Interest rates continue to increase here and globally. The 10 yr. this morning at 1.94% +2 bps from yesterday, 23 bps since last Friday, 1.69% to 1.92%. The 16 month trade standoff between the US and China thaw, the Fed signaling no more rate cuts for a while, tensions in the mid-east cooling, less concerns over Brexit with the exit now delayed until at least January and markets unconcerned about the impeachment at the moment; all combining to lessen demand for safety….risk now on in stocks and bonds.
Not much new news this morning. China's comments on Tuesday that tariffs will be lifted by both the US and China took hold and is driving fears away. Meanwhile, comments from the US have been cautious, and President Trump hasn't had much to say about rolling back tariffs. Questions remain over how much ground—if any —the Trump administration had agreed to give. Markets overall, stocks and interest rates, optimistic the trade war was finally nearing an end. Suspicions still there though, but markets are seeing the end in sight. "There is no agreement at this time to remove any of the existing tariffs as a condition of the phase one deal," said President Trump's senior trade adviser, Peter Navarro in an interview on Fox Business Network. "The only person who can make that decision is President Donald J. Trump, and it's as simple as that." A Hudson Institute expert who advises the Trump administration said he believed the statement from China's Commerce Ministry "may represent wishful thinking on the Chinese side more than a specific agreement."
At 9:30 am ET the DJIA opened -8, NASDAQ -12, S&P -4. 10 yr. at 9:30 1.93% +1 bp after trading down to 1.90% overnight and at 8:00 am 1.96%. MBS prices at 9:30 -8 bps from yesterday's close and -7 bps from 9:30 yesterday.
At 10:00 am ET the mid-month U. of Michigan consumer preliminary sentiment index expected at 96.0 from 95.5 in October; the index reported 95.7.
Also, at 10:00 am ET Sept wholesale trade expected to fall 0.3%, as reported -0.4% the lowest inventory build since October 2017.
Markets are heading into a long weekend. Monday, markets will be closed for Veterans Day; stocks and bonds closed.
Nothing else scheduled today but remarks from Congress on impeachment possible as well as Trump tweets.
Our technicals are solidly bearish presently and have been negative for interest rates since the beginning of the month. It's possible MBS and treasury may improve a little today with the long weekend ahead, but there is little likelihood of anything significant. The US and global interest rates increasing on trade optimism and global tensions easing, betting on future increases in growth. The Fed had it right, signaling a pause in interest rates cuts. In the rearview mirror, global interest rates were excessively fearful and correcting now. In the windshield, the optimism over the trade issues being resolved is excessive.
PRICES @ 10:10 AM
10 yr. note: 1.92% unch
5 yr. note: 1.72% -1 bp
2 Yr. note: 1.66% -1 bp
30 yr. bond: 2.39% unch
Libor Rates: 1 mo. 1.758%; 3 mo. 1.901%; 6 mo. 1.922%; 1 yr. 1.983% (11/7/19)
30 yr. FNMA 3.5: @9:30
15 yr. FNMA 3.0: @9:30
30 yr. GNMA 3.5: @9:30
Dollar/Yuan: $6.9905 +$0.0121
Dollar/Yen: 109.33 +0.05 yen
Dollar/Euro: $1.1025 -$0.0025
Dollar Index: 98.33 +0.18
Gold: $1459.70 -$6.70
Crude Oil: $56.26 -$0.88
DJIA: 27,627.85 -46.95
NASDAQ: 8427.24 -7.28
S&P 500: 3080.28 -4.90
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.
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Intra-Day Lock Status: Its super simple. Positive news on Trade negotiations = downward pressure on MBS prices. This morning's news on a date and time for the President's to meet as well as a potential agreement on phasing out tariffs, will keep MBS in the red today. As we explain in today's video we could see some intra-levels in the -20 to -30 BPS range before settling in the -15 to -20 range.
Jobs: Initial Weekly Jobless Claims were lighter than expected (211K vs. est. of 215K). The more closely watched 4 week moving average dropped to 215K.
Treasury Dump: We have our 30 year bond auction today at 1PM
Central Bank Palooza: The Bank of England kept their key interest rate at 0.75% which was widely expected. However, what was NOT expected is that two members voted for a rate decrease.
The Talking Fed: Today we hear from Robert Kaplan and Raphael Bostic.
Trade War: Both sides are saying that there is agreement on phasing out the U.S. tariffs on Chinese goods as part of a Phase 1 deal. However, there still is not an official agreement on Phase I. Also, both Presidents have agreed to meet at the NATO Summit on December 3-4.
Across the Pond:
Germany: Industrial Production -0.6% vs. est. of -0.4%.
Questions about my commentary? No problem, email me at firstname.lastname@example.org and I will do my best to answer your questions.
