity.

Looking ahead, new information about the plans of the Trump administration likely will continue to influence mortgage rates. In addition, Existing Home Sales will be released on Tuesday. New Home Sales and Durable Orders will come out on Wednesday. The minutes from the November 2 Fed meeting also will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials. The minutes are not likely to change investor expectations for a rate hike at the next Fed meeting on December 14. Mortgage markets will be closed on Thursday for Thanksgiving.

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

This Week in Mortgage News: Rates Rise after Election

Nov 10 2016

Rates Rise after Election

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The unexpected results in the Presidential election caused significant volatility in the markets, both overnight as the likelihood of a Trump victory grew and the next couple of days as investor expectations for the U.S. economy under Trump became the focus. Mortgage rates ended the week at the highest levels of the year, and the Dow stock index reached a record high.

As Trump performed well in the early voting states and the possibility of his victory grew, long-term Treasury yields and stock futures began to fall. At one point during Tuesday night, the yield on the 10-year Treasury had declined over 10 basis points and stock futures had fallen 5%. The early reaction by investors was a flight to safety. Investors felt that they mostly knew what to expect in a Clinton presidency, but they had more uncertainty about what to expect in a Trump presidency.  


Economic Consequences

Mortgage_news_election.pngThen, as a Trump victory became more certain, investors began to focus on the expected economic consequences of the policies Trump promoted during the campaign. The drop in 10-year yields and in stocks reversed direction. By Wednesday morning, the yield on the 10-year had risen over 25 basis points from the low, and similarly the Dow was 6% above the overnight low. 

Trump has advocated for greater spending on defense and infrastructure, and at the same time he proposes to cut taxes. These policies raise the prospects for increased deficits and inflation, neither of which are good for mortgage rates. 


Looking Ahead

Looking ahead, new information about the plans of the Trump administration likely will continue to influence mortgage rates. In addition, Retail Sales will be released on Tuesday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Housing Starts and the Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Thursday. CPI looks at the price change for goods and services which are sold to consumers.

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

Topics: mortgage news

Three Central Bank Meetings

Nov 04 2016

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Over the past week, the meeting of the Bank of England and news related to the U.S. election were the main influences on mortgage rates. The U.S. economic data had little impact. The net result was that mortgage rates ended the week a little lower.

Three major central banks had meetings over the past week, and none of them made any policy changes. In the case of the U.S. Fed and the Bank of Japan, this was the expected outcome. However, investors were disappointed that the Bank of England (BOE) held rates steady and downplayed the likelihood of further rate cuts. Bond purchases from central banks around the world have helped push global bond yields lower in recent years, so this indication from the BOE that there may be less future stimulus than expected caused yields to rise on Thursday, including U.S. mortgage rates. 

As expected, the Fed made no change in policy and few changes in its statement. The statement suggested that the economy is closer to the threshold required to increase the federal funds rate. Fed officials also expressed more confidence that inflation will rise to its target level of 2.0% "over the medium term." 

11-4.pngThe economy added 161K jobs in October, a little below the consensus of 175K. However, upward revisions added 44K jobs to the results for prior months. Investors focused more on wage growth, which rose more than expected. Average hourly earnings were 2.8% higher than a year ago, which was the largest annual increase since June 2009.

Over the past week, there were many news stories about the two candidates in the U.S. election, and some of these stories had a noticeable effect on mortgage rates. Generally, news which favors a Trump victory has been positive for bonds and negative for stocks. News which favors a Clinton victory has caused the opposite reaction.

Looking ahead, the U.S. election likely will continue to influence mortgage rates. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. The economic calendar will be very light. The JOLTS report, which measures job openings and labor turnover rates, will be released on Tuesday. Consumer Sentiment will come out on Friday. While the stock market will be open, mortgage markets will be closed on Friday in observance of Veterans Day.

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

Topics: mortgage news

This Week in Mortgage News: Strength in Europe

Oct 28 2016

Strength in Europe

MortgageNews_iPadArt-4-1.jpgOver the past week, events outside the U.S. caused global bond yields to move higher. The U.S. economic data had little impact. As a result, mortgage rates ended the week at the highest levels since the middle of June before the UK voted to exit the European Union.

On Thursday, a burst of news from Europe and Japan was negative for global bonds. In the UK, third quarter GDP growth was stronger than expected, and Spain's unemployment rate declined more than expected. An official from the European Central Bank (ECB) then reminded investors that the ECB will decide whether to extend its bond purchase program at its next meeting on December 8. Given the better than expected European data, concerns grew that the ECB may provide less stimulus. In addition, an official of the Bank of Japan (BOJ) said that the BOJ may not increase its bond purchase program. Bond purchases from central banks around the world have helped push global bond yields lower in recent years, so indications that there may be less stimulus in the future caused yields to rise, including U.S. mortgage rates.

GDP Estimate 

gdp_estimate.pngThe first estimate for third quarter Gross Domestic Product (GDP), the broadest measure of economic activity, was considerably stronger than other recent readings. After three straight quarters below 2.0%, GDP grew 2.9% during the third quarter of 2016, above the consensus of 2.5%, and up from 1.4% during the second quarter.

Strength was seen in exports and inventory levels. On the negative side for the economy, consumer spending grew at a slower pace than in the second quarter. The report caused some volatility for mortgage rates but had little net effect.


Looking Ahead

Looking ahead, next week will be packed with central bank meetings and economic reports. The Core PCE price index, the inflation indicator favored by the Fed, will be released on Monday. On Tuesday, ISM Manufacturing will come out and a Bank of Japan meeting will take place. A U.S. Fed meeting will take place on Wednesday, but no significant change in policy or in guidance is expected. Finally, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

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

Topics: mortgage news

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