President Trump just called of the summit meeting with North Korea.
Yesterday we experienced a strong rally in the bond market on renewed trade issues as well as President Trump tossing cold water on the summit meeting with North Korea. By afternoon the FOMC minutes added more price gains with confirmation that the Fed will likely allow the 2.0% inflation target to be exceeded. Rates across the curve declined. The 2-yr was down 4 bps, the 5-yr lost 6 bps, and the 10-yr note at 3.00% dropped 6 bps. Early this morning the 10-yr traded unchanged at 3.00% and MBS prices started up 3 bps from yesterday’s improvements.
On trade; President Trump is considering adding tariffs on imported autos; this morning on CNBC Sec of Commerce Wilbur Ross commented: “There is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry.” The 1962 Trade Expansion Act that was passed for national security reasons is the fallback reason. For those who don’t have direct experience with US autos built in the ‘60s and ‘70s, US automakers lost out in a major way because they built what was considered inferior cars. There was actually a slogan back then about never buying a new car that came off an American assembly line on Fridays or Mondays because workers slacked off on Fridays and Mondays, they worked with hangovers. Putting tariffs on imported autos will, if imposed, may hurt our main allies.
At 8:30 am EST weekly jobless claims increased +11K to 234K; estimates were for a decline of 2K. Claims remain at some of the lowest levels in decades.
At 9:00 am the March FHFA home price index was expected to increase 0.8%, it was up just 0.1% and yr/yr the price index up 6.7% and down from yr/yr in February at 7.2%.
At 9:30 am the DJIA opened down -74, NASDAQ down -5, S&P down -6. The 10-yr at 9:30 am held at 2.97%, -3 bps.
At 10:00 am April existing home sales figures were released; forecasts were for sales to have been unchanged from March at 5.600 mil. Sales declined to 5.460, down -2.5%; yr/yr -1.4% from -1.2% in March.
This afternoon the Treasury will sell $30B of 7-yr notes; yesterday’s 5-yr auction was decent other than the fact that indirect bidders were not as aggressive when compared to the last year for 5-yr Treasury debt.
The 10-yr dropped below the psychological 3.00% to 2.97% this morning, now trading under its 20-day average since early April. Our momentum oscillators have moved from negative to positive. Despite that, however, we can’t build a case for major declines in interest rates. From a fundamental perspective, the Fed’s comments that inflation over 2.0% would not trigger any serious changes for gradual increases in the Federal Funds rate means a decline in rates is an opportunity for prospective home buyers.
PRICES @ 10:10 AM
10 yr. note: +8/32 (25 bp) 2.964% -3.6 bp
5 yr. note: +5/32 (15 bp) 2.80% -4 bp
2 Yr. note: +2/32 (6 bp (2.50% -3 bp
30 yr. bond: +16/32 (50 bp) 3.13% -3 bp
Libor Rates: 1 mo. 1.959%; 3 mo. 2.330%; 6 mo. 2.497%; 1 yr. 2.754%
30 yr. FNMA 4.0 June: @9:30 101.66 +9 bp (+29 bps from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.49 +6 bp (+15 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.11 +31 bp (+13 bp from 9:30 yesterday)
Dollar/Yen: 109.25 -0.83 yen
Dollar/Euro: $1.1724 +$0.0026
Dollar Index: 93.79 -0.17
Gold: $1304.50 +$9.70
Crude Oil: $70.77 -$1.07
DJIA: 24,763.60 -123.21
NASDAQ: 7400.21 -25.75
S&P 500: 2721.11 -12.18
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.
There were literally no changes in the 10-yr and MBSs since last Friday; we believed this week would be quiet as we approach the Memorial Day holiday weekend. Until this morning we were right on, but that changed. The 10-yr note rate early this morning declined briefly below 3.00% but moved back to 6 bps decline to 3.01%, following the German 10-yr bund.
This morning we learned the IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI) sank in May to an 18-month low of 54.1 from 55.1, below all forecasts. The decline added to the weakness in both Germany and France PMI indexes earlier. The unexpected weakness in growth outlooks set off a strong run to safe German bunds and is following through in US treasuries this morning. The soft PMI reads igniting new concerns the ECB may be unable to begin withdrawing its stimulus.
Although the US bond market had no reaction to the possibility of the North Korea summit being delayed or cancelled yesterday, it added to the weakness in the EU zone this morning and provided another motive to buy German bunds. US rates follow the decline in rates in the next strongest global bond market (Germany's). Money market pricing today suggested investors were scaling back bets the ECB would raise rates by mid-2019.