MBS OVERVIEW - LEARN FROM THE PAST
Mortgage backed securities (FNMA 3.500 MBS) gained +18 basis points (BPS) from Tuesday's close which caused your backend pricing to improve for the session but remained lower for the week.
Here is what I said in Wednesday's Morning Coffee Update: "As we explain in today's video, Tuesday's movement pressed MBS to the bottom of our channel and understanding how trading channels work, is that our bottom (support level) held yesterday and therefore will force MBS to trade back near the middle of our channel, so expect us to recoup a small portion of Tuesday's losses, most likely in the +6 to +15 range."
Taking it to the House: Weekly Mortgage Applications were flat with a net change of only -0.1%. Refinance Applications rose by 2.0% and Refinance Applications fell by -3.0%.
Productivity: The 3rd QTR Non-Farm Productivity was a big miss with a reading of -0.3% vs. est. of +0.9%. However, the reason for the shortfall was a huge spike in wages as Unit Labor Costs shot up by 3.6% vs. est. of 2.2%.
Treasury Dump: We had our 10 year not auction today at 1PM. It was strong. $27B went off at a high yield of 1.809% and foreign buyers gobbled it up.
The Talking Fed: New York Federal Reserve President John Williams said that any changes in interest rates from here will depend on the incoming economic data but policymakers should be preemptive in taking steps to keep the expansion alive.
Across the Pond:
Germany: Factory Orders 1.3% vs. est. of 0.1%, Markit Services PMI 51.6 vs. est. of 51.2
Eurozone: Markit Services PMI 52.2 vs. est. of 51.8, Retail Sales 0.1% vs. est. of 0.1%
Any news about trade with China has become a major mover for the bond and stock market, yesterday some minor concerns improved the rate and mortgage markets somewhat, today positive reports and a technically bearish interest markets are sending the 10 yr. to 1.88% (+7 bp) and MBS prices at 8:30 -25 bps.
The trade news this morning; China and the US are agreeing to back off tariffs on each other’s goods in phases as they work toward a deal between the two sides, a Ministry of Commerce spokesman said. “In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” spokesman Gao Feng said today….. “If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Such an understanding could help provide a road-map to a deal de-escalating the trade war that’s cast a shadow over the world economy. Signing the phase one agreement with Trump and Xi is still not set up as to where and when but it is very likely to occur later this month or early Dec. (More likely Dec)
The EU out adding more concerns for the EU economies; the European Commission cut its euro-area growth and inflation outlook amid global trade tensions and policy uncertainty. The Commission sees economic momentum remaining muted through 2021, forecasting an expansion of 1.2% for that year. At 1.3%, inflation is projected to remain well below the European Central Bank goal of just below 2% over the medium term. “Adding to domestic economic shocks and policy uncertainty, the slowdown in global demand and weak trade has hit the European economy hard,” EU chief economist Marco Buti wrote in the report. Meanwhile here in the US optimism remains high for the outlook although the 11 yr. growth is showing some signs of weakness in outlooks. Both the US and China may be seeing the light that neither country will get what it wants, so make a deal has to occur otherwise the outcome will be serious for all economies. The European Central Bank's latest economic bulletin noted that economic growth is expected to remain positive, but moderate, as the second half of 2019 winds to a close.
At 8:30 am ET weekly jobless claims 211K -8K.
At 9:30 am ET the DJIA opened +170, NASDAQ +41, S&P +14. 10 yr. 1.89% +8 bps. MBS prices for the 3.5 coupon and -20 bps from yesterday’s close and -10 bps from 9:30 yesterday. The 3.0 coupon -30 bps from yesterday’s close and -27 bps from 9:30 yesterday.
At 1:00 pm ET Treasury will auction $19B of 30s, re-opening the issue from August; yesterday the 210 yr. auction attracted reasonable demand but traders didn’t react much to it.
At 3:00 pm ET Sept consumer credit expected at $15B down from $17.9B in August; as you know we put all focus on the revolving credit component.
It is all about US/China trade “progress” that is moving markets today. Technically it isn’t new news that our work and all other tech analysts are in the same boat. The 10 will test 1.90%, the high 10 yr. note rate since mid-Sept. I hate to say it but if 1.90% is exceeded and holds above it for a few sessions then 2.10% becomes the next technical target as we see it presently. Montage rates over 4.10%?
10 yr. trading today
STAY LOCKED TODAY.
