Stuck: the bond and mortgage markets have not changed one bit this week so far, before this morning’s May new home sales at 10:00 AM EDT. This has been, as we have noted, one of the quietest in a very long time--almost like trading the few days before the year's end. In the equity markets, the only index that has seen gains is the NASDAQ. A week with no economic news and very little political and geopolitical news.
The Senate is working on its version of a healthcare plan that at the moment is tenuous; four Republican senators in opposition. To get it passed, it will take at least two of those to get on board, or it ends with a thud. Senate majority leader Mitch McConnell wants a vote before the 4th of July to avoid the anticipated protests that will likely occur over the three-day holiday. Ted Cruz, Rand Paul, Mike Lee and Ron Johnson, all members of the party’s conservative faction, had announced they would not cast a vote to support the bill in its current form. Paul, the conservative senator from Kentucky, said: “The current bill does not repeal Obamacare. It does not keep our promises to the American people.” In the meantime, more insurance companies are leaving the states over the present health care act.
There are numerous news events as usual, but nothing that is getting any trader attention. Negotiations on Brexit: Theresa May’s offer on safeguarding the rights of EU citizens in Britain after it leaves the bloc was not good enough. Negotiations needed to make considerable progress for a second phase of talks on future relations, such as trade ties, to begin in the autumn will be stymied unless there is more progress. This is politics; nothing in that world ever happens quickly.
The eurozone's manufacturing PMI unexpectedly jumped to 57.3 in June (prior 57.0), but the services PMI fell more than expected to 54.7 (prior 56.3).
The only key data today, May new home sales at 10:00 am, expected +3.6% to 590K units. Up 2.8% to 610K units but that is based on April revisions that were revised from 569K to 593K, a 4% increase from what was originally reported. There was no immediate reaction to the news although better over the last two months than thought; MBS price -5 bps on the day, the same as at 9:30.
The June Composite Flash including manufacturing and services; the index expected at 53.8 as reported 53.0; manufacturing index expected at 52.7, as reported 52.1; service sector expected 53.7,as reported 53.0.
Three Fed officials today: 11:15 Bullard (St. Louis), 12:40 pm Mester (Cleveland) and 2:15 pm Powell (Fed Governor)
PRICES @ 10:10 AM
10 yr. note: -3/32 (9 bp) 2.16% +1 bp
5 yr. note: -2/32 (6 bp) 1.77% +1 bp
2 Yr note: +1/32 (3 bp) 1.34% -1 bp
30 yr. bond: -10/32 (31 bp) 2.73% +1.5 bp
Libor Rates: 1 mo 1.216%; 3 mo 1.295%; 6 mo 1.448%; 1 yr. 1.738%
30 yr. FNMA 3.5 July: @9:30 103.16 -5 bp (-8 bp from 9:30 yesterday)
15 yr. FNMA 3.0: @9:30 102.93 -2 bp (-5 bp from 9:30 yesterday)
30 yr. GNMA 3.5: @9:30 103.92 -8 bp (-11 bp from 9:30 yesterday)
Dollar/Yen: 111.21 -0.12 yen
Dollar/Euro: $1.1186 +$0.0034
Dollar Index: 97.37 -0.17
Gold: $1257.90 +$8.50 (weaker dollar)
Crude Oil: $42.65 -$0.09
DJIA: 21,376.22 -21.07
NASDAQ: 6234.50 -2.19
S&P 500: 2435.05 +0.55
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.
Overnight, the bellwether 10 yr. was flat but slightly higher at 2.20%; by 8:30 am EDT, however, there was some minor improvement. Yesterday, MBS prices were down about 11 bps, early this morning up 5 bps. Nothing for traders and investors that will increase volatility.
No data again today, except at 8:30 the Q1 current account deficit that was thought to have increased to $122B from -$114B in Q4; the deficit as reported -$116.8B. Importing goods was the main reason for the deficit increase. The goods deficit totaled $200.3B in the quarter, up $5.3B from the fourth quarter. As a percentage of GDP, the current account edged 1 tenth higher to a still moderate 2.5%. This ratio had been over 3.0% early in the expansion. Markets usually don’t pay much immediate attention to this report.
Crude oil continues to fall, a plus for the long end of the curve, because as crude goes, so go the inflation concerns. Very little inflation now, but the Fed and its many Fed regional presidents continue to sweat inflation. Recently they had to face the reality that prices are not increasing and wages are only moving higher in tiny amounts. The old standard that economists continue to cling to, that 4.3% unemployment is sure to drive wages higher, has to be reconsidered in this ‘new normal.’ Crude early this morning at a new recent low down $1.14 from yesterday to $43.06 at 9:00 am . Today’s decline has lit up the financial news media. We have long forecast crude would fall. Now at these levels, the cost of production will be tested.
