Stocks Rally, Rates Rise

Jul 15 2016


Investors showed a preference for stocks over bonds this week. The economic data had little impact. As a result, mortgage rates ended the week a little higher.

With long-term bond yields at or near record low levels following the Brexit vote on June 23, investors decided this week that stocks had become relatively more attractive than bonds. Investors shifted assets from bonds to stocks, pushing the Dow to a record high, and mortgage-backed securities (MBS) prices lower. Since mortgage rates are set based on MBS prices, rates moved higher. Mortgage rates still remain significantly lower than they were before the Brexit vote.

The recent increase in mortgage rates has occurred despite little change in the outlook of investors for future Fed policy. Numerous Fed officials made speeches over the past week, and the central theme was that federal funds rate hikes will take place at a very gradual pace. In futures markets, investors have priced in less than a fifty percent chance of a rate hike during the remainder of 2016.

After a slow start to the year, retail sales posted a fourth straight month of solid gains on Friday. Retail sales excluding the volatile auto component surpassed expectations with an increase of 0.7% in June. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. 

Partly due to the pickup in consumer spending, second quarter Gross Domestic Product (GDP), the broadest measure of economic growth, is expected to more than double the 1.1% level seen during the first quarter. 

Looking ahead, most of next week's economic data will come from the housing sector. The NAHB housing confidence index will come out on Monday. Housing Starts will be released on Tuesday. Existing Home Sales and the Philly Fed regional manufacturing index will come out on Thursday. In addition, there will be a European Central Bank (ECB) meeting on Thursday which could influence U.S. mortgage rates. 

Topics: The Money Source, mortgage news, economic data, federal funds rate

Fed Lowers Forecasts

Jun 17 2016


Over the past week, mortgage rates were helped by Wednesday's dovish Fed statement and concerns about the upcoming British vote on leaving the European Union. There was little reaction to the recent economic data. As a result, mortgage rates ended the week near the best levels of the year.

The Fed statement and Fed Chair Yellen's press conference proceeded pretty much as expected. The Fed made no change in the federal funds rate. Investors mostly focused on the projections from Fed officials for the path of rate hikes in coming years which showed a significantly slower pace than the last set of projections made three months ago. Little new information was provided about the timing of the next rate hike. The dovish tone of the statement was positive for mortgage rates.

After several months of disappointing readings, retail sales have bounced back strongly with three straight months of nice gains. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Consumer spending increased at just a 1.9% annual rate during the first quarter of 2016. 

Following the most recent results, economists estimate that consumer spending is increasing at a 3% to 4% annual rate during the second quarter, leading to higher forecasts for second quarter GDP growth.

The most recent inflation reading, the consumer price index (CPI), reported that core inflation in May was 2.2% higher than a year ago. Core inflation, which excludes the volatile food and energy components, has held steady near this level for several months. During most of 2015, the readings for core inflation were closer to 1.5%.

Looking ahead, the main influence on U.S. mortgage rates is likely to be the "Brexit" vote on Thursday. Due to the economic uncertainty which would result, a vote for the UK to exit the European Union is expected to be positive for U.S. mortgage rates, while a vote to remain would be negative. Polling data released during the week could increase daily volatility. The major U.S. economic reports which will be released next week include existing home sales, new home sales, and durable orders.

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Topics: The Money Source, mortgage news, consumer price index, economic data, federal funds rate, mortgage rates, retail sales, consumer spending

Huge Home Buying Activity

May 31 2016


Despite stronger than expected housing data and a nice rally in the stock market, investors showed significant demand for bonds, including mortgage backed securities (MBS). As a result, prices for MBS improved, causing mortgage rates to end the week a little lower.

The housing data released this week showed that home buyers were busy in April signing contacts to purchase homes. The market for both previously owned homes and newly built homes saw their best activity in years. Improved labor market conditions and low mortgage rates are a great combination to support a very active housing market.

The Pending Home Sales Index, which measures the number of contracts signed to buy previously owned homes, jumped in April by 5% over March, to the highest level of activity since February 2006. Similarly, the New Home Sales report, which measures the number of contracts signed to buy newly built homes, surged by 17% over March, to its best level since January 2008.

The Fed has stated that the decision on when to next hike the federal funds rate will depend on the incoming economic data. This week's data certainly increases the chance of a rate hike in the near term. Besides the strong housing data, Durable Goods orders rose in April by much more than expected. Orders jumped 3.4% from March when an increase of only 0.5% was expected. March orders were revised higher as well. Although the durable orders data is volatile from month to month, the April data does show that demand for big ticket items is high and that there is confidence in improved future economic activity.

Looking ahead, 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. Before that, the core PCE price index, an inflation indicator favored by the Fed, will come out on Tuesday. The ISM national manufacturing index will be released on Wednesday, and the ISM national services index will come out on Friday. Mortgage markets will be closed on Monday in observance of Memorial Day.

Topics: The Money Source, mortgage news, employment report, housing data, federal funds rate, mortgage rates, labor market conditions, unemployment rate, new home sales report, pending home sales

Central Banks See Continued Support

Apr 11 2016


Mortgage rates improved again this week and are now near their best levels of the year. Again the improvement resulted from statements by central bankers. The economic data had little effect.

Statements by the heads of the International Monetary Fund (IMF), the European Central Bank (ECB), and the U.S. Fed shared the same sentiment, the global economy needs support. IMF Managing Director Lagarde described economic growth in Europe as "too slow, too fragile". ECB President Draghi said the ECB will do what ever it takes to stimulate growth and raise inflation. Inflation in the eurozone is now -0.1%. The target is 2.0%. The minutes from the U.S. Fed meeting on March 16th supported recent comments that the Fed will take a gradual approach to raising the federal funds rate. These dovish comments were well received by the bond markets, including U.S. mortgage-backed securities.

The economic data released this week shows that the U.S. economy is on far better footing than the overall global economy. The JOLTS report, which measures job openings and labor turnover rates, showed that job openings rose and voluntary quits increased. Both are signs of an improving labor market.

The ISM Services index measures expansion or contraction in the services sector of the economy. Readings above 50 indicate expansion. The index for March, at 54.5, shows that the service sector expanded again and did so at a better pace than the previous two months.

Looking ahead, the Retail Sales report will be released on Wednesday. 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) will come out on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services which are sold to consumers. Industrial production, another important indicator of economic activity, will be released on Friday.

Topics: Ali Vafai, The Money Source, mortgage news, economic data, federal funds rate, mortgage rates, stimulate growth, US labor market

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