PRICES @ 10:00 AM
10 yr. note: 1.89% +8 bp
5 yr. note: 1.70% +7 bp
2 Yr. note: 1.66% +4 bp
30 yr. bond: 2.39% +7 bp
Libor Rates: 1 mo. 1.755%; 3 mo. 1.904%; 6 mo. 1.923%; 1 yr. 1.976% (11/6/19)
30 yr. FNMA 3.5: @9:30 102.41 -20 bp (-17 bp from 9:30 yesterday)
15 yr. FNMA 3.0: @9:30 102.06 -10 bp (-13 bp from 9:30 yesterday)
30 yr. GNMA 3.5 @9:30 103.59 -25 bp (-21 bp from 9:30 yesterday)
Dollar/Yuan: $6.9771 -$0.0211
Dollar/Yen: 109.16 +0.18 yen
Dollar/Euro: $1.1062 -$0.0022
Dollar Index: 98.03 +0.07
Gold: $1488.20 -$4.90
Crude Oil: $57.38 +$1.03
DJIA: 27,702.57 +210.01
NASDAQ: 8464.25 +53.62
S&P 500: 3093.94 +17.16
Interest rate markets started a little better this morning after the 10 yr yield had increased 15 bps since last Friday. Yesterday the 10 yr broke above its near term technical support at 1.80%, once it did there was a noticeable drive higher as those bullish on rates in the near term jumped ship quickly. MBS prices yesterday 38 bps (3.0 coupon) and -21 bps (3.5 coupon). At 9:00 am ET this morning, the 3.0 coupon +16 bps, the 3.5 coupon +6 bps.
Weekly MBA mortgage applications were better than what we were thinking; overall -0.1%, purchases -0.3%, refinances +2.0%.
At 8:30 am, ET preliminary Q3 productivity and unit labor costs. Productivity expected up 1.0%, it declined 0.3% but Q2 was revised from +2.3% to 2.5%. Productivity negative, the first decline in almost 4 yrs. Unit labor costs expected +2.2%, increased 3.6%.
Yesterday was election day; most were local and no national elections. In Kentucky and Virginia, President Trump took a hit; in Kentucky, the Democrat looks like a winner in the governor race, and in Virginia, Democrats seized both houses of the Legislature from Republicans, gaining full control of state government for the first time in 26 years. Other contests in Mississippi and New Jersey saw no changes in power -- were embraced by Trump and the Republican Party as key tests of the president’s popularity. Take your pick.
At 9:30 am ET, the DJIA opened unchanged, NASDAQ -17, S&P unchanged. 10 yr 1.83% -3 bps. MBS price for 3.0 coupon +17 bps from yesterday’s close and -4 bps from 9:30 yesterday. 3.5 coupon at 9:30 +9 bps from yesterday’s close and -7 bp from 9:30 yesterday.
This afternoon at 1:00 pm ET, Treasury will auction $27B of 10s re-opening the issue in August.
We are watching the events in Iran closely. Yesterday the country announced it would fire up its closed centrifuges that were shut down in 2015 when Iran and the west agreed on a nuke agreement that halted Iran’s push to develop a nuclear bomb. The US backed the agreement last year. Iran has now violated the deal that Europe was trying to salvage. This morning, Reuters is reporting Iran briefly held an inspector for the UN nuclear watchdog in the Islamic Republic and seized her travel documents. Diplomats familiar with the International Atomic Energy Agency’s (IAEA) work said on Wednesday, some describing it as harassment. The incident appears to be the first of its kind since Tehran’s landmark deal with major powers was struck in 2015, imposing restrictions on Iran’s nuclear activities in exchange for the lifting of international sanctions.
Not much through the rest of the day other than the 10 yr auction at 1:00 pm ET; even that won’t have much direct impact on the rate markets. It should be quiet for the rest of the day. Our near term technicals are bearish now.
10 yr. note: 1.83% -3 bp
5 yr. note: 1.64% -2 bp
2 Yr. note: 1.60% -3 bp
30 yr. bond: 2.31% -3 bp
Libor Rates: 1 mo. 769%; 3 mo. 1.893%; 6 mo. 1.926%; 1 yr. 1.966% (11/5/19)
30 yr. FNMA 3.0: @9:30 101.31 +17 bp (-4 bp from 9:30 yesterday) 3.5 102.53 +9 bp (-7 bp from 9:30 yesterday)
15 yr. FNMA 3.0: @9:30 102.16 -3 bp (-18 bp from 9:30 yesterday)
30 yr. GNMA 3.0: @9:30 102.66 +16 bp (-4 bp from 9:30 yesterday)
Dollar/Yuan: $6.9995 -$0.0102
Dollar/Yen: 109.01 -0.15 yen
Dollar/Euro: $1.1083 +$0.0008
Dollar Index: 97.85 -0.13
Gold: $1490.00 +$6.30
Crude Oil: $57.30 +$0.07
DJIA: 27,489.22 -3.41
NASDAQ: 8418.48 -16.20
S&P 500: 3075.91 +1.29
Recent rate cut means smiles for mortgages and credit cards, sad news for savers
When the Federal Reserve cuts rates, there is a reason for it. While there is no crystal ball, the Feds look for signs of a slowing economy and often hedge their bets by announcing a rate cut to encourage more consumer spending.