Yesterday President Trump was less optimistic about the summit meeting between the US and North Korea, saying it might be delayed or cancelled completely. Trade with China looked good over the weekend with comments from Sec. of Treasury Mnuchin, who said the trade discussions with China were going well. Now both concerns are up in the air again. US stock indexes declined yesterday and in futures trading prior to the 9:30 am ET open the key indexes were under additional pressure. All stock markets were lower today.
At 10:00 am April new home sales were expected to have declined to 677K from 694K in March, down 2.5%; sales reported 662K, but March revised lower to 672K, making the month-to-month decline 1.5%. The lower revision in March and the weaker-than-thought April numbers are due to higher rates; April is usually a strong month for new home sales.
At 1:00 Treasury will sell $36B of 5 yr notes; yesterday the demand for the 2-yr was soft.
Early this morning (7:00 am) found weekly MBA mortgage applications down 2.6%, purchase apps lost -2.0%, while refinance apps declined -4.0%. The fourth weekly decline in a row shrank the year-on-year gain in purchase applications to 3 percent. The refinance share of mortgage activity fell 0.2 percentage points to 35.7 percent.
More angst is expected today at 2:00 pm when the FOMC minutes from the May meeting will be released. Markets expect the Fed to increase the Federal Fund rate at the June meeting. The minutes will be scrutinized for any additional clues to future increases with discussions focused on the economy and inflation expectations. The Fed increased its benchmark rate in March, and another move is widely expected in June. Odds are currently split between the probabilities for three and four increases over the year as a whole, according to pricing of federal funds futures contracts.
At 10:15 am the stock indexes had recovered half of the losses at opening time. The 10-yr note yield tested 3.00%; its near-term resistance has so far held and at 3.02%. The 20-day average is at 3.02% and 3% a key psychological resistance. Weak Euro zone economic releases and less optimism over the trade and summit meeting are pressuring stocks somewhat. The rate decline in the US is presently driven by the decline in the German 10-yr bund. While we still can’t get bullish, some of the decline today can be attributed to the long weekend ahead. This afternoon’s FOMC minutes will offer the next key news today.
PRICES @ 10:15 AM
10 yr. note: +10/32 (31 bp) 3.02% -4 bp
5 yr. note: +5/32 (15 bp) 2.86% -4 bp
2 Yr. note: +1/32 (3 bp) 2.58% unch
30 yr. bond: +16/32 (50 bp) 3.18% -2 bp
Libor Rates: 1 mo. 1.965%; 3 mo. 2.330%; 6 mo. 2.499%; 1 yr. 2.764% (5/22/18)
30 yr. FNMA 4.0 June: @9:30 101.37 +15 bp (+15 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.34 -2 bp (-1 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 101.98 +25 bp (+25 bp from 9:30 yesterday)
Dollar/Yen: 110.10 -0.90 yen
Dollar/Euro: $1.1709 -$0.0071
Dollar Index: 93.94 +0.35
Gold: $1294.10 -$3.30
Crude Oil: $72.09 -$0.15
DJIA: 24,769.57 -64.84
NASDAQ: 7366.58 -11.87
S&P 500: 2718.22 -6.22
Once again today, no economic data and all market focus on trade and the coming summit between President Trump and North Korea’s Kim Jung Un.
South Korea’s Pres. Moon Jae-in is in Washington to coordinate with Trump on the coming summit with North Korea (June 12th). The summit is still on based on comments from President Trump and North Korea. So far it hasn’t been canceled and yesterday Chinese officials were telling Washington not to ‘give up.’ President Trump, however, has a penchant for upsetting apple carts. This meeting, however, is critical for his global reputation.
Those trade wars that captivated the financial markets and financial media are fading as we expected they would. China today announced it willcut import duties on passenger cars from 25 percent to 15 percent effective July 1, another sign of easing trade tensions between the world's two largest economies. There are also reports that the US and China are coming to an agreement to ease selling semiconductors to China’s giant ZTE Corp. ZTE has been forced to halt major operations after the US slapped a ban on China’s second-largest maker of phone networking equipment for violating a settlement on breaching sanctions and then lying about it. President Trump claimed yesterday that China had agreed to buy “massive amounts” of American agricultural products – “practically as much as our farmers can produce” – as well as reduce trade barriers and tariffs.
Yesterday the stock market improved on the weekend easing of tensions over trade. China is coming around to realizing its trade surplus with the US has to be lessened; facing a president unlike any others, they realize the current one won’t back down, and the surplus isn’t good for either China or the US. China has also let it be known it wants a deal or at least continued dialogue between the US and North Korea.
