Strong Job Gains

Mar 10 2017

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Stronger than expected U.S. labor market data was negative for mortgage rates over the past week. Increased expectations for tighter monetary policy from the central banks in the U.S. and Europe also were unfavorable. As a result, mortgage rates ended the week higher. 

On Wednesday, ADP, a private payroll firm, estimated that there were an enormous 298,000 private sector jobs added in February, far above the consensus of 190,000. This was great news for the economy. However, faster economic growth raises the outlook for future inflation, making it negative for mortgage rates. Fearing that Friday's more highly regarded Employment report from the Bureau of Labor Statistics (BLS) would exhibit similar strength, mortgage rates moved higher on Wednesday and Thursday.

MortgageNews_3-10.pngThe BLS report revealed that the economy added 235,000 jobs in February, a little above the consensus forecast of 190,000. Although the BLS report was a little stronger than expected overall, it was weaker than some investors had feared, and on Friday mortgage rates recovered a portion of their losses.

With the recent string of strong economic data, investors are now nearly certain that the U.S. Fed will raise the federal funds rate at its meeting on March 15. Investors also have significantly raised their outlook for the pace of rate hikes in 2017. In addition, stronger economic growth in Europe may lead to less accommodative monetary policy from the European Central Bank (ECB). At its meeting on Thursday, the ECB made no policy changes, but the tone of ECB President Mario Draghi's press conference was a little more hawkish. In particular, he said that there is no longer "that sense of urgency" to provide new stimulus measures. 

Wednesday will be the big day next week with reports on Retail Sales and CPI in the morning and the results of the Fed meeting in the afternoon. 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) is a widely followed monthly inflation report that looks at the price change for goods and services which are purchased by consumers. As mentioned, the Fed is widely expected to hike rates, so investors will be focused on hints about the pace of future tightening. After that, Housing Starts will be released on Thursday, and Industrial Production will come out on Friday.

Topics: mortgage news

Rising Rate Hike Expectations

Mar 03 2017

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A shift in expectations toward a faster pace of tightening by the Fed was negative for mortgage rates this week. Stronger than expected economic data also was unfavorable. As a result, mortgage rates ended the week higher.

This week, speeches by several Fed officials were more hawkish than expected. This caused investors to expect a faster pace of monetary policy tightening. Futures markets now price in about a 75% chance of a federal funds rate hike at the next Fed meeting on March 15, up from just a 25% chance a week ago. While the federal funds rate is more highly correlated with short-term yields than with long-term yields such as mortgage rates, a faster pace of tightening is bad for mortgage rates because it likely means that the Fed will begin to reduce its holdings of mortgage-backed securities (MBS) sooner. Fed purchases of MBS have helped mortgage rates move lower in recent years, so the shortened expected timeline for reduced demand from the Fed caused mortgage rates to rise. 

MortgageNews_3-3.pngOne reason that Fed officials may be inclined to hike rates this month is that recently released economic data has generally continued to surpass expectations. Since the election, both consumers and businesses appear to be more optimistic about the economic outlook. The February measure of Consumer Confidence from the Conference Board rose to the highest level since 2001

The ISM national manufacturing index increased to 57.7, the highest level since August 2014. Readings above 50 indicate an expansion in the sector. As recently as August, the index was below 50. The ISM national services index also rose more than expected to 57.6, the best reading since April 2015. Stronger economic activity raises future inflationary pressure, which is bad for mortgage rates.

Looking ahead, there will be a European Central Bank (ECB) meeting on Thursday. No policy changes are expected, but guidance about the outlook for future policy could influence U.S. markets. In the U.S., the important monthly Employment report will be released on Friday. As usual, this report on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. 

Topics: mortgage news

Focus on Europe

Feb 27 2017

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It was another volatile week for mortgage markets. Uncertainty about the outcome of the elections in Europe had a positive influence on U.S. mortgage rates. The Fed minutes and the economic data had little net effect. As a result, mortgage rates ended the week lower.

One source of volatility is uncertainty about the outcome of upcoming elections in several European countries. Investors are most focused on the presidential election in France which will take place on April 23. Polls show a close race between Marine Le Pen and Emmanuel Macron. Le Pen's campaign has been centered on plans for France to leave the EU and to stop using the euro currency, while the centrist Macron has run on a more traditional platform. It is not clear what would happen to the EU if France decided to exit. As a result, investors have reacted by shifting to safer assets after news which favors a Le Pen victory and doing the opposite after positive news for Macron. Since U.S. mortgage-backed securities (MBS) are viewed as relatively safer assets, they have been affected by the shifts in sentiment, causing volatility. The net effect on mortgage rates for the week was positive.