The effects of three rate cuts over the past year offer a mixed bag, with some Americans taking advantage of cheaper loans (impacting your mortgage, home equity loan, credit card, student loan tab, and car payment). Lenders, however, may be less included to lend money in anticipation of an economic slowdown. Throw in less interest on that rainy day nest egg, and in some cases, buying power is lost over time.
So let’s study all the edges of the rate cut sword as described by CNBC’s Jessica Dickler. First off, the prime rate (the rate banks extend to their most creditworthy customers), is typically 3 percentage points higher than the federal funds rate. That not only determines your savings rate; it also is the rate used for many types of consumer loans, particularly credit cards.
“With a rate cut, the prime rate lowers, too,” she says, “And credit cards likely will follow suit. Most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.” This means cardholders could see a reduction in their annual percentage rate within a billing cycle or two. However, credit card debt will continue to be expensive, with only a small dip in the foreseeable future.
Dickler says it’s a good time to shop around for a zero-interest balance transfer offer because if the economy continues to soften (the reason for the three cuts in the past year), these terms could get less generous. You can also call your credit card issuer directly and request a break on interest rates. You have nothing to lose.
As for savings, online banks typically offer the highest yields because they come with fewer overhead expenses than traditional bank accounts. Shop around for the best rates. And don’t forget that although you can’t access it for while if you do so, you can lock in a higher rate with a one-, three- or five-year certificate of deposit.
While the economy, the Fed, and inflation all have some influence over long-term fixed mortgage rates (which generally are pegged to yields on U.S. Treasury notes), there is no direct connection to mortgage interest rates. Historically speaking; however, mortgage rates are the lowest that have been in many years — always good news for the housing market, whether it be existing homes or new construction. If you’re not buying, however, this also makes it a good time to both refinance or pull equity from your home.
Wondering if buying a car might be cheaper with rates this low? The recent rate cut will likely not have any material effect on what you pay, according to Dickler. “For example, a quarter-point difference on a $25,000 loan is $3 a month, according to Bankrate,” she says. “Auto loan rates have remained low, even after years of rate hikes.” But it’s wise to reward of how other factors may affect a car purchase, as prices for them may rise due to trade wars increasing tariffs on materials.
Source: CNBC, TBWS
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 +33 bps. This was enough to move rates lower last week. We saw a good deal of rate volatility at the end of the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that can impact rates this week. 1) Trade War, 2) Central Bank, and 3) Services.
1) Trade War: We start the week on a bit of high note as Commerce Secretary Wilbur Ross met with Chinese Premier Li Keqiang in Bangkok on Monday. Ross says that the two sides are "very far along" with a Phase 1 trade deal. Any further movement on a concrete date and place for the next physical summit meeting and/or official announcements of agreements on larger portions of the Phase I deal will hurt rates. Conversely, any breakdowns in talks could push rates lower.
2) Central Bank: This week we get interest rate decisions from the Bank of England and the Reserve Bank of Australia
3) Services: While the manufacturing sector in the U.S. and China has been weak, the services sector has been solid, with it accounting for almost 75% of our economic output. The ISM Services report is expected to show expansion, and at a pace, that is stronger than the last reading. We also get key services readings from China, Germany, and the EU.
Treasury Dump: Here is this week's auction schedule
The Fed: Here is this week's speech schedule:
This Week's Potential Volatility: Average
Last week we had the Fed rate cut, weak manufacturing, and trade pushing rates around. This week it is all about the trade deal. It looks like we're close to a phase 1 deal. However, if things breakdown again, we're likely to see rates dip lower on elevated 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.
Once the 10 yr. dropped back below 1.80% yesterday, more treasury buying occurred at the long end of the curve; short positions jettisoned, and it has followed through this morning in early trading. The Fed is on pause now after cutting rates yesterday, as was widely expected. No inflation, China trade deal always wobbly, now becoming subject, China says it will never give in on the core issues that Trump is driving for. The Phase One deal may happen, but China is now saying it may not be possible ever to get a trade pact the US is looking for. That makes sense, a trade deal the US wants never appeared possible. Now just comments, but at the end of the day, some kind of middle ground may be possible and some benefits for both countries and better than it was, but likely the US demands won't happen. China concerned about President Trump's impulsive nature and the risk he may back out of even a limited deal.
Weekly jobless claims +5K to 218K.
Sept personal income and spending, both as expected, income +0.3%, spending +0.2%. Sept PCE 0.0%, yr./yr. +1.3%; core PCE 0.0%, yr./yr. +1.7%. No noticeable reaction to the report. Inflation is still dormant. News media stoking worries that spending up 0.2% is slowing; August spending was revised in this release from +0.1% to +0.2%. Spending taking a break before more significant data between now and the end of the year.