At 9:30 am EST the DJIA opened +40, NASDAQ +32, S&P +6. The 10-yr at 9:30 am remained unchanged at 3.06% and yesterday unchanged at 3.06%. We noted last Friday this week would likely not see much change in the bond and mortgage markets this week with no economic data until tomorrow and a cooling in the trade sweats that captivate media.
Iran: Although President Trump slammed the door on the US/Iran accord two weeks ago, the EU in various statements and comments said it would continue to ‘work’ with Iran and stay in the accord. Now The US has said it hopes to use strong shared interests that have emerged with its European Union partners in recent months to move forward on addressing Iran’s nuclear program, missile development and role in regional conflicts.
This afternoon the Treasury will auction $33B of 2s, starting three days of borrowing; tomorrow $36B of 5s and Thursday $30B of 7s. Treasury borrowing is increasing as the federal annual deficit increases.
Should be another quiet session in the bond and mortgage markets. The 10-yr at 3.06% has near-term minor resistance at 3.04%, strong resistance at 3.00%. Support at 3.10% isn’t likely to be taken out this week without some major shock.
Not much so far this week on US economy; tomorrow we’ll see the minutes from the March FOMC meeting and April new home sales that are expected to have declined 2.5%.
PRICES @ 10:00 AM
10 yr. note: -2/32 (6 bp) 3.067% +0.3 bp
5 yr. note: unch 2.90% unch
2 Yr. note: unch 2.58% unch
30 yr. bond: -6/32 (18 bp) 3.21% +1 bp
Libor Rates: 1 mo. 1.961%; 3 mo. 2.330%; 6 mo. 2.498%; 1 yr. 2.765% (5/21/18)
30 yr. FNMA 4.0 June: @9:30 101.22 -2 bp (+4 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.35 -1 bp (+2 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 101.73 -3 bp (-1 bp from 9:30 yesterday)
Dollar/Yen: 110.97 -0.08 yen
Dollar/Euro: $1.1782 -$0.0008
Dollar Index: 93.53 -0.19
Gold: $1293.60 +$2.70
Crude Oil: $72.31 +$0.07
DJIA: 25,025.64 +12.35
NASDAQ: 7415.36 +21.32
S&P 500: 2739.32 +6.31
Homeowners Plan to Pump over $13B in Tax Savings into the Housing Market:
Both current homeowners and renters plan to use their tax savings in the housing market.
Zillow estimates both homeowners and renters could put $13.2 billion in tax savings directly into the American housing market in 2018, using some of their tax cut to rent or buy a bigger home. Americans will likely spend almost double that amount – an additional $24.7 billion – on home renovations in 2018, and will add about $62.6 billion to their savings and investments, according to results of the most recent Zillow Housing Aspirations Report (ZHAR).
The Tax Cuts and Jobs Act (TCJA) enacted in December is likely to result in tens of billions of dollars being reinvested into housing in some form or another – despite the fact the legislation expressly limited a number of longstanding tax benefits for homeowners.
The net effect of the TCJA was to reduce most Americans’ federal tax liability and increase their after-tax income, in large part by lowering marginal tax rates and increasing the standard deduction. Many are likely to spend at least some of these gains, however small, on housing – despite new limits on tax benefits historically aimed at homeowners, including the mortgage interest deduction and deductions for state and local property taxes.
How Rates Move:
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-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 moving sideways so far today. The MBS market worsened by -40 bps last week. This was enough to worsen mortgage rates or fees. The rates experienced moderate volatility last week.
This Week's Rate Forecast: Neutral
Three Things: These are the three things that have the greatest ability to impact mortgage rates this week. 1) Geopolitical, 2) Fed and 3) Oil
1) Geopolitical: U.S. Treasury Secretary Steven Mnuchin declared that looming U.S. - China trade war is "on hold." The U.S. will hold off on implementing tariffs, and China has agreed to purchase more from the U.S., specifically from the agriculture segment. Also, NAFTA is still a major concern as the administration is now focusing on a "skinny" version of NAFTA. Italy's debt problems and the Brexit will also garner plenty of attention from traders.
2) Fed: The two biggest events of the week are the release of the Minutes of the last FOMC meeting and Friday's speech by Fed Chair Powell. The Minutes will be combed over for more details about their discussions about the injection of their new word "symmetry" as it relations to their target inflation rate. We have a pretty full schedule this week:
3) Oil: WTI Oil prices have risen from $50.73 on May 21, 2017, to $71.39 on May 21, 2018. And the recent push above $70 has undoubtedly increased both awareness and concern over inflationary input costs. As WTI Oil marches towards $75 and Brent towards $80, it will pressure MBS.