The Fed was another source of volatility this week. On Wednesday, the Fed released the minutes from the February 1 Fed meeting. Concerned that the Fed might talk about a need to reduce its holdings of MBS, investors pushed mortgage rates a little higher ahead of the release of the minutes. When the minutes made little mention of this topic, investors later reversed their positions, resulting in little net change.

MortgageNews_2-24.pngHome sales begin the year on a strong note. In January sales of previously owned homes rose to the highest level since February 2007. Sales might have been even better if inventory levels had been higher. Total inventory of existing homes for sale remained near record low levels with just a 3.6-month supply. 

Looking ahead, Pending Home Sales and Durable Orders will come out on Monday. The Core PCE price index, the inflation indicator favored by the Fed, will be released on Wednesday. The ISM national manufacturing index also will come out on Wednesday, and the ISM national services index will be released on Friday. Fed Chair Yellen is scheduled to speak on Friday as well. The next Employment report will come out on March 10 (due to February being a shorter month).

Topics: mortgage news

Sentiment Remains High

Feb 10 2017

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Last Friday's Employment report left investors feeling good about buying bonds, and mortgage rates improved over the first half of this week. An announcement from President Trump on Thursday was negative for bonds, however, and a partial reversal took place. After a couple of weeks with relatively little net change, mortgage rates ended this week a little lower.

The much weaker than expected wage growth in the Employment report released on February 3 eased investor concerns about future inflation. Lower inflation increases the value of future cash flows from bonds. With little economic news early in the week, investors purchased bonds, including mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, rates declined.

On Thursday, President Trump said to expect an announcement about tax cuts in two to three weeks. Mortgage rates moved a little higher after the comment. There are a couple of reasons why tax cuts are viewed as negative for mortgage rates. The first is that tax cuts increase the wealth of the affected individuals or businesses. As they spend some of this money, it boosts economic activity, which in turn raises the outlook for future inflation. The second reason is that tax cuts increase the budget deficit, at least initially. This means that the government has to issue more Treasury bonds to fund the deficit. The added supply reduces the value of bonds, including MBS.

MortgageNews_2-10.pngThe report on Consumer Sentiment released on Friday showed that consumers remained optimistic about economic activity. While the reading was a little below the 13-year high seen last month, it was still quite high by historical standards. This survey from the University of Michigan measures the level of optimism or pessimism about current and future economic conditions. 

Looking ahead, Retail Sales 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), a widely followed monthly inflation report, also will come out on Wednesday. CPI looks at the price change for goods and services which are purchased by consumers. Housing Starts will be released on Thursday. In addition, Fed Vice Chair Fisher will be speaking on Saturday morning, and Fed Chair Yellen will deliver her semi-annual testimony to Congress on Tuesday and Wednesday. 

Topics: mortgage news

Fed Officials Surprise Investors

Jan 23 2017

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Comments from Fed officials and stronger than expected economic data were negative for mortgage rates this week. Renewed concerns about the United Kingdom's exit from the European Union offset a little of the increase, but mortgage rates ended the week higher.

Brexit is back in the news. On Tuesday, British Prime Minister Theresa May spoke about the UK's objectives in its negotiations for the United Kingdom to exit the European Union. According to May, the UK will not attempt to remain in the single market of the EU because it would require allowing the free movement of workers between the UK and the rest of the EU. Instead, the UK will negotiate trade agreements with the EU and other countries. It is difficult at this time to predict the effect Brexit will have on the economies in Europe. The uncertainty about the outlook for growth caused investors to shift to safer assets, including U.S. mortgage-backed securities. This added demand was good for mortgage rates.

On Wednesday, however, the Fed's Kaplan expressed support for tighter monetary policy due to progress in meeting the Fed's labor market and inflation goals. Of note for mortgage rates, he thinks that the Fed should soon begin to consider a reduction in the Fed's large holdings of MBS and Treasuries. The prospect that this change may take place sooner than expected was negative for mortgage rates. Later that day, Fed Chair Yellen said that most Fed officials expect to raise the federal funds rate gradually until it reaches 3.00% by the end of 2019. This was a faster pace than many investors had expected, and Yellen's comments also pushed mortgage rates higher.

MortgageNews_1-23.pngHousing data released this week revealed that the housing market ended 2016 on a positive note. In December, housing starts rose 11% from November, well above the expected levels. For the year, housing starts were 5% higher than in 2015, making it the best year since 2007. 

Looking ahead, additional information about policy changes under the Trump administration could continue to affect mortgage rates. Existing Home Sales will be released on Tuesday and New Home Sales will come out on Thursday. The first reading for fourth quarter GDP, the broadest measure of economic growth, will be released on Friday. Durable Orders, another important indicator of economic activity, also will come out on Friday. 

Topics: The Money Source, mortgage news

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

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