House Democrats hold a vote today to affirm an impeachment inquiry of President Trump. The resolution in support of the inquiry will be the first chance for all House members to be on record supporting or rejecting the impeachment process. It's headed for a mostly party-line vote, with the Democratic majority prevailing.
At 9:30 am ET the DJIA opened -44, NASDAQ +10, S&P -4. 10 yr. 1.74% -4 bp after dropping 6 bps yesterday. MBS prices at 9:30 +11 bps from yesterday's close and +46 bps from 9:30am ET yesterday.
At 9:45 October, Chicago purchasing mgrs. index expected at 48.3 from 47.1 in Sept; under 50 is contraction; as released 43.2, the lowest reading going back to Dec 2015.
Tomorrow markets have to confront October employment data and the National October ISM manufacturing index, two key data releases. We won't be surprised if the index that is expected at 49.3 is reported lower given the GM strike this month.
The decline in the 10 yr. note rate and increased prices for MBSs is a technical issue, not yet a fundamental change. 1.80% as you know is a major technical level, falling back under it yesterday triggered by a near term trade reversal. Traders were selling 10yr notes and simultaneously buying 2s, betting the Fed would be more bearish on the economic outlook, but the FOMC and Powell were more optimistic and shot down the idea more rate cuts were likely. The Fed will pause. Now adding to the improvement in rates is helped by the significant drop in the October Chicago purchasing mgrs. index released at 9:45 am ET this morning.
10 yr. note: 1.71% -7 bps
5 yr. note: 1.55% -6 bps
2 Yr. note: 1.56%-4 bps
30 yr. bond: 2.20% -6 bps
Libor Rates: 1.781%; 3 mo. 1.909%; 6 mo. 1.919%; 1 yr. 1.979%
30 yr. FNMA 3.0: @9:30 101.44 +11 bp (+46 bp from 9:30 yesterday)
15 yr. FNMA 3.0: @9:30 102.27 +4 bp (+17 bp from 9:30 yesterday)
30 yr. GNMA 3.0: @9:30 102.75 +14 bp (+44 bp from 9:30 yesterday)
Dollar/Yuan: $7.0364 -$0.0190
Dollar/Yen: 108.15 -0.70
Dollar/Euro: $1.1145 -$0.0005
Dollar Index: 97.35 -0.30
Gold: $1512.40 +15.70
Crude Oil: $54.40 -$0.65
DJIA: 27,063.83 -122.36
NASDAQ: 8285.03 -18.94
S&P 500: 3036.12 -10.62
A technical breakdown yesterday on the 10 yr. note that further pressures mortgage rates; the 10 yr. closed at 1.84% +4 bps and above 1.80% that we have been talking about the past week or so. MBS prices yesterday didn't move much but ended slightly lower in price. The S&P made a new all-time high. News wise yesterday didn't have anything that added to or detracted to trader attitudes, but Nancy Pelosi did confirm that she will call for a full House vote on impeachment to legitimize the closed-door hearings. The vote, when it occurs, will accomplish that, and likely the vote will be on party lines. Today one of President Trump's top advisers on European affairs is set to testify he told a government lawyer about concerns that U.S. national security could be undermined after a phone call between Trump and Ukraine's president.
U.S.-China trade deal optimism persists, yet that idea seems to be "old news" for the time being, so it isn't making a meaningful difference for the stock or bond markets. Separately, the Brexit saga continues with news today that the Labour Party is now open to a general election before Christmas, knowing the EU has confirmed an Article 50 extension until Jan. 31.
The FOMC meeting begins this morning. The consensus is for another cut in the Federal Funds rate, and that is completely factored in current rate levels. Also, a consensus is that the Fed will imply there will be no more cuts for a while and take a rest from 3 cuts this year to access the longer-term results to the economy the cuts have accomplished. Q3 GDP will weaken compared to Q2; the current estimates are GDP growth at 1.7%. Tomorrow at 8:30 am ET, the Commerce Dept. will release the advance report, the first of three, and before the FOMC policy decision tomorrow afternoon.
At 9:00 am ET this morning August Case/Shiller home price index; expected -0.1% was down 0.2%; yr./yr. home prices expected +2.5%, as released +2.0%. Year-on-year growth, at 2.0% in July and a 7-year low didn't improve. An interesting monthly report, but as far as markets are concerned, it normally doesn't elicit much response. That data was taken from Econoday. Now, here is what the Wall Street Journal reported; "Average national home prices grew 3.2% in the year ending in August, according to the S&P CoreLogic Case-Shiller National Home Price Index, up slightly from 3.1% the prior month."