Media and politicos are focusing on the congressional elections in Georgia and South Carolina today. Trump picked Republicans in the two elections to fill cabinet posts, now the elections are viewed by politicians as the first test of Trump’s presidency. Democrats, according to what we read, have raised $23M in the election in Georgia making it the most money ever for a congressional election. The total spent on the Georgia and South Carolina campaigns are estimated at $60M.
House Speaker Paul Ryan is going to speak today and release the House tax cut changes. It is a steep hill no matter what Republicans propose. The opposition party will very likely fight many of the ideas and in the Senate, even more resistance. It remains a huge question in markets about when or if any significant tax plan gets passed. We doubt it will happen this year; we never believed the Trump initiatives would get through this year; the goal for a tax plan is currently in September prior to the end of the government’s fiscal year. “We need to get this done in 2017,” he will say, according to excerpts distributed by his office. “Transformational tax reform can be done, and we are moving forward.” In the Senate, the main obstacle is the proposed border tax that is said to fund the tax cuts.
Marking time, looking for some reason to move either up or down; the bond market remains longer term bullish, but as long as equity markets continue to make new highs, the demand for more bond purchases ebbs somewhat. That said, so far the strength in the bond and mortgage markets continues to surprise many. No inflation fears, a soft dollar and increasing concerns that equity markets are still very over-valued. Of all, the biggest driver in the US bond markets is the weakness in the dollar. As long as foreign investors take advantage of the weakness and trade strong currencies for weak ones the bond market in the US will benefit and US rates will continue to be seen as low.
PRICES @ 10:00 AM
10 yr note: +4/32 (12 bp) 2.18% -1 bp
5 yr note: unch 1.79% unch
2 Yr note: unch 1.36% unch
30 yr bond: +21/32 (66 bp) 2.76% -3 bp
Libor Rates: 1 mo 1.213%; 3 mo 1.280%; 6 mo 1.433%; 1 yr 1.728%
30 yr FNMA 3.5 July: @9:30 103.09 +6 bp (+3 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.95 +8 bp (+8 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 103.81 -6 bp (-13 bp from 9:30 yesterday)
Dollar/Yen: 111.62 +0.09 yen
Dollar/Euro: $1.1144 -$0.0005
Dollar Index: 97.66 +0.14
Gold: $1245.30 -$1.40
Crude Oil: $42.95 -$1.25
DJIA: 21,507.86 -21.13
NASDAQ: 6221.54 -17.71
S&P 500: 2444.59 -8.87
Demand up for New Homes:
According to the Mortgage Banker's Association, mortgage applications for New Homes (homes not previously occupied) are on the move upward.
Purchase apps were up 15% year over year. Month over month, applications went up by 4%. On a seasonally adjusted basis, last month saw an increase of 8.6% from April’s 557,000 units; on an unadjusted basis, new home sales rose 5.6 % to 57,000 new units from 54,000 in April.
"Following a decline in April, applications for new homes slightly rebounded month-over-month in May, setting up a 15% year over year increase relative to May of 2016," said Lynn Fisher, MBA vice president of research and economics. "While March has signaled the peak in applications for new homes for the last two years, we may see more sustained activity throughout the balance of this year as demand for new homes continues to increase and strong house price growth continues to motivate homebuilding."
Conventional loans made up 69.2% of loan applications; FHA loans, 17.5%; RHS/USDA loans, 1.1%; and VA loans, 12.2%. The average loan size of new homes decreased to $324,844 last month from $329,244 in April.
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 trending sideways this morning. Last week the MBS market improved by +13bps. This caused mortgage rates to move sideways for the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week: 1) Fed, 2) Geopolitical Events and 3) Across the Pond.
1) Fed: The bond market has effectively ignored a surprisingly more "hawkish" tone last week. But this week we get a barrage of Fed officials, and we will be paying close attention to their messages.
2) Geopolitical Events: Brexit talks between Great Brittan and EU members started officially today and comments/details out of the negotiations could have an impact on how traders view growth prospects in the EU. The markets will also react to any progress with health care in the Senate and tax reform through the House as well as new developments in the Russia/Trump "investigation." We have conflicting reports from both media and state department sources if there even is an investigation (other than in Congress) by the FBI, etc.
3) Across the Pond: While we have a lot of housing news to digest this week, there are no domestic economic releases that have the gravitas to move the needle for mortgage rates. The bond market will be focusing on overseas economic data this week:
This Week's Potential Volatility: Low
We had a lot of choppiness last week (62BPS swing from our highs to our lows) but in the end, MBS really just moved sideways. This week, look for MBS to once again move sideways but without the choppiness (flat mortgage 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.