This Week's Potential Volatility: Average
Mortgage rates and markets in general are likely to have a relatively calm week with the holiday. By Thursday of this week, many traders will be heading out of town. Of course, any unexpected geopolitical news has the ability to move rates.
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.
Rate markets opened weaker this morning (prices) and higher in yield. The 10-yr at 8:15 am EST was at 3.08%, +2 bps from Friday’s improvement that dropped the 10-yr to 3.06%, -5 bps, and MBS prices +100 bps. No real movement and not likely there will be much change this week. Trade meetings continue between the US and China; over the weekend Sec of Treasury Mnuchin and the administration’s Trade Representative Robert Lighthizer added more debate. Mnuchin on Fox News Sunday said the U.S. was “putting the trade war on hold” and wouldn’t assess tariffs on Beijing while the two sides talked. Lighthizer then out saying tariffs remained a tool in working out trade imbalances. This morning Mnuchin commenting that this isn’t a war but discussions to balance the trade between the two economic powers.
Initial reactions this morning to Mnuchin ’s remarks over the weekend is pushing US stock indexes higher in pre-open trading, DJIA +240 points. German markets are closed today, although it doesn’t’ mean much.
This week will see increasingly less trading as we move closer to the weekend and the Memorial Day holiday. April home sales and April durable goods orders are the headlines.
Stocks held strong following the increasing strength in the dollar and comments from Mnuchin over the weekend. He made a nice effort to remove the word “war” from the dialogue. The use of it does get headlines, but as we have continued to comment, no one wins an economic war between the two biggest economies in the world when both would suffer. It will take most of this year and possibly into next year to resolve the trade disputes to both countries’ benefits, but both will have to relent on some issues. China praised a dialing back of trade tension with the United States, saying an agreement was in the interests of both countries, while state media trumpeted what it saw as China's refusal to surrender.
Treasury auctions, the FOMC minutes and home sales for April are the dominant influences this week. Trade is also in the picture and depends on who in Washington is talking at the moment. $99B of notes are being sold this week as borrowing amounts will increase with increased spending and higher rates. The Fed will increase the Federal Funds rate at the June meeting next month. In the meantime, the minutes from the March meeting may influence market thinking. Trade volume should thin out by Wednesday afternoon, and by Thursday only caretakers will be on the desks.
This Week’s Calendar:
10:00 am May Richmond Fed manufacturing index (10 frm -3 in April)
1:00 pm $33B 2 yr note auction
7:00 am weekly MBA mortgage applications
8:30 am April new home sales (677K -2.5% from March)
1:00 pm $36B 5 yr note auction
2:00 pm FOMC minutes from March meeting
8:30 am weekly jobless claims ( -2K to 220K)
9:00 am March FHFA home price index (+0.7%)
10:00 am April existing home sales (5600K unchanged from March)
1:00 pm $30B 7 yr note auction
8:30 am April durable goods orders (-1.3%, ex transportation orders +0.6%)
10:00 am May final U. of Michigan consumer sentiment index (99.0 from 98.8)
2:00 pm bond and mortgage markets close.
10 yr. note: -3/32 (9 bp) 3.07% +0.5 bp
5 yr. note: -2/32 (6 bp) 2.90% +1 bp
2 Yr. note: -2/32 (6 bp) 2.90% +2 bp
30 yr. bond: -3/32 (9 bp) 3.20% unch
Libor Rates: 1 mo. 1.952%; 3 mo. 2.329%; 6 mo. 2.498%; 1 yr. 2.764%
30 yr. FNMA 4.0 June: @9:30 101.17 -9 bp (+3 bp from 9:30 Friday)
15 yr. FNMA 4.0: @9:30 102.33 unch (+6 bp from 9:30 Friday)
30 yr. GNMA 4.0: @9:30 101.75 -8 bp (+5 bp from 9:30 Friday)
Dollar/Yen: 111.18 +0.43 yen
Dollar/Euro: $1.1767 -$0.0003
Dollar Index: 93.83 +0.12
Gold: $1288.60 -$2.70
Crude Oil: $71.65 +$0.37
DJIA: 24,995.18 +280.09
NASDAQ: 7426.20 +71.86
S&P 500: 2733.54 +20.57
Pres. Trump sounded like he is lowering the bar on trade issues with China saying he doubts trade negotiations will succeed. "Will that be successful? I tend to doubt it,"….. "The reason I doubt it is because China has become very spoiled. The European Union has become very spoiled. Other countries have become very spoiled because they always got 100 percent of whatever they wanted from the United States."…… "But we can't allow that to happen anymore," At least they are talking, there is a Chinese delegation here in the US now after meeting a month ago in China. Chinese Vice Premier Liu He, Xi's top economic advisor, told U.S. lawmakers Wednesday that he planned to work hard to address the countries' trade imbalance and other trade issues. Trump is expected to meet with him later today. This is what to expect over the next year as the tit for tat is likely to continue, but as long as there is talk, the outlook remains slightly positive. Any failure will damage both of the two largest economies in the world and China more than the US will take the biggest hit.
It was a quiet session today ahead of the weekend and after the recent increase in rates yesterday and Tuesday. The 10 at 3.11% +1 bp.
The Pope waded in on credit-default swaps, following Warren Buffet who has referred to CDSs as “financial weapons of mass destruction.” Unusual for a Pope to speak so directly about global finance. “A ticking time bomb,” the Vatican called them. He has spoken before about global capitalism. “The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view." Gambling on failures isn’t ethical in other facets of the world, but in the world of finance these days, anything goes.
Increasing mortgage rates has lit a fire under buyers, moving much more rapidly; Redfin saying the average contract from listing to contract at 36 days now. Home prices jumped 7.6 percent in April from a year earlier to a median of $302,200, and sellers got a record 98.8 percent of what they asked on average according to Redfin. Fannie Mae reduced its mortgage origination volume forecast for 2018 and 2019 as rising interest rates are affecting re-financings now, and will curtail purchase activity going forward. The 2018 forecast was cut to $1.667 trillion from April's forecast of $1.69 trillion. In 2019, Fannie is now projecting $1.67 trillion of originations, down from its prior forecast of $1.686 trillion.
Dallas Fed’s Robert Kaplan; the U.S. economy has reached the threshold for maximum employment, and it may already be lower than is sustainable. “Our judgment at the Dallas Fed is that we are either at or already past full employment,” he is one that looks for just two rate increases this year.
No data tomorrow and the weekend ahead.
PRICES @ 4:00 PM
10 yr. note: -3/32 (9 bp) 3.11% +1 bp
5 yr. note: +1/32 (3 bp) 2.93% -0.5 bp
2 Yr. note: +1/32 (3 bp) 2.57% -1.5 bp
30 yr. bond: -17/32 (53 bp) 3.25% +3 bp
Libor Rates: 1 mo. 1.935%; 3 mo. 2.325%; 6 mo. 2.494%; 1 yr. 2.761% (5/16/18)
30 yr. FNMA 4.0 June: 100.98 +5 bp (+3 bp from 9:30)
15 yr. FNMA 4.0: 102.24 +3 bp (+2 bp from 9:30)
30 yr. GNMA 4.0: 101.75 +8 bp (+3 bp from 9:30)
Dollar/Yen: 110.78 +0.38 yen
Dollar/Euro: $1.1795 -$0.0011
Dollar Index: 93.50 +0.17
Gold: $1289.20 -$2.30
Crude Oil: $71.59 +$0.10
DJIA: 24,713.98 -54.95
NASDAQ: 7382.47 -15.82
S&P 500: 2720.13 -2.33
The dam broke yesterday and selling flooded the bond and mortgage markets. Once 3.00% was taken out, then the inter-day high at 3.04% was also penetrated when selling overtook the market. Until yesterday trading in the 10-yr note rate had been essentially well balanced between 2.92% and 3.00%; investors betting on 3.00% would hold had to abandon and turned to selling those long positions. It wasn’t if the 10-yr would increase, but when — and it came with no warning.
This morning has been quiet and fractionally better; at 8:30 am EST the 10-yr was down 1 bp to 3.06% and MBS prices +6 bps from yesterday’s close.
Weekly MBA mortgage applications declined again; down 2.7% overall, down 2.0% on purchase apps and -4.0% on re-finances. The unadjusted year-on-year gain rose 1 percentage point from the prior week to 4 percent. Refinancing fell 4 percent from the previous week to the lowest level since August 2008, taking the refinance share of mortgage activity down 0.4 percentage points to 35.9 percent.
At 8:30 am April housing starts and permits numbers were released; starts were thought to be 1324K from 1319K in March, +0.4% as reported +1287K; however March starts were revised from 1319K to 1336K, causing the percent change to -3.7% from the revision. Starts were weaker than forecasts. Permits were thought to be 1350K, as reported 1352K, but March was revised from 1354K to 1377K, -1.2% from the revised level.
At 9:15 am April industrial production and capacity utilization figures revealed production expected +0.6%, cap utilization 78.4%. Production +0.7%, cap utilization at 78%.
What appeared as a step forward between North and South Korea and the US last week is looking wobbly; the North announced it won’t meet with the South because of the annual military exercises between the US and South Korea.
US financial markets (stocks and bonds) are quiet so far this morning after yesterday’s volatile movements in both. After moving above 3.00% yesterday, that 3.00% now becomes a resistance point. Inflation concerns have been boosted recently. The Fed is universally expected to increase the Federal Fund rate next month, crude oil adding to inflation worries. Stocks are adjusting to higher rates. Obviously nothing has changed in our outlook, still bearish. 3.00% on the 10-yr is critical from a technical perspective.
10 yr. note: +2/32 (6 bp) 3.07% unch
5 yr. note: +1/32 (3 bp) 2.91% -1 bp
2 Yr. note: +1/32 (3 bp) 2.58% unch
30 yr. bond: +7/32 (22 bp) 3.19% unch
Libor Rates: 1 mo. 1.938%; 3 mo. 2.320%; 6 mo. 2.492%; 1 yr. 2.753% (5/15/18)
30 yr. FNMA 4.0 June: @9:30 101.20 +6 bp (-3 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.38 +2 bp (-3 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 101.92 +3 bp (-2 bp from 9:30 yesterday)
Dollar/Yen: 110.17 -0.18 yen
Dollar/Euro: $1.1798 -$0.0039
Dollar Index: 93.42 +0.14
Gold: $1290.40 +$0.10
Crude Oil: $70.87 -$0.44
DJIA: 24,736.88 +30.47
NASDAQ: 7380.16 +28.54
S&P 500: 2717.67 +6.22
It’s back to 3.04% this morning for the 10-yr (3.06% at 10:00 am EST); what technicians see as a critical support after hitting it three weeks ago. It was only a matter of time. Now through the rest of the session, the 10-yr has to stabilize and close lower than 3.04% as it did three weeks ago after which it improved back to 2.92%. Seems rather mundane we talk in ranges of a few basis points as the end all for rates, but that is what we have had now for weeks. MBS prices getting hit hard, down 28 bps from yesterday.
At 8:30 am April retail sales expected +0.3% were at +0.3%; excluding auto sales forecasts were for an increase of 0.5%, as reported up just 0.3%; less autos and gas estimates were +0.4%, as reported +0.3%. The strength in the report today was upward revisions to March sales; from 0.6% to 0.8%, less autos revised from +0.2% to +0.4%, less autos, and gas from +0.3% to +0.4%. The April control group sales which are another core measure and a direct input into GDP, rose 0.4%. Take the two months together, and the takeaway is retail sales are beginning to improve after weak Jan and Feb sales.
The May NY Empire State manufacturing index expected at 115.5, increased to 20.1; new orders have been very strong in this report and picked up the pace with a 7-point gain to 16.0. Unfilled orders did pile up a bit but at 5.0 only at a modest pace, which is good news for this sample considering signs that capacity is being stretched.
At 10:00 am the May NAHB housing market index was expected at 69. The index was at 70, while April was revised lower to 68.
Also at 10:00 am March business inventories, expected +0.2%; inventories were unchanged after increasing 0.6% in Feb.
Higher rates this morning are having a direct impact on the dollar, increasing in a strong move this morning. The break over 3.00 and 3.04% is triggering huge volatility in stock currencies and rate markets. For weeks we have reminded readers that our technical analysis has been bearish, and this morning we were proven correct. On the international front, the trouble between Israel and Palestinians hasn’t ignited many market fears — no safe haven buying into US treasuries. China/US trade fears are presently waning; China plans to send Vice Premier Liu He to Washington for more trade talks; that the two countries are calming and are now in detailed talks lessens demand for safe US treasuries.
10 yr. note: -15/32 (47 bp) 3.06% +7 bp
5 yr. note: -6/32 (18 bp) 2.90% +4 bp
2 Yr. note: -1/32 (3 bp) 2.57% +2 bp
30 yr. bond: -34/32 (106 bp) 3.19% +6 bp
Libor Rates: 1 mo 1.933%; 3 mo 2.330%; 6 mo 2.500%; 1 yr. 2.757$ (5/14/18)
30 yr. FNMA 4.0 June: @9:30 101.25 -23 bp (-34 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.41 -11 bp (-19 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 101.97 -17 bp (26 bp from 9:30 yesterday)
Dollar/Yen: 110.27 +0.65 yen
Dollar/Euro: $1.1837 -$0.0093
Dollar Index: 93.43 +0.77
Gold: $1292.20 -$26.00 (strong dollar)
Crude Oil: $70.55 -$0.41
DJIA: 24,716.58 -182.83
NASDAQ: 7332.51 -78.80
S&P 500: 2709.42 -20.71
Wage growth helps to boost housing affordability
If the adage about rising tides lifting all boats is true, then it comes as no surprise that rising incomes have been helping to offset recent increases in mortgage rates, offering a boost to housing affordability in the first quarter of this year, the National Association of Home Builders/Wells Fargo Housing Opportunity Index shows.
With an increase of 59.6 percent of homes sold that were affordable to median income earners, the index showed that 61.6 percent of new and existing homes sold between the beginning of January and the end of March were affordable to families earning the U.S. median income of $71,900. That median income mark reflects an increase of 5.7 percent in 2018. According to a news article in Realtor Magazine, the NAHB chief economist Robert Dietz reports that this wage growth has helped to boost housing affordability. He goes on to say that a growing economy, along with tight inventories and increasing household formations, will lift housing production in the year ahead. This prediction is dependent, of course, on the fate of mortgage rates as the year progresses.
According to the article, of the 237 metro areas analyzed in the first quarter, the index showed 167 markets experiencing an increase in affordability compared to the fourth quarter of 2017.
While we aren’t expecting you to scramble to an area based solely on affordability, if you’re looking for the nation’s most affordable major housing market, look no further than Youngstown-Warren-Boardman, OH-PA metro area, where 90.9 percent of all new and existing homes sold in the first quarter were affordable to families earning the area’s median income of $60,100. Other affordable major housing markets (in order) were Indianapolis-Carmel-Anderson, Ind.; Scranton-Wilkes Barre-Hazleton, PA.; Toledo, OH; and Harrisburg-Carlisle, PA.
If you prefer small-town living, the most affordable small market is Cumberland, Md.-W.Va., where 98.5 percent of the homes sold in the first quarter are affordable to families earning the median income of $55,500.
The most unaffordable place to live if you fall in the median income slot? It’s still San Francisco, CA, which remains the most costly major housing market, and where only 9.2 percent of homes sold in the first quarter of 2018 were affordable to families earning the area’s median income of $119,600. California continues to dominate the least affordable markets, with Los Angeles-Long Beach-Glendale; Anaheim-Santa Ana-Irvine; San Jose-Sunnyvale-Santa Clara; and San Diego-Carlsbad falling closely behind them.
Source: Realtor Mag, NAHB,TBWS
Mortgage rates are trending sideways to slightly higher this morning. Last week the MBS market worsened by -22bps. This moved mortgage rates slightly higher last week. Mortgage rates have been moving mostly sideways the last week
Three Things: These are the three areas that have the greatest potential to impact mortgage rates this week. 1) Across the Pond, 2) Fed and 3) Geopolitical
1) Across the Pond: We get some economic releases that have some real "heft" to them from world's top economies this week. Generally, the stronger these reports are, the worse it is for mortgage rates and vice versa. China - Retail Sales, Industrial Production. Japan - GDP, Industrial Production, CPI. Germany - GDP, CPI, PPI. Eurozone - GDP, CPI, and a Non-Monetary ECB Meeting. We actually will hear from quite a few voting members of the ECB this week. We started off with ECB member and Bank of France governor, Francois Villeroy de Galhau. He insisted that despite sluggish inflation, the governing council is set to stick with the plan and end QE over the near term, citing September or December as the likely cutoff point and warning that the first rate hike could come quarters, not years after the end of asset purchases.
2) Fed: We will get a lot of speeches from both voting and non-voting members of the FOMC. The aggregate tone of their speeches can shape markets.
3) Geopolitical: NAFTA will get the bulk of attention from bond traders as the May 17th deadline imposed by Speaker Paul Ryan is fast approaching. Italy will continue to be a concern for the Eurozone/ECB. Trade with China continues to be closely watched as President Trump said he is working with the Chinese President, Xi to start to ease up on exports to ZTE. Also, China's Vice Premier Lie He is traveling to Washington to continue talks with Treasury Secretary Steven Mnuchin.
Mortgage rates could see some volatility from overseas economic data this week. If those numbers are in line with expectations, look for rates to once again move sideways with relatively low volatility.
Last Friday there was no change in rate markets. This morning no change in rates but the 10 yield did open at 2.98%, +1 bps, with MBS prices down 3 bps on the opening trades.
This is the week each month that doesn’t have much economic news, so there is no economic data today. Expect retail sales, housing starts and permits (the May NAHB housing market index), and May Philadelphia Fed business index highlight the data this week. But nothing today and nothing on Friday.
President Trump commented he would help China to reduce the ban from exporting to a tech company (ZTE) in China after the Commerce Dept. banned American companies from selling to the firm for seven years. This was done as punishment for ZTE breaking a 2017 agreement after it was caught illegally shipping U.S. goods to Iran and North Korea. This is a huge reversal in sentiment leading to possible extended trade talks and lessening the potential of a trade war between the two largest economies. According to news reports, China had demanded the ZTE issue be resolved before more detailed trade talks. ZTE had been cut off from semiconductors and other telecommunications that has led to the company suspending operations. “Too many jobs in China lost. Commerce Department has been instructed to get it done!” the President wrote on Twitter, saying he and Chinese President Xi Jinping were working together on a solution for ZTE.
The Fed’s Cleveland President Loretta Mester in Paris this morning said The U.S. should keep its debt-to-GDP in mind before things "get out of hand." Currently, the US debt as a percentage of GDP is 75% and expected to continue to increase with increasing government spending and the possibility that the US economy may enter into a recession next year after 10 yrs of expansion. The IMF is saying the U.S. is the only advanced economy where debt-to-GDP is scheduled to increase in the next five years. Given our political situation, there is very little reason to believe US debt to GDP can be controlled until a crisis occurs; spending is what our politicians are expected to do, and they have proven they do it well. U.S. debt-to-GDP reached 104 percent in 2017, its highest level since 1946 when it hovered around 120 percent. Total U.S. debt has surpassed $21 trillion this year, a more than 120 percent increase from a decade ago.
Mohamed A. El-Erian commented today about the outlook. He has three points about stocks not presently reflecting the true conditions. 1. Having already outpaced the actual improvements in the economic and corporate landscape in 2017, this market is simply a reversion to the mean. 2. Concerns about sustainability: Less reassuring for investors is the view that the pause in market prices this year goes beyond mean reversion and reflects mounting concerns about the durability of improved economic and corporate conditions. Parts of the global economy are already showing signs of losing momentum. 3. Losing artificial support: Those most concerned about sustainability also worry about the policy transition in central banking. It has become increasingly obvious to traders and investors that central banks have been stepping back from the practice of repressing financial volatility at the first sign of market instability. This accentuates a risk factor that requires some rerating of financial assets, especially stocks.
Although economic releases this week are thin there are Fed officials out every day; it’s not likely, however, that they will offer any comments that will move markets. Markets well aware of what the Fed is thinking — a rate increase in June and more angst about inflation that so far hasn’t shown much increases. Close to 3.00% this morning but traders are looking more toward 3.04% the inter-day high three weeks ago before slipping back to 2.90% and now moving back to the high of the range (2.92% to 3.00%). Mortgage rates generally unchanged over the last three weeks.
8:30 am April retail sales (+0.3%, ex auto and truck sales +0.5%.
10:00 am May NAHB housing market index (69, unchanged from April)
7:00 am weekly MBS mortgage apps
8:30 am April housing starts and permits (starts 1324K +0.4%; permits 1350K -0.3%)
9:15 am April industrial production and capacity utilization ( production +0.6%, cap utilization 78.4% up from 78.0% in March)
8:30 am Weekly claims (215K +4K)
10:00 am April leading economic indicators (+0.4% from +0.3% in March)
10 yr. note: -6/32 (18 bp (2.99% +2 bp
5 yr. note: -3/32 (9 bp) 2.86% +2 bp
2 Yr. note: -1/32 (3 bp) 2.55% unch
30 yr. bond: -12/32 (37 bp) 3.13% +3 bp
Libor Rates: 1 mo. 1.918%; 3 mo. 2.342%; 6 mo. 2.515%; 1 yr. 2.765% (5/11/18)
30 yr. FNMA 4.0 June: @9:30 101.59 -6 bp (-4 bp from 9:30 Friday)
15 yr. FNMA 4.0: @9:30 102.60 -4 bp (-3 bp from 9:30 Friday)
30 yr. GNMA 4.0: @9:30 102.23 +5 bp (+1 bp from 9:30 Friday)
Dollar/Yen: 109.54 +0.15 yen
Dollar/Euro: $1.1989 +$0.0048
Dollar Index: 92.26 -0.27
Gold: $1320.70 unch
Crude Oil: $70.83 +$0.13
DJIA: 24,937.93 +106.76
NASDAQ: 7441.88 +38.99
S&P 500: 2738.22 +10.50