At 9:30 am ET the DJIA opened -33, NASDAQ -12, S&P -4. 10 yr. 1.84% unch. 3.0 FNMA +5 bps from the close yesterday and +13 bps from 9:30 yesterday. 3.5 FNMA unch from yesterday's close and +5 bps from 9:30 yesterday.
At 10:00 am ET October Conference Board consumer confidence index was thought to be better at 128.5 compared to 125.1 in Sept; the index lower at 125.9 and July was revised to 126.3 from 125.1. August pending home sale better than forecasts at +1.5% against forecasts of +0.7%.
The bond and mortgage markets are technically bearish as they have been for the last two weeks. The rest of this week, there are numerous data points and of course, the FOMC and Jerome Powell tomorrow.
10 yr. note: 1.84% unch
5 yr. note: 1.66% unch
2 Yr. note: 1.63% -2 bp
30 yr. bond: 2.33% unch
Libor Rates: 1 mo. 1.799%; 3 mo. 1.935%; 6 mo. 1.939%; 1 yr. 1.995% (10/28/19)
30 yr. FNMA 3.5 @9:30 102.31 unch (+5 bp from 9:30 yesterday) 3.0 100.95 +5 bp (+8 bp from 9:30 yesterday)
15 yr. FNMA 3.0: @9:30 102.08 -1 bp (-1 bp from 9:30 yesterday)
30 yr. GNMA 3.5: @9:30 103.66 +2 bp (+4 bp from 9:30 yesterday) 3.0 102.30 +3 bp (+5 bp from 9:30 yesterday)
Dollar/Yuan: $7.0654 -$0.0025
Dollar/Yen: 108.95 -0.01
Dollar/Euro: $1.1099 -$0.0003
Dollar Index: 97.77 +0.01
Gold: $1487.80 -$8.10
Crude Oil: $54.96 -$0.85
DJIA: 27,094.26 +3.24
NASDAQ: 8292.72 -33.27
S&P 500: 304024. +0.82
Accessory dwelling units are being used for fun, family and profit
Casitas. Granny flats. Tiny homes. Back yard in-laws units. She-sheds. Man caves. Call them what you will, but across the country they are now being used not only for fun, but for profit as well.
According to a recent article by CNBC, the latest housing trend in backyards around America is the emergence of the accessory dwelling unit (ADU), cropping up in back and side yards across America, acting as either rental units or additional space for aging parents and still-nested adult children.
Writer Diana Olick says, “Growth in the sector has been fueled by changes to local and state zoning rules. Some municipalities are struggling with a lack of affordable housing and see these additional units as one remedy.” She goes on to describe how in 2010 Portland, Oregon waived impact fees for ADUs, making them significantly less expensive. As a result, the number of ADU permits jumped from 86 in 2010 to 660 in 2018. Same thing happened in California when a 2017 state law forced cities to relax ADU regulations, where permits jumped even more dramatically.
This means huge growth for ADU builders, who are eager to expand the market and drive the number of ADU installations up dramatically. Financing for ADUs is still looking for a home, however. “ADU is still really for the most part an affluent homeowner product, meaning you have to have cash on hand to take this on,” says one ADU builder. “Financing is a concern for the larger homeowner universe.”
As for he purposes these tiny dwellings are serving, ADU builders are reporting that interest is evenly split between those looking to address housing for family members and those seeking rental income. Pricing depends on the size of the unit, of course, but the most popular model, with the most common size is running just under 300 sq. ft. and cost around $105,000 to install.
Whether it’s housing family or renting out their units on AirBnb, many ADU owners look for their units to provide an even bigger financial return in retirement. One couple in the article lived in their ADU for nearly a year while renovating their main dwelling. Their plan? Someday they want to live in (visit?) their ADU and rake in the cash by renting out their house, traveling and doing whatever they please.
Local zoning regulations remain as one of the greatest roadblocks for ADU builders. While it is definitely becoming easier to build ADUs in some local areas, Olick reports that there are still battles big and small, from zoning to neighborhood opposition. “Some don’t want to see their neighborhoods crowded with renters, pushing density and services beyond capacity.”
Before considering adding an ADU to your property, experts recommend you not only check with your neighborhood’s rules and regulations. Talk to your neighbors as well, because especially in many upscale neighborhoods NIMBY (not in my backyard) is alive and well.
Mortgage rates are trending sideways this morning. Last week the MBS market worsened by -2 bps. This caused rates to remain unchanged for the week. We saw low rate volatility through the week.
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week. 1) Central Bank, 2) Jobs and 3) Domestic.