May housing starts and permits didn’t meet expectations, and April data was revised lower than what was originally reported. Starts were expected at 1221K +4.0%, as reported 1092K -5.5%. April starts originally reported at 1172K, revised to 1156K. May building permits were thought to be up 2.6% at 1249K; permits were 1168K down 4.9%. All components show declines with single-family starts down 3.9 percent to a 794,000 rate and permits down 1.9 percent to 779,000. Multifamily starts fell 9.7 percent to 298,000 with permits down 10.4 percent to 389,000. Total completions did rise 5.6 percent to a 1164K rate, which adds supply to a thin market, but homes under construction slipped 0.7 percent to 1067K. Quarter-to-quarter comparison, starts have averaged 1124K so far in the second quarter, down a very sizable 9.2% from 1238K in the second quarter. Permits, at an average of 1198K, are down 4.9 percent. No matter how we look at it, this is disappointing and will be a drag on Q2 GDP. It is yet another weaker than expected measurement. May retail sales, reported on Wednesday, also well below economist’s estimates.
The initial reaction was rather subdued but did improve levels before the 8:30 AM EDT report. The 10 before housing +1 bp to 2.17%, MBS prices down 2 bps from yesterday’s close. By 9:00 the 10-yr. unchanged at 2.16% and MBS prices up 3bps. Not much of a reaction given the weakness, and adding to the reality that regardless of the reasons, are not meeting expectations for growth. No inflation fears and weak data should support the long end of the yield curve.
The dollar strength or weakness has influence over the US markets, especially bonds. Yesterday, the dollar had a nice improvement (the index +0.51). This morning, the index a little weaker. As long as the dollar is thought to decline more it is a plus for lower interest rate expectations.
Markets still absorbing the FOMC and Yellen last Wednesday. The Fed isn’t likely to increase the Federal Funds rate at the September meeting based on the soft economy, but it does appear based on the Fed’s update of its ‘normalization’ plans announced on Wednesday that in September the Fed will begin cutting back support. Presently, the Fed is set to begin unwinding its balance sheet by not reinvesting principal payments, and the plan calls for $4B a month reduction in MBS purchases and $6B cut in Treasury purchases. It is another way the Fed can tighten without increasing the Federal Funds rate. The reduction of MBS purchases will cause MBS markets to adjust the relationships between MBSs and Treasuries; the MBS market is very thin; the Fed has been buying about 30% of MBSs for the last eight years. Although it remains a moving target, and as the Fed says, it’s data dependent, presently markets are leaning to another federal funds increase at the December meeting. Unless there is an increase in growth and inflation that view will change.
At 10:00 AM the preliminary June U. of Michigan consumer sentiment index was expected unchanged from May at 97.1; as reported the index declined to 94.5 the lowest since November.
Not in our wheelhouse, but the big news this morning is that Amazon will buy Whole Foods for $13.9B in cash. Stocks of grocers are under pressure, and Jim Cramer on CNBC has been almost apoplectic over it; thought he might have an aneurysm. Kroger stock over this week down 31%.
The only event left today: Dallas Fed’s Kaplan at 12:45. There will be Q&A after his speech to Park Cities Rotary Club in Dallas. Our technicals still hold bullish biases.
10 yr note: +3/32 (9 bp) 215% -1 bp
5 yr note: +2/32 (6 bp) 1.75% -1 bp
2 Yr note: +2/32 (6 bp) 1.33% -2 bp
30 yr bond: +4/32 (12 bp) 2.78% -1 bp
Libor Rates: 1 mo 1.209%; 3 mo 1.267%; 6 mo 1.427%; 1 yr 1.729%
30 yr FNMA 3.5 July: @9:30 103.16 +9 bp (+3 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.94 +3 bp (-10 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.13 -31 bp (-4 bp from 9:30 yesterday)
Dollar/Yen: 110.90 -0.03 yen
Dollar/Euro: $1.1173 +$0.0028
Dollar Index: 97.31 -0.15
Gold: $1257.20 +$2.60
Crude Oil: $44.74 +$0.28
DJIA: 21,336.89 -23.01
NASDAQ: 6157.31 -8.19
S&P 500: 2427.94 -4.52
Prior to 8:30 AM EDT data, the US bond market started weaker after the strong rally yesterday and MBS prices lower (higher rates). 8:30 data didn’t help. Weekly claims -8K to 237K, the 4-week average at 243K from 242K the prior week. May import prices expected 0.0% down 0.3%, export prices expected +0.1% dropped 0.7%; yr./yr. imports +2.1% down from 4.1% in April, yr./yr. exports +1.4% from +3.0% in April. The price declines largely oil related, but still less inflation pressure. June Philly Fed business index expected at 26.0 from May’s 38.8, came in at 27.6. New orders continue to increase, at 25.9 vs 25.4 in May and are increasingly being pushed into backlogs, which rose 5 points to 14.0. Employment fell to 16.1 from 17.3; prices paid slipped to 23.6 from 24.2, business conditions fell to 31.3 from 34.8. June NY Fed Empire State manufacturing index expected at 5.0 from -1.0 was 19.8, but that index has a history of large swings.
The 8:30 data overall was not bearish to bonds, nor bullish. The rate markets rallied hard yesterday on the May retail sales, not anything that came from the FOMC and Janet Yellen. Retail declined 0.3% against forecasts of +0.2%, indicating consumers less willing to spend, at least in hard box stores. Also pushing rates lower yesterday, the break of technical levels that generated selling by computers, investors and traders once the 10 yr. broke below 2.20%. The 10 yr ran down to 2.10% at one point before ending yesterday at 2.14% and MBS prices at one point fell 45 bps before finishing +31 bp.
Consensus this morning is that Yellen had a hawkish bent. The FOMC statement and the addendum to the Policy Normalization Policy that made it clearer that the Fed will begin cutting onto its $1.4 trillion balance sheet by the end of the year. The plan is to stop reinvesting the runoffs from principal payments of maturing bonds and securities (MBSs). The plan is to cap the reinvestments in treasuries at $6B per month and MBSs by $4B a month. It is another way the Fed will tighten as well as still talking about one more Federal Funds rate cut this year. Since the 2008 recession, the Fed has been buying a significant quantity of treasuries and particularly mortgages. Less investment means the markets will have to pick up more Treasuries and MBSs. That is going to have as much impact as the Fed tightening the base rate. No definite decision of when it will begin; the Fed setting up markets for the eventuality that will likely happen toward the end of this year.
Part of the FOMC statement:
At 9:15, May industrial production was expected +0.2%, as reported 0.0%. Manufacturing expected +0.2%, as reported -0.4%. Capacity utilization in May expected at 76.8% declined to 76.6% from 76.7% in April. Another key data point that is weaker than expectations, especially manufacturing. Vehicle production fell sharply in the month, down 2.0 percent in a reminder that consumer spending on autos has been very weak this year. And in a reminder of how weak capital goods data have been, production of business equipment fell 0.7 percent. Hi-tech goods, in yet further confirmation of trouble, were unchanged in the month. Initially no reaction to the softness.
At 10:00, June NAHB housing market index, expected at 70, unchanged from May; as reported the index was at 67 and May revised from 70 to 69. Of the index's three components, current sales conditions fell two points to 73, and sales expectations over the next six months fell two points to 76. The component measuring buyer traffic dropped two points to 49, now in negative territory. Yet another weaker than expected data point but no reaction in the bond market.
Bond market not pretty this morning but our technical models and other key technical reads remain bullish. As noted yesterday, 2.22% is the level our work will turn bearish, and in the MBS market, that’s about where it is trading this morning. Looking back and so far today, the bond and mortgage markets did overreact yesterday and no follow-through so far this morning. A drag on US markets today, the strong dollar. If the dollar reverses and begins to strengthen, it will take away a lot of foreign buying that has been one strong propellant for US interest rates.
10 yr note: -12/32 (37 bp) 2.17% +3 bp
5 yr note: -7/32 (22 bp) 1.76% +4 bp
2 Yr note: -1/32 (3 bp) 1.35% +1 bp
30 yr bond: -17/32 (53 bp) 2.80% +3 bp
Libor Rates: 1 mo 1.171%; 3 mo 1.250%; 6 mo 1.426%; 1 yr 1.736%
30 yr FNMA 3.5 July: @9:30 103.13 -19 bp (-26 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 103.04 -13 bp (-19 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.17 -17 p (-27 bp from 9:30 yesterday)
Dollar/Yen: 110.39 +0.79 yen
Dollar/Euro: $1.1149 -$0.0070
Dollar Index: 97.41 +0.45
Gold: $1256.40 -$19.50
Crude Oil: $44.51 -$0.22
DJIA: 21,296.57 -77.99
NASDAQ: 6124.99 -69.90
S&P 500: 2422.36 -15.56
Two economic reports at 8:30 AM EST, both weaker than expectations and both very critical data points. May CPI -0.1% weaker than 0.0%, the core excluding food and energy expected +0.2%, +0.1% as reported. Yr./yr. overall CPI +1.9% and ex-food and energy yr./yr. +1.7%. Inflation based on this report is less than the May PPI yesterday. The big shock (and bullish for interest rate markets): May retail sales. They were expected to have increased 0.2%, as reported down 0.3%; excluding auto sales expected +0.2%, as reported also down 0.3%. We are not unusually surprised with the weakness; we have noted a number of times consumers are not as enthusiastic about spending as what is believed by the elites in New York and Washington. That said, we admit we weren’t expecting that much of a miss. The reaction to the two reports increased MBS prices +27 bps from yesterday and drove the 10-yr. yield down 5 bps to 2.16%.
Not only the weak data at 8:30; as you know by now a shooting at a ballpark where Republican House members were practicing for the annual game between GOP vs Dems. According to preliminary reports, 20 to 30 shots were fired, hitting Capitol police and Congressman Majority Whip Steve Scalise (LA). No deaths. The shooter appeared to be a white male, "a little bit on the chubby side," Representative Mo Brooks told CNN, adding that he only saw the man for a second. Brooks said he heard 10 to 20 rounds from the gunman's rifle before the security detail returned fire. He said there were 20 to 25 at the practice in Alexandria, Virginia when the gunfire erupted. After individual attacks in the UK, it has now hit here and is fueling some safety moves to Treasuries. The data released, though, was a big boost to rate markets.
The FOMC this afternoon, and Yellen’s press conference. The surprisingly weak May retail sales and low inflation reads on CPI are increasing the thought that the economy isn’t what the Fed and most believe it is. Consumer spending accounts for about 70% of GDP growth and the weakness in spending that has been the case all this year may give the Fed reason to rethink about another rate increase this year after the increase today.
Earlier this morning, weekly MBA mortgage applications were reported. Apps overall +2.8%, purchase apps -3.0% while re-finance apps +9.0. The decline is a result of heavy adjustments for the Memorial Day holiday in the prior week. The unadjusted purchase index increased 19 percent from the prior week to a level 8 percent higher than the same week a year ago. Refinances were at the highest level since November last year. The refinancing share of mortgage activity to 45.4 percent, up 3.3 percentage points from the prior week.
At 10:00 April business inventories, expected -0.1% were down 0.2%; a negative for GDP calculations.
There has been a lot of talk recently that with unemployment at 4.3% it is bound to increase wages. It isn’t happening and most likely will not meet those forecasts of wage growth and the intended inflation increases that are baked into the equity market cake. The bond market recently suggesting that inflation isn’t a sure thing; interest rates declining on weakness in the dollar but bond investors not worried about inflation pressures. Not sure how the Fed thinks; we may know something from Yellen this afternoon, although the Fed is in Pollyanna mode, so whitewashing reality will likely continue. The Fed cannot endorse anything that is negative to the economic outlook. No Fed can, as was evidenced in 2007 when the collapse happened.
10 yr note: -1/32 (3 bp) 2.24% unch
5 yr note: -1/32 (3 bp) 1.78% +1 bp
2 Yr note: -1/32 (3 bp) 1.29% +1 bp
30 yr bond: -6/32 (18 bp) 2.91% +2 bp
Libor Rates: 1 mo 1.017%; 3 mo 1.286%; 6 mo 1.415%; 1 yr 1.722%
30 yr FNMA 3.0 June: @9:30 102.97 -5 bp (-3 bp from 9:30 Friday)
15 yr FNMA 3.0: @9:30 102.92 -4 bp (-2 bp from 9:30 Friday)
30 yr GNMA 3.5: @9:30 103.98 -5 bp (-4 bp from 9:30 Friday)
Dollar/Yen: 111.21 -0.05 yen
Dollar/Euro: $1.1255 +$0.0049
Dollar Index: 96.92 -0.21
Gold: $1258.50 +$4.90
Crude Oil: $50.64 +$0.31
DJIA: 20,899.79 +94.95
NASDAQ: 6116.00 +32.30
S&P 500: 2391.15 +9.42
First Time Home Buyers up 11 Percent:
The June 2017 First Time Home Buyer Market Report released by private mortgage insurance provider, Genworth Mortgage Insurance shows a steady increase in housing demand by first time home buyers in the 1st QTR of 2017. You can read the full report here.
Last year was the strongest period for the first-time homebuyer market in 11 years, according to Genworth’s First-Time Homebuyer Market Report. 2016 saw two million first-time homebuyers – 15% more than 2015.
They also contributed to 37% of all single-family home purchases, up from 34% in 2015, and the most purchases since 2005.
For the first quarter of 2017, 424,000 single-family homes were bought by first-time homebuyers – an 11% year-over-year increase.
First-time home buyers have led the housing recovery, contributing over 60 percent of the sales growth in the housing market over the past five years and 85 percent of the growth in the past two years. The resurgence of the first-time home buyer market has contributed to very tight housing supplies and accelerating home prices, particularly in the “low” end of the real estate market.
Unlike repeat home buyers, first-time home buyers do not bring another housing unit to the market at the time they are seeking to buy. They represent a shift in housing demand from rental to owner occupancy. Therefore, rising first-time home buyers in the housing market drain housing inventory and the supply of homes for sale much faster than a similar increase in repeat home buyers.
Mortgage backed securities (FNMA 3.50 MBS) lost -20 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move slightly higher from the prior week. The market saw its lowest rates on Tuesday and its highest rates on Friday.
Central Banks: Obviously, all eyes will be on our Federal Reserve but we also have Central Bank rate decisions and policy announcements from the Bank of England (5th largest economy) and Bank of Japan (3rd largest economy).
Our Federal Open Market Committee (FOMC) will begin meeting on Tuesday and will conclude Wednesday at 2:00 PM EDT. The following is the schedule: 2:00 EDT. Release of their Interest Rate Decision and Policy Statement 2:00 EDT. Release of their Economic Projections and Dot Plot Chart 2:30 EDT. Fed President Janet Yellen live press conference.
While most bond traders publicly say that they expect a 25 BPS rate hike at this meeting, it doesn't seem to be fully priced in. That is mostly because long bond traders have significantly walked back their expectations for a 3rd hike this year. Their forward guidance (dot plot chart) and Yellen's live comments will have more of an impact on our MBS pricing than a rate increase by itself.
Treasury Auctions this Week:06/12 10-year note06/13 30-year bond
Domestic: We have a huge week for economic data with the focus on inflationary data (PPI and CPI) and Retail Sales.
Geopolitical: We still have a lot of uncertainty in Great Britain as their new government attempts to gain some sort of majority and direction. Qatar and the Saudis appear deadlocked into more conflict, and at home we have more Senate testimony (Attorney General Sessions to testify) and the state of Maryland has filed a lawsuit against Trump.
This Week's Potential Volatility: Average
We start our day with our FNMA coupon rollover. We expect Monday to trade in the +12 to -12 BPS range (net of the rollover). For the week, we expect MBS to end the week at a slightly lower level than Monday's open (higher rates). In order for rates to move lower, the following would have to happen: The Fed does not increase the Federal Funds rate on Wednesday OR they signal that there will be no more rate hikes this year, along with comments from Yellen indicating a low likelihood of additional rate hikes this year. The greatest likelihood is that we will see MBS continue to drift slightly lower (higher rates). Although MBS are under pressure, geopolitical fear provides a "floor" for MBS.
This is a big week for the US financial markets. The headliner is the FOMC meeting, Yellen’s press conference and the Fed’s quarterly forecasts for inflation and GDP over the next two years. The economic calendar also flush with key data and Treasury will auction $56B of notes and bonds. This morning in early trade the 10 yr note yield +1 bp to 2.22%, early trade in MBSs -3 bps from Friday’s close.
On Wednesday the Fed will increase the federal funds rate by 0.25%, that is already discounted in markets. The issue, or question, is what the policy statement and Janet Yellen will frame for markets to estimate a possible increase in Sept. The level of inflation is presently not an issue for the Fed, running lower than the Fed’s 2.0% target. It more likely falls on whether the Fed thinks the economy may be overheating based on how equity markets have performed this year. In the WSJ this morning front page article about how the Fed is increasingly concerned that financial markets are over-extended. Interest rates falling after the Fed has increased rates four times over the last two years and the stock exchange very over-bought. Even the most bullish funds and large investor firms are in agreement, but no one appears to be the first to jump ship. Last Friday the NASDAQ down 114 points, the largest decline in many months but the DJIA +89.
Crude oil trading higher this morning, recovering some of the massive declines over the last ten sessions. Gold lower. The dollar index about unchanged but the dollar is weaker against the yen and euro currency. Should be a quiet one today with only the Treasury auctions, although the demand for the 10 yr will be of particular interest for mortgage rates. The FOMC and Yellen on Wednesday then a heavy data calendar on Thursday have the potential for increased volatility. Over the last couple of weeks, bond market volatility has been low. In the equity markets, volatility is almost zero suggesting investors and markets, in general, are too complacent now.
This Week’s Calendar:
Monday, June 12
11:30 AM $24B 3 yr note auction
1:00 pm $20B 10 yr note auction
8:30 am May PPI (+0.1%, ex food and energy +0.2%)
10:00 am FOMC meeting begins
1:00 pm $12B 30 yr bond auction
7:00 pm weekly MBA mortgage applications
8:30 am May retail sales (+0.2%, ex-auto sales +0.2%)
May CPI (0.0%; ex food and energy +0.2%)
10:00 and April business inventories (-0.1%)
2:00 pm FOMC policy statement
2:30 Janet Yellen press conference
8:30 am weekly jobless claims (242K -3 K)
May import and export prices (imports 0.0%; exports +0.1%)
June Philadelphia Fed business index (27.0 from 38.8)
June Empire State manufacturing index (6.0 from -1.0)
9:15 am May industrial production and capacity utilization (production +0.2%, capacity 76.8% from 76.7%).
8:30 am May housing starts and permits (starts 1221K +4.0%; permits 1249K +2.6%).
10:00 am June U. of Michigan prelim consumer sentiment index (97.1 from 97.1 at the end of May).
10 yr note: -4/32 (12 bp) 2.21% +0.50 bp
5 yr note: -2/32 (6 bp) 1.78% +0.50 bp
2 Yr note: -1/32 (3 bp) 1.35% unch
30 yr bond: -7/32 (22 bp) 2.87% +1 bp
Libor Rates: 1 mo 1.127%; 3 mo 1.236%; 6 mo 1.416%; 1 yr 1.728%
30 yr FNMA 3.5 July: @9:30 102.97 -8 bp (-8 bp from 9:30 Friday)
15 yr FNMA 3.0: @9:30 103.05 -2 bp (+4 bp from 9:30 Friday)
30 yr GNMA 3.5: @9:30 104.05 -5 bp (-19 bp from 9:30 Friday)
Dollar/Yen: 109.84 -0.49 yen
Dollar/Euro: $1.1209 +$0.0013
Dollar Index: 97.23 -0.01
Gold: $1269.30 -$2.10
Crude Oil: $46.41 +$0.58
DJIA: 21,217.56 -54.41
NASDAQ: 6126.50 -81.42
S&P 500: 2422.64 -9.13
Overnight, the US bond markets were a little weaker. By this morning the 10 traded unchanged, as did the MBS markets. At 7:00 this morning EDT, the weekly MBA mortgage applications jumped substantially: apps +7.0%, purchase apps +10% and refinance apps +3.0%. Apps were the highest weekly increase going back to May 2010 after declining the last three weeks. Yr./yr. applications +6% from 7.0% last week. Refinancing apps accounted for 42.1%, down 1.1% from the prior week. Purchase applications for home mortgages indicates that the robust housing market of the first quarter is probably still alive despite other recently released but older period data showing weakness, such as last week's release of pending home sales for April, which were down for a second straight month and 3.3 percent below last year's level. The state of the market remains a mixed housing bag of data; some reports look good while others not so much. Overall housing, while healthy, is still dragging compared to previous recoveries.
Genworth Mortgage Insurance, which examines mortgage data from Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Affairs and other sources saying that first-time home buyers averaged 1.5 million in the last 10 yrs compared to the historical average of 1.8 million. The definition of first-time buyers is anyone who hasn’t owned a home in the previous three years. The study didn’t reveal anything new; student loans, tight credit, and increased rents have kept young buyers from being able to save enough for down payments. “What’s been missing is confidence,” said Sam Khater, deputy chief economist at CoreLogic Inc. First-time buyers are picking up momentum, according to Genworth. About 78% of first-time buyers are using low-down-payment loans, compared with the historical average of 73%. To cater to rising demand from first-timers, home builders are starting to build less expensive homes after years of focusing mainly on the upper end of the market. Some economists expect a big increase in first-time buyers over the next decade.
The only data today, this afternoon at 3:00 pm April consumer credit, expected at $17B from $16.4B in March. Not too interested in the overall, just the revolving credit numbers that report the use of credit cards.
Today the Senate Intelligence Committee begins the hearings into the national security with testimony from Dan Coats, director of National Intelligence. Others expected to appear in front of the Committee: Deputy Attorney General Rod Rosenstein, National Security Agency Director Michael Rogers and Federal Bureau of Investigation Acting Director Andrew McCabe. Tomorrow is the big day with the long-awaited testimony from Ex-FBI Director Comey. Tomorrow is also the British snap election in parliament. Prime Minister Theresa May’s Brexit plan in question and she may lose some of her previously strong support.
Not much direct revealing news today; waiting for tomorrow’s Comey testimony and next week’s FOMC meeting. No economic data of substance today or tomorrow. Crude oil inventories at 10:30 this morning, the EIA this morning reporting that OPEC is having problems continuing to maintain the cuts the group implemented last November and recently extended the cuts through March 2018. As we have mentioned here, OPEC eventually will cheat, and oil prices will not increase much. Technically, crude presently trading at $47.64 (-$0.55 this morning) has strong support at $47.00. A break below that level will drive prices lower and add more to the belief that inflation isn’t likely to increase much as has been expected.
The bond market is still bullish (lower rates), although a pull-back in prices as we have this morning may hold rates steady with FOMC meeting next week and the political tensions in Washington over the Comey/Trump meeting dominating today, his testimony tomorrow.
10 yr note: -4/32 (12 bp) 2.16% +1 bp
5 yr note: -2/32 (6 bp) 1.73% +2 bp
2 Yr note: -1/32 (3 bp) 1.31% +1 bp
30 yr bond: -9/32 (28 bp) 2.83% +2 bp
Libor Rates: 1 mo 1.088%; 3 mo 1.219%; 6 mo 1.417%; 1 yr 1.722%
30 yr FNMA 3.5 June: @9:30 103.39 -9 bp (-9 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 103.21 -1 bp (-4 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.30 -5 bp (-5 bp from 9:30 yesterday)
Dollar/Yen: 109.50 +0.09 yen
Dollar/Euro: $1.1261 -$0.0016
Dollar Index: 96.77 +0.12
Gold: $1294.40 -$3.10
Crude Oil: $47.66 -$0.53
DJIA: 21,179.16 +42.93
NASDAQ: 6296.16 +21.10
S&P 500: 2434.09 +4.76
Not all housing reports are the same
There are several housing reports released each month; the following shows you which reports carry the most weight in the marketplace and how they’re different.
The following are the housing data releases listed in order of importance over the past two weeks:
1) Existing Home Sales: This report is published by the National Association of Realtors. It is the most valuable as it contains sales information for both cash and mortgage transactions as well as Agency (Conventional and Government financing) and Non-Agency (Jumbo loans, etc). It covers the entire U.S. and is not based on a small sample size. The most recent release contains data from April and it showed the following:
2) FHFA: This report is from the Federal Housing and Finance Agency which controls Fannie Mae, Freddie Mac, FHA and the VA, is all the purchases that had an agency (Fannie Mae or Freddie Mac) conventional mortgage. So, it does not include cash sales, jumbo loans or government loans. The most recent release covered March and was released in May. It showed the following:
3) Case-Shiller: This report covers a 20 metro city area to come up with an index. They have several indexes, but the markets focus on the 20 cities. The most recent release was from March, and it showed home prices in that sample size increased by 5.9% from that same period last year.
So there you have it, three different housing reports by three different companies but all show that home prices are averaging a 6% increase in value/price over the past 12 months.
Mortgage rates are trending slightly higher this morning. Last week the MBS market improved by +38 bps. This was enough to improve mortgage rates or fees. Mortgage rates experienced moderate to low volatility throughout the week.
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week: 1) Central Banks, 2) Fear Factor and 3) Domestic.
Central Banks: The two biggest central banks that drive global bond prices are our own Fed and the European Central Bank (China a close third). The ECB will have its policy statement and rate decision Thursday morning, followed by a live press conference with their President, Mario Draghi. They have already begun slowing their purchases of from last year's pace. The market will be keen to learn about any adjustments to that pace as well as their outlook (good economic numbers out of the Eurozone lately) and inflation expectations.
Geopolitical concerns (fear) have kept MBS trading at elevated levels for the past month, and that is likely to continue as the market is concerned over two major elections. Great Britain and Germany, as well as developments in Qatar and here at home in the U.S. Thursday's testimony by former FBI chief James Comey could have a big impact on rates.
Domestic: Once again taking a back seat but still important is our domestic economic data. This morning's ISM Services (56.9 vs est. of 57.0) is very strong and shows that more than 2/3 of our economy is doing very well. But for the rest of the week, we have very limited releases that only have low to mid-level impact.
We have yearly highs in both the stock markets and bond markets at the same time. If the market were based upon economic fundamentals, then those would be moving in opposite directions. But they are not, because the market is suspending economic and inflationary fundamentals and has been doing so for the past three weeks. That will continue this week as well. We will continue to enjoy favorable pricing levels for MBS (lower rates) that otherwise would not exist. Thursday is key, with the combination of the ECB, Great Britain and the Comey testimony. Any of these events could have a major impact on rates. We get all three on the same day, so be alert on Thursday. An upper limit for MBS prices was set on Friday, but we will still see some great rates this week.