Given the narrow trading range for mortgages and treasuries over the past month, we see any changes as something to talk about, even though most of it in the macro perspective. Not much is occurring in the interest markets at the long end of the curve. Yesterday when the president commented he wasn’t thrilled over the Fed’s plans to continue increasing rates, the media went ballistic, and short-term bond traders took advantage by buying 10-yr note futures.
This morning trade is the focus; President Trump is saying he is ready to slap the $500B of tariffs he has talked about sooner than he had previously suggested. There has been no progress in trade talks with China; a game of Chinese roulette? “We’re down a tremendous amount,” Trump said in an interview about trade imbalances with China on CNBC broadcast on Friday. “I’m ready to go to 500.” $500B is all of the imports from China each year ($505B in 2017). According to government data, the trade deficit with China last year totaled $376B. One of China’s leverages is its willingness to cut off US soybean imports from the US; farmers are feeling the pain as the price of beans tumbles.
From the markets’ perspective trade worries are not as critical as the financial media makes of all of it. Trade is an important issue and the president will not let it go until there is an acceptable resolution globally.
There are no domestic data points today. Stocks are weaker and yesterday’s brief improvement in the rate markets has evaporated.
The remainder of the day will see more trade and currency chatter. Regardless of President Trump’s threats and China’s push to lower its currency as a reaction to the tariffs, US markets are stable, and US interest rates continue to be flat with little change. The rate markets are fully expecting the Fed to raise rates in September and there is increasing belief that another hike is in the offing in December. Currency markets are now seen by investors and governments as a tool to increase exports; a strong currency is a hurdle to exporting; it is a race to see how low the value can go — the lower, the better in the case of China. In the meantime, the bond market and stock market, based on movements, are not concerned…yet.
PRICES @ 10:00 AM
10 yr. note: -7/32 (22 bp) 2.86% +2 bp
5 yr. note: -2/32 (6 bp) 2.75% +1 bp
2 Yr. note: unch 2.60% unch
30 yr. bond: -26/32 (81 bp) 3.00% +4 bp
Libor Rates: 1 mo. 2.081%; 3 mo. 2.347%; 6 mo. 2.527%; 1 yr. 2.807% (7/19/18)
30 yr. FNMA 4.0 Aug: @9:30 101.95 -8 bp (+5 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.41 -2 bp (+1 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.52 -9 bp (-1 bp from 9:30 yesterday)
Dollar/Yen: 111.87 -0.59 yen
Dollar/Euro: $1.1708 +$0.0066
Dollar/yuan: 6.7677 -0.0064
Dollar Index: 94.62 -0.54
Gold: $1228.00 +$4.00
Crude Oil: $69.70 +$0.24
DJIA: 25,063.26 -1.24
NASDAQ: 7851.26 +25.96
S&P 500: 2806.02 +1.53
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.
Early this morning (7:00 am EST) the 10-yr note yield increased to 2.90%, the highest for the last three weeks; it held there, a key support level. By 9:00 am the note backed down to 2.88% unchanged from yesterday.
At 8:30 am weekly jobless claims were expected to increase 6K, but claims declined 8K to 207K, the lowest claims in over 50 years (Dec 1969). There are now more jobs than can be filled, as more workers are returning to the job market. The data last week is the sample week for the July employment report in two weeks.
Also at 8:30 am, the July Philadelphia Fed business index was expected to rise to 22.0 from 19.9 in July; the index increased to 25.7. Within the report, there was a sharp increase in prices paid for inputs, up 11% to 62.9. The increased costs are in response to the tariffs and according to the report selling prices increased 3.3% some of the highest in 40 years. Some of the increase in prices paid are being absorbed by businesses and is reflected in the six-month outlook in the report down to 29.0 from 35.0 last month, the lowest outlook in two years.
Q2 earnings outlooks took a minor hit with weaker than expected results from eBay and American Express yesterday. Prior to the 9:30 am stock market opening, key US indexes were lower. Comments are also coming from the EU that it is ready to launch its own tariffs and penalties if President Trump moves to add more tariffs on imported autos and auto parts; already tariffs of 10% have been levied against steel and aluminum coming from Europe. Concerns about the impact of tariffs have been growing among manufacturers in every one of the Federal Reserve’s 12 districts, yesterday’s Beige Book noted
The dollar is continuing to increase against other global currencies; yesterday Fed chair Powell provided a continued upbeat assessment of the US economy; said he believed the United States was on course for years more of steady growth, and carefully played down the risks to the U.S. economy of an escalating trade conflict. The dollar has increased 6% over the last three months. The yuan has declined to a one year low in most markets.
At 10:00 am June’s leading economic indicators, thought to be +0.4%, increased 0.5%. May LEI revised from +0.2% to 0.0%.
No change in the neutral outlook for mortgage rates. Early this morning it looked tenuous when the 10-yr ran to 2.90% but retreated into its comfort zone to 2.86% -1 bp from yesterday. Rates at 10:00 am are lower across the curve. Stock indexes opened lower and by 10:00 am continued to decline, adding support to the bond markets although no significant breaks. One way to view rates at the long end of the curve; no one wants to buy, and no one wants to sell. Investors and traders happy to be where they are.
10 yr. note: +3/32 (9 bp) 2.86% -1 bp
5 yr. note: +1/32 (3 bp) 2.76% -0.5 bp
2 Yr. note: unch 2.61% unch
30 yr. bond: +11/32 (-34 bp) 2.97% -3 bp
Libor Rates: 1 mo. 2.086%; 3 mo. 2.347%; 6 mo. 2.526%; 1 yr. 2.800% (7/18/18)
30 yr. FNMA 4.0 Aug: @9:30 101.91 +3 bp (-5 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.40 +7 bp (+4 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.50 +2 bp (-2 bp from 9:30 yesterday)
Dollar/Yen: 113.04 +0.19 yen
Dollar/Euro: $1.1595 -$0.0046
Dollar/Yuan 6.7820 -0.0598 Yuan
Dollar Index: 95.43 +0.34
Gold: $1217.20 -$10.70
Crude Oil: $69.56 +$0.80
DJIA: 25,072.07 -127.22
NASDAQ: 7819.16 -35.28
S&P 500: 2803.69 -11.83
Not much change in rates this morning but at 8:00 am EST the 10-yr dropped 1 bp and in early MBS trade added +5 bps from yesterday’s close.
Weekly MBA mortgage applications were down 2.5%, purchase apps -5.0% and re-finance apps +2.0%. Last week showed a little improvement after previously lower apps. The bad news, however; June housing starts, thought to be -2.8% to 1320K, dropped 12.3% to 1173K the weakest since Sept 2017, June building permits, thought to be +2.4% at 1330K, were down 2.2% to 1273K. Single-family starts were down 9.1% to 858K. The Midwest led the way to these lower numbers. Single-family building permits did increase 0.8% after declining 2.3% in May. This is a volatile series. In May yr/yr starts were +20.3%, in June yr/yr -4.2%. we’re seeing higher prices for new homes, wages not keeping pace with the increases, and all this while mortgage rates remain historically low. The rate increases that occurred in April, May, and June add to the weakness. Higher lumber prices (+50%) and shortages of land and labor are constraining homebuilding. The Trump administration in April 2017 imposed anti-subsidy duties on imports of Canadian softwood lumber, which builders say have boosted the price of a new single-family home. The housing market is lagging overall economic growth, which appears to have accelerated in the second quarter after hitting a soft patch at the start of the year. May starts were revised lower, 1337K from 1350K
Yesterday Jerome Powell told senators he believes gradual increases in interest rates would help sustain economic growth; he also commented that it is too early to make any judgments about the full impact of the escalating trade tariffs on the US and global economies. If trade tariffs continue to escalate, Powell will have to think about keeping rates low. Trump is still on pace to add another $16B of tariffs (to total $50B) on China, and in August he has threatened to add another $200B which is about all of China’s export to the US. Powell will appear before the House Financial Services Committee this morning for the second day of required semi-annual testimony.
At 9:30 am there was no movement in interest rates and not much change on the open of the stock market; the DJIA opened +6, NASDAQ +4, S&P +2. The 10-yr at 9:30 remained unchanged at 2.86%. The stock market is focused on Q2 earnings, and so far most have met or beat estimates; Q2 GDP growth presently thought to be +4.5% according to the Atlanta Fed GDPNow; another update will be released later today including soft housing starts and permits.
This afternoon the Fed will release its Beige Book. In the meantime, markets will turn to listening to Powell as he begins his testimony at the House Financial Services Committee.
No change in rates now for four weeks with no real change in mortgages and treasuries at the long end of the curve. No change in our technical observations — still neutral reflecting what is going on.
10 yr. note: +2/32 (6 bp) 2.86% unch
5 yr. note: +1/32 (3 bp) 2.76% -0.5 bp
2 Yr. note: +1/32 (3 bp) 2.60% -1 bp
30 yr. bond: unch 2.97% unch
Libor Rates: 1 mo. 2.081%; 3 mo. 2.341%; 6 mo. 2.523%; 1 yr. 2.795% (7/17/18)
30 yr. FNMA 4.0 Aug: @9:30 101.95 +3 bp (+3 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.36 +5 bp (+7 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.52 +2 bp (-1 bp from 9:30 yesterday)
Dollar/Yen: 112.80 -0.08 yen
Dollar/Euro: $1.1635 -$0.0030
Dollar Index: 95.21 +0.23
Gold: $1224.30 -$3.00
Crude Oil: $67.37 -$0.71
DJIA: 25,146.12 +26.33
NASDAQ: 7843.54 -11.58
S&P 500: 2809.44 -0.11
Quiet opening in the bond market this morning, stock indexes in the futures market slightly lower. Markets waiting for Jerome Powell this morning when he testifies at the Senate Banking committee. He will begin at 10:00 am.
Fed's Powell will face questions about increasing interest rates, the impact of the trade tariffs, the Fed’s outlook for the US economy and employment. Likely a repeat of his press conference after the FOMC meeting in June, “the U.S. economy is in great shape.” Yesterday the IMF joined a number of other forecasts and warned once again about the trade conflicts; saying the current threats made by the US and its trading partners risked lowering global growth by as much as 0.5% by 2020, or about $430B in lost GDP worldwide. Although all economies would suffer from further escalation, the US would find itself “as the focus of global retaliation” with a relatively higher share of its exports taxed in global markets. “It is therefore especially vulnerable.”
At 9:15 am ET June industrial production was expected +0.6%, as released +0.6%, but May production initially reported -0.1% was revised to -0.5%. Manufacturing in June +0.8% from -1.1% in May. The soft production will lead to increased unit labor costs. June capacity utilization was thought to be at 78.3% as reported 78.0%, May also revised weaker, from 77.9% to 77.7%.
At 10:00 am the July NAHB housing market index expected at 69 up 1 point from June; as reported 68. The lack of acceleration in this index belies what have been solid gains in new home sales and also housing starts and permits. The report notes that high costs for construction materials are a negative for home builders, (lumber prices 50% higher than a year ago).
Jerome Powell is about to begin his testimony at the Senate Banking Committee. Part of his opening remarks: “I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent.”
Day after day the 10 yr note is holding within a 6 bp trading range, mortgage rates, and prices also flatlining. Technically the long end of the yield curve is neutral in every study we use; not a surprise given the narrow movement. Powell’s testimony might move the needle a little although we doubt much. He is unlikely to rattle markets with any significant changes from what he and other Fed officials have said recently. Traders will direct attention to handicapping his comments to judge whether we get one or two more increases in the federal funds rate this year and whether the Fed has any new view about the impact of the trade tariffs; at the FOMC meeting, the Fed said it was too early to form an opinion.
Interest rates early this morning were unchanged from Friday, but it didn’t last long. At 8:30 June retail sales +0.5% as expected, ex-auto sales +0.4% as expected; May revisions is the headline. May sales revised from +0.8% to +1.3%; ex-autos revised from 0.9% to +1.4%.
Also at 8:30 the July NY Empire State manufacturing index at 22.6 from 25 in June and expected at 21.0.
It’s the meeting between Trump and Putin that is drawing all focus. The meeting is underway. Trump goes into it with a lot of boy scout bravado against Putin. President Trump commented last week that he and Putin might become friends. Trump is taking a lot of criticism about his positive comments and being pushed to confront Putin over the Russian hacking and in the mid-east. Saw President Trump and Putin on CNBC leading to the private talks; Trump being Trump with a lot of optimism while Putin glared at him. We will have to wait and see, but given Putin’s history, he isn’t likely to be too cooperative thinking he has the advantage now. Have no opinion at this point how markets will react to the likely press conference after the meeting if any.
At 10:00 May business inventories were expected +0.4%; the index as reported +0.4%.
The news today centers on Trump/Putin, but the more immediate focus should be on Fed Chair Jerome Powell testifying tomorrow and Wednesday in Congress. Rate increases are coming, but there is still debate within the markets about whether the Fed will do one more in Sept or another in December. The US economy is strong as evident in this morning’s retail sales. Strong gains for the discretionary categories of autos and restaurants and a big upward revision to May highlight the June retail sales report. Gains in auto sales point to new confidence among consumers and are consistent with the strength underway in the labor market. Building materials, at plus 0.8 percent in June, and furniture store sales, up 0.6 percent, are both positive indications for residential investment. Powell will field a lot of questions about the Fed’s outlook, and there'll be questions focusing on the trade tariffs and what Powell thinks about the US economic impact.
More data out of China is adding to concern its economy is slowing. Data released since Friday has affirmed what’s been expected for some time: That an ongoing campaign to curtail credit is putting the brakes on the world’s second-largest economy. Given that China generates as much as a third of global growth, that’s adding to signs that the best world expansion in years is plateauing. The IMF has worried the trade tariffs will slow growth; it is scheduled to release its latest forecast later today. China’s GDP is slowing, but it is still running at 6.7% although the weakest in two years.
The 10 and mortgage rates locked in a very narrow ranges, the 10 since June 27th trading between 2.88% and 2.82% the narrowest in over 2 years. Our technical work remains neutral reflecting the tight movements.
This Week’s Calendar:
8:30 am June retail sales as reported +0.5%, May revised from +0.8% to +1.3%; excluding auto sale +0.4%, May revised from +0.9% to +1.4%.
10:00 am May business inventories expected at +0.4%, as reported +0.4%
9:15 am June industrial production and capacity utilization (production +0.6%, cap utilization 78.3% from 77.9% in May)
10:00 am Jerome Powell at the Senate Banking Committee
10:00 am July NAHB housing market index (69.0 from 68.0 in June)
7:00 am weekly MBA mortgage applications
8:30 am June housing starts and permits (starts -2.8% to 1320K; permits +2.4% to 1330K)
10:00 am Jerome Powell at the House Financial Services Committee
2:00 pm Fed Beige Book
8:30 am weekly jobless claims (220K +6K)
10:00 am June leading economic indicators (+0.4%)
10 yr. note: -10/32 (31 bp) 2.865% +3.5 bp
5 yr. note: -5/32 (15 bp) 2.76% +3 bp
2 Yr. note: -1/32 (3 bp) 2.60% +2 bp
30 yr. bond: -25/32 (78 bp) 2.97% +4 bp
Libor Rates: 1 mo. 2.073%; 3 mo. 2.336%; 6 mo. 2.520%; 1 yr. 2.786%
30 yr. FNMA 4.0 Aug: @9:30 101.86 -12 bp (-5 bp from 9:03 Friday)
15 yr. FNMA 4.0: @9:30 102.27 -13 bp (-8 bp from 9:30 Friday)
30 yr. GNMA 4.0: @9:30 102.58 -12 bp (-5 bp from 9:30 Friday)
Dollar/Yen: 112.33 -0.02 yen
Dollar/Euro: $1.1721 +$0.0040
Dollar Index: 94.50 -023
Gold: $1241.00 -$0.20
Crude Oil: $69.15 -$1.86
DJIA: 25,035.32 +15.91
NASDAQ: 7831.78 +5.81
S&P 500: 2798.84 -2.47
Quiet this morning; the bond and stock market in early trade were both unchanged from yesterday and yesterday was unchanged from Wednesday.
President Trump is ending his visit to England today after having tea with the Queen, taking the weekend off, then meeting with Russian President Putin on Monday. The U.S. media appear to think president Trump will not succeed while Putin will get a huge boost from the meeting. The president and U.K. Prime Minister Theresa May affirmed their commitment to striking a trade deal, seeking to project unity after the U.S. leader criticized the prime minister’s approach to Brexit in a recent interview. As far as markets go, there has been no movement ahead of the meeting. Between the current trade news and this week’s NATO meeting, the meeting is more a media event than one posing any significant market concerns.
Earnings season is officially underway today with banks reporting; already JP Morgan reported profits that beat all forecasts. Wells Fargo profits fell 11% after the bank recorded $1.1B in charges related to previously disclosed regulatory matters and tax issues. Citigroup reported profits added +16%, better than analysts expected. PNC was also better than forecasts profits with a boost of +24%. Before the reports, markets were expecting banks would have a good quarter. There has been no noticeable reaction to the releases.
June import and export prices came out this morning; import prices declined 0.4% against forecasts of +0.1%. Export prices were thought to be +0.3%, as reported +0.3%. Yr/yr imports +4.3%, yr/yr exports +5.3%. Import prices saw foods and feed down 2.6%, petroleum products down 0.8%, industrial supplies down 0.1%. And even finished goods show a sweep of declines led by consumer goods which fell 0.3%. The drop in imports comes prior to the impact that may come from the trade conflicts.
At 10:00 am the mid-month U. of Michigan consumer sentiment index was expected at 98.4 from its May final at 98.2; the index slid to a very soft 97.1. Are consumers worried about the potential negative impact of a prolonged tariff war?
What is the Fed thinking these days? More rate increases? Is caution about the economic and inflation outlook over the possible trade war increasing? Does the Fed have any analytical forecasts about what a continued tariff war would do to the US and global economic outlook? Questions abound; markets will get some insight next week when Jerome Powell testifies before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday about his required semi-annual report on the U.S. economy and inflation. In the meantime, we don’t believe interest rates will change, having traded within the narrow range since June 21st. Powell will get most of the questions on President Trump’s trade tariffs and what the Fed believes would occur based on a number of different scenarios.
China wants its yuan to decline against other currencies to make their exports cheaper; yesterday the yuan increased. Recent economic reports show China’s economy is slowing although its GDP growth dwarfs the US and other major economies. Europe is slowing while emerging markets are softening. Now we are reading more economists are now looking for the U.S. to also slow in the second half of the year.
By 10:00 am today after the very weak consumer sentiment index, the bond and mortgage markets improved, but not much.
10 yr. note: +2/32 (6 bp) 2.84% -1 bp
5 yr. note: +1/32 (3 bp) 2.74% -1 bp
2 Yr. note: +1/32 (3 bp) 2.59% -1 bp
30 yr. bond: +6/32 (18 bp) 2.93% -1.5 bp
Libor Rates: 1 mo. 2.071%; 3 mo. 2.339%; 6 mo. 2.519%; 1 yr. 2.785%
30 yr. FNMA 4.0 Aug: @9:30 101.92 +3 bp (++10 bps from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.35 -1 bp (-7 bps from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.63 +5 bp (+9 bp from 9:30 yesterday)
Dollar/Yen: 112.49 -0.03 yen
Dollar/Euro: $1.1650 -$0.0019
Dollar Index: 95.03 +0.20
Gold: $1241.20 -$5.40
Crude Oil: $70.51 +$0.18
DJIA: 24,923.53 -1.36
NASDAQ: 7820.15 -3.76
S&P 500: 2795.88 -2.41
The bond and mortgage markets were weaker in early trade this morning, with global stock markets including the US under pressure yesterday. This morning the US indexes traded higher before the 9:30 am EST opening.
Yesterday June PPI data was stronger than most expected: +3.4% yr/yr and the core PPI +2.8% was up from 2.4% in May.
This morning June CPI, more important than PPI, was a little softer; CPI +0.1% (0.2% expected), the core +0.2% as expected. Yr/yr CPI +2.9% remained unchanged from May; the core yr/yr +2.3% up from 2.2% in May. CPI the strongest since 2012.
Weekly jobless claims saw a good decline, down 18K to 214K.
At 9:30 am the DJIA opened +208 after declining 219 yesterday, NASDAQ +36 from -42 yesterday, and the SP +15 from -19 yesterday. The 10-yr at 9:30 am was up +2 bps to 2.86%. Investors and analysts are expecting Q2 earnings that begin tomorrow with bank earnings, which will remain strong. Trade fears come and go while markets are less nervous at the moment thinking the US economic outlook will continue to improve.
This this week’s afternoon Treasury will finish auctions with $14B of 30 yr bonds. Yesterday the 10-yr auction saw very solid bidding partly on the firmer dollar but mostly driven by Trump’s new trade threats on China, upping the amount to $200B. Whether that occurs depends on what will happen with any negotiations that China is proposing this morning.
President Trump is in England now after stirring up a lot of issues yesterday at the NATO meeting, including a German-Russian pipeline deal to deliver natural gas to Europe. Trump criticized the arrangement and chided Germany on its lack of spending on NATO security. At the end of the day (after raising cane) the president left telling reporters that "everyone's agreed to substantially up their commitment."
On trade China today called for new bilateral negotiations, while White House officials said they're willing to resume talks if China addresses U.S. grievances. Trump has upped the ante calling for another $200B of tariffs on China exports to the US. This list is long and will have negative impacts on US consumers as well as Chinese citizens. The numbers are being crunched on the trade impact; Morgan Stanley saying the result of $250B of China tariffs will weaken US growth by 0.3 to 0.4% and China down 0.3%. Deutsche Bank forecasting China’s GDP would slip 0.3% in 2019. J.P Morgan saying China growth down 0.2%.
Trulia said today housing inventory is increasing, improvement of 12.2% in the second quarter, the best gain since Q1 2015; however still down 3.5% from a year ago. Their reasoning included sellers more willing to put homes on the market with the recent increase in prices, more new construction, and baby boomers previously unwilling to sell before retirement are now giving up that idea.
No change in interest rates; they haven’t moved for almost a month now. Technically the bond and mortgage markets continue to be flat, neither either bullish or bearish. No matter the news or fundamental data or trade news, the long end is locked while the short end is very slowly flattening. The 5/10 spread is just 10 bps; 2/10 spread is a meager 29 bps.
PRICES @ 10:10 AM
10 yr. note: -3/32 (9 bp) 2.86% +0.5 bp
5 yr. note: -1/32 (3 bp) 2.75% +0.5 bp
2 Yr. note: -1/32 (3 bp) 2.59% unch
30 yr. bond: unch 2.95% unch
Libor Rates: 1 mo. 2.074%; 3 mo. 2.337%; 6 mo. 2.512%; 1 yr. 2.778%
30 yr. FNMA 4.0 July: @9:30 101.81 -8 bp (-3 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.42 +2 bp (-2 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.55 -8 bp (+1 bp from 9:30 yesterday)
Dollar/Yen: 112.50 +0.49 yen
Dollar/Euro: $1.1679 +$0.0005
Dollar Index: 94.75 +0.03
Gold: $1246.50 +$2.10
Crude Oil: $70.52 +$0.14
DJIA: 24,879.29 +178.84
NASDAQ: 7774.05 +57.44
S&P 500: 2789.39 +15.37
More tariffs on China — $200B more. The reaction sent all global equity markets down including pre-opening trade in US futures markets. At 8:00 am EST the DJIA lost -190. The tariffs are likely to go into effect on August 30th, allowing US businesses to make adjustments. There is a proposed list of thousands of products on which it plans to impose 10% tariffs, ranging from vacuum cleaners and windshield wipers to sterling silver spoons and badger hair. The U.S. omitted some high-profile items like mobile phones. The amount is equivalent of half of US imports from China. The belief of economists and business leaders is this increasing “war” will slow US and global growth. One negative is that China will likely become an antagonist in the negotiations with North Korea.
President Trump is in Brussels for the NATO meeting. He is stirring the pot over Germany’s energy buying from Russia and his attack on NATO members that don’t and have not, contributed their share toward military defense. President Trump accused Germany of being a “captive” of Russia as Western leaders gathered in Brussels for a NATO summit. He told NATO Secretary-General Jens Stoltenberg that Germany was wrong to support a new $11B Baltic Sea pipeline to import Russian gas while being slow to meet targets for contributing to NATO defense spending.
Early this morning the weekly MBA mortgage applications improved; apps +2.5%, purchase apps up a solid 7.0% while refinances dropped 4.0%. Unadjusted, purchase applications were 8% higher than a year ago, making a strong comeback after the prior week's negative year-on-year reading. The refinancing share of mortgage activity fell 2.4 percentage points to the lowest level since August 2008, 34.8%.
At 8:30 am the June PPI was hotter than forecasts; PPI was up +0.3% on estimates of 0.2%, yr/yr +3.4% from 3.1% in May. Core PPI was in line up 03%, yr/yr 2.8% from 2.4% in May. When services are included along with food and energy, PPI increased by 0.3% and yr/yr +2.7% from 2.6% in May. Trade services, which tracks prices at wholesalers and retailers, jumped 0.7% in June on top of May's 0.9% gain. Will these troubling increases be passed on to consumers? Tomorrow June CPI will be released more concerning than PPI. Higher energy prices (+0.8%) and gasoline prices (+0.5%) contributed to the increases.
A new report from the San Francisco Fed is saying the forecasts of stronger growth coming from the tax cuts earlier this year may be “too rosy”. The substance is that fiscal stimulus isn’t as effective when the economy is growing rather than when the economy is in a slump. “The predominant research finding is that the fiscal multiplier is smaller during expansions than during recessions,” economists Tim Mahedy and Daniel Wilson wrote.
This afternoon Treasury is scheduled to auction $22B of 10 yr notes, re-opening the issue from May. Yesterday Treasury sold $33B of 3 yrs, in line with the weakest demands in years. The 10-yr has obvious implications at the long end of the curve including mortgage rates.
Nothing new in the bond and mortgage markets, still holding in narrow ranges regardless of any particular news. This morning’s strong PPI didn’t faze the bond market. The 10-yr is presently smack dab in the middle of the three-week range.
10 yr. note: +1/32 (3 bp) 2.85% unch
5 yr. note: -2/32 (6 b) 2.76% +1 bp
2 Yr. note: -2/32 (6 bp) 2.59% +2 bp
30 yr. bond: +2/32 (6 bp) 2.95% unch
Libor Rates: 1 mo. 2.066%; 3 mo. 2.337%; 6 mo. 2.511%; 1 yr. 2.780%
30 yr. FNMA 4.0 July: @9:30 101.83 +2 bp (-5 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.44 -2 bp (-2 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.53 -3 bp (-1 bp from 9:30 yesterday)
Dollar/Yen: 111.19 +0.19 yen
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Housing experts report on the new normal
Using a MarketNsight study of 18 cities across the country, Builder Magazine’s John Hunt explores how, in spite of nearly a decade of positive job growth and population growth, the U.S. housing market is still anywhere from 30% to 60% below pre-recession levels.
In the “old normal” (before the 2003 to 2006 bubble), Hunt says first-time buyers and first-move-up buyers made up 60% of all new home sales. Buyers typically entered the market for the first time by the age of 25, started a family, and moved to larger homes around age 32. Currently, however, that demographic accounts for less than 40% of new home sales. The profile of today’s first-time buyer reveals an average age of 33-years-old, with this aging trend not changing any time soon.
“There have been countless articles written about millennials’ absence from the new home market,” says Hunt. “It comes down to this – we cannot give them what they want, where they want it, at a price they can afford... yet. We are in the very early stages of seeing some much-needed innovation in our industry, aimed at recapturing a small percentage of that all-important first-time buyer.”
Hunt uses the retail sector as an example of how desperately innovation is needed. He talks of a reset in that all-important industry, with thousands of brick and mortar locations closing last year with that pace now quickening. “Changes in shopping habits, driven by technology and millennials, have caught many traditional retailers unprepared. We would do well to take note of this in our industry,” says Hunt.
Anyone in the housing industry who was around back in the late ‘90s and early 2000s may recall how slow builders were slow to embrace using the Internet, instead paying for huge display ads in local newspapers, which were, in general, already going the way of the dodo. Hunt says the housing industry has been slow to innovate, essentially building the same house today that it built 40 years ago. “Our last major innovation was also brought about by a technological revolution – the sewer. As sewer lines reached farther out from city centers, we saw the 1950s and 1960s brick ranches on a half-acre give way to the five, four-and-a-door homes of the 1980s…and there we stopped. We did not innovate from 2000 to 2006 because there was no need.” After that? Well, we know what that market looked like.
Hunt recalls truly believing that the apartment industry was going to over-build beginning 3 or 4 years ago, citing rising rental rates that would beckon renters to become homeowners. But now he says he and other experts were all wrong. “The old rules in housing simply do not apply anymore,” he says. “A quick check of the rental rates and square footages in your core counties might surprise you.”
Today’s first time home buyers, as well as other demographics of buyers, are willing to pay high prices for much smaller spaces in their preferred locations and Hunt says some pioneering builders and developers are taking notice of this and choosing to compete.
This means condos and townhomes, located where buyers want to live, are gaining in popularity so fast that no one seems to care about the common-wall-air-space-monthly-fees thing anymore. Also thrown into this mix are tiny homes within good commute distances to metro areas.
MarketNsight’s study reveals millennials are not alone, with Baby Boomers vying for the same homes in a market when housing is already tight. With kids are gone and retirement imminent, young-at-heart older buyers prefer to leave the suburbs behind and move to where the action is. All this means is that experiences and location are the new rock stars of housing, with square footage rapidly becoming the poor stepchild.
How Rates Move:
Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways this morning. Last week the MBS market improved by +12bps. This was not enough to significantly improve rates last week. Mortgage rates stayed in a very tight channel throughout the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three things that have the greatest ability to impact your mortgage rates this week. 1) Trade wars, 2) Geopolitical and 3) Inflation.
1) Trade wars: This story continues to suck all of the oxygen out of the room. The initial tit-for-tat $34B in tariffs with China is less of a concern to long bond traders than what comes next. Does this escalate to a $200B war? Is there some agreement on some items that decrease the $34B down to $10B? Will progress be made on other fronts (NAFTA, Europe, etc).
2) Geopolitical: A lot going on this week with Brexit taking on center stage as their Brexit Secretary just quit. President Trump will be traveling to the U.K. to meet with Prime Minister May and will be at the NATO summit on Wednesday and Thursday. Trump is also expected to announce his appointment for the Supreme Court, and the bond market will react based upon if they are pro-business/less regulation or not.
3) Inflation: This week's Consumer Price Index will get a lot of attention as the YOY reading is expected to climb to 2.3%. An important story will be the impact of tariffs on raw material costs (PPI) and if the higher costs have transferred to the consumer in the form of higher prices.
Treasury auctions this week:
This Week's Potential Volatility: Average
Markets have shrugged off the trade war news. If the trade tensions escalate, we could see it start to affect markets in a more meaningful way. Otherwise , once again look for rates to move sideways with relatively low volatility.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.