1) Central Bank: Our own Federal Reserve will start two days of meetings on Wednesday, which will conclude with their interest rate decision and policy statement. We will also get a live press conference with Fed Chair Powell, but we will not get updated economic projections (dot plot) at this meeting. The market has priced in a rate cut of 25 basis points. We also hear from the Bank of Canada and the Bank of Japan; both are expected to keep its key policies at current levels.
2) Domestic: We have a lot going on this week. The biggest release (other than Friday's Jobs deluge) is Wednesday's first release of the 3rd QTR GDP. The market is expecting a range of 1.7% to 1.8%. Any reading at or above 2% would be negative for your rates. We also get the Fed's key inflation index (PCE) on Thursday and two key readings on Manufacturing (Chicago PMI and ISM Manufacturing). Both have been trending below 50, which is contractionary.
3) Jobs: We get a deluge of jobs and income-related data this week with ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, and Personal Income. But Friday's BLS Jobs report will get the most attention but likely to get a "pass" as both the Non-Farm Payrolls and the Unemployment Rate are expected to soften due to the GM Strike. Average Hourly Earnings will continue to be the primary focus of bond traders.
This Week's Potential Volatility: High
What a week for data. We have a lot going on this week that can move rates. The economic data denoted above, trade and of course the Fed.
Dipping interest rates help single family home permits surge ahead of predictions
It’s a numbers game, but it’s one everyone in the real estate and the home building industry watches. While construction of new houses fell more than 9% in September, there is a now a backlog of permits suggesting the dip is simply a brief pause in a real estate market reinvigorated by lower mortgage rates, according to Realtor’s Jacob Passy.
He adds that housing starts slid to an annual rate of 1.26 million last month from a revised 1.39 million in August, the government said Thursday, concentrated in new buildings with five units or more that typically get rented. Even though the number of permits to build fell slightly month-to-month, the number of permits filed was nearly 8% higher compared to a year earlier.
Construction of apartments, condo complexes, and other projects with five units or more have the potential to swing sharply from month to month. But new construction on single-family homes (about 75% of all homes sold) rose slightly to an annual rate of 918,000, marking the highest level since the start of 2019. Single-family starts have risen for four months in a row and are 2.8% higher compared to a year ago.
Passy says indicators illustrate that construction has perked up following a steep decline in interest rates, even though builders still are not producing enough new homes to satisfy demand.
Home-builder sentiment surged to a 20-month high of 71 in October from 68 in the prior month, the National Association of Home Builders said Wednesday. Readings over 50 are a sign that confidence is improving. Just 10 months ago, the index stood at a 3½-year low of 56.
Source: Realtor, MarketWatch, TBWS
Mortgage rates are trending sideways this morning. Last week the MBS market worsened by -7bps. This caused rates to move sideways on low volatility for the week.
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week. 1) Brexit, 2) Central Bank and 3) Trade War.
1) Brexit: Last week, the EU Council accepted British Prime Minister Boris Johnson's latest deal, and Johnson now needs to get his Parliament to pass it. He was unable to do that over the weekend, falling short by just nine votes. It looks like he thinks he now has the votes and is looking to have another vote on Monday. However, he faces procedural challenges with the vote.
2) Central Bank: The European Central Bank will meet on Thursday and release their latest interest rate decision and policy statement. This will be the last ECB meeting before Christine Lagarde takes over as ECB President on November 1. She has just recently been the head of the IMF.
3) Trade War: The China trade talks will continue this week with the National Economic Council. Larry Kudlow, saying that the December 15th round of tariffs could be postponed or even withdrawn if the talks continue to go well. Meanwhile, China's state-run Xinhua News Agency reported that Vice Premier Liu He told a conference in the southern city of Nanchang that the most recent trade talks with the U.S. made "substantial progress."
There isn't any economic data due for release this week that is likely to cause rates to move. As a result, all eyes are on Brexit, ECB, and of course, the trade war with China. Any news on those three fronts can spike volatility and move rates.
Borrowers jump on board the refinance bandwagon as rates drop
When mortgage rates plummet to historically low levels, you have to expect a reaction from the borrowing public. And, as usual, they did not disappoint. Borrowers got themselves to their loan reps and began taking advantage of the market. According to the Mortgage Bankers Association (MBA), the volume of mortgage applications rebounded sharply last week as homeowners rushed to refinance.
Mortgage News Daily says, "The Refinance Index increased 14 percent from the previous week and was 133 percent higher than the same week one year ago. The refinance share of mortgage activity increased to 58.0 percent of total applications from 54.9 percent the previous week."
The article reports that although refinance activity slowed in September compared to August, the months together were the strongest since October 2016, and this is expected to continue. MBA' Joel Kan said, "Purchase applications also increased and remained more than 9 percent higher than a year ago. Low rates and healthy housing market fundamentals continue to support solid levels of purchase activity."
The FHA share of total applications decreased a percent, to 10.4 percent from 11.4 percent the week the previous week and VA loans followed, dropping to 12.4 percent from 13.1 percent. The average contract interest rate for 30-year fixed-rate mortgages (FRM) with origination balances at or below the conforming limit of $484,350 decreased as well, while the contract interest rate for jumbo 30-year FRM, loans with balances greater than the conforming limit, dipped 2 basis points. The article reports that both the contract and the effective rate for 5/1 adjustable rate mortgages (ARMs) moved higher.
MBA's Weekly Mortgage Applications Survey has been around since 1990 and covers over 75 percent of all US retail residential applications. Its respondents include mortgage bankers, commercial banks and thrifts.
Source: MorgageNewsDaily, TBWS
Mortgage rates are trending sideways so far today. Last week the MBS market improved by +40 bps on moderate to high volatility. This was enough to improve mortgage rates or fees.
Three Things: These are the three areas that have the greatest ability to impact mortgage rates pricing this week. 1) The Fed, 2) Trade War and 3)Geopolitical
1) The Fed: We will hear from Fed Chair Powell no less than three times this week. We will also get the release of the Minutes from the last FOMC meeting and a barrage of talking feds all week.
2) Trade War: Chinese Vice Premier Liu He is due to visit Washington for talks with meetings expected to take place on Thursday and Friday. According to news reports, the Chinese are "increasingly reluctant to agree to a broad trade deal" and that the "range of topics they're willing to discuss has narrowed considerably." The same reports claim that Vice Premier Liu He is likely to bring an offer that won't include commitments on reforming Chinese industrial policy or government subsidies that have been the target of longstanding US complaints. Direct reports from the White House and Chinese delegation could have a huge impact on market sentiment later this week.
3) Geopolitical: The three-ring circus of the impeachment "inquiry" will get a lot of attention as well as the drama from across the pond with Brexit negotiations. Both have seen massive media coverage amid new developments; both will feature heavily this week.
Treasury Auctions this Week:
We shouldn't see too much rate volatility today, but this week could be a different story. Rate markets will be focusing on a few things; the trade war, Brexit, Fed Chair Pawell's speeches, and potentially impeachment news. If anything happens outside market expectations, which is entirely possible, rates are likely to experience increased volatility.
First-time homebuyers often feel unprepared for ownership
For some it seems like a no-brainer. Renting a home feels like throwing money away, offering no sense of ownership whatsoever. Buying a home is investing in the future. Even if it takes up to 30 years to pay off the loan, you have been LIVING in your investment.
According to a new study by Framework, however, there is more than meets the eye with first time home buyers, who see it as laced with blind spots and pre-loaded with anxiety — mostly because they went into it fairly blind, without enough education and information. The surveys were completed by two groups: recent first-time homebuyers and prospective first-time homebuyers.
The report says only 41% feel very well prepared for the home buying process, 57% worry they can't afford homeownership, 47% think the home buying process is "rigged" against the buyer, 44% fear making costly mistakes, and 55% said they could use an independent advocate to coach them through the process of home buying and homeownership. On top of that, more than half of first time home buyers in both groups said buying a home was more difficult than it should be.
So what does this tell the average real estate professional or mortgage loan officer? That they may have fallen short of making their buyers literate enough to have confidence in the process? While, once they had been through the process of buying a home, 64% of responders said they emerged from it knowing a lot more about the financial aspects of it, most wished they had taken some kind of class to prepare them for it.
When you think about it, those in the industry often don't do a great job in explaining aspects of homeownership not in their purview — things like paying taxes, how and when a payment can adjust, or promoting the idea of having a home ownership "slush fund" in the case of an emergency, such as flooding, a failing roof, or plumbing leaking underground. Of course, these aren't included in the warm, fuzzy feelings industry professionals care to project as they lead buyers through the process, but that doesn't mean first-time homebuyers shouldn't be encouraged to find classes or sources that address their concerns.
CurrentMortgageRatesToday.org says that while the largest cost of owning a home will be your monthly mortgage payment, there are several other costs that you should be aware of when trying to find out how much homeownership will cost you — things like an HOA fee (and what it covers), property taxes, homeowner's insurance, and utilities. And then there is maintenance and repairs.
There are always risks inherent in any large purchase. But it's up to the potential homeowner to decide if it's the best financial step for them. Lenders and Realtors often offer courses for first-time homebuyers, but they can also be found online as well.
Source: PRNewswire, currentmortgageratestoday.org, TBWS
Mortgage rates are trending sideways so far today. Last week the MBS market worsened by -1bps. This caused rates to trend sideways for the week. Rate markets started to settle down through the week. We could see a good deal of rate volatility toward the end of the week.
Three Things: These are the three areas that have the greatest ability to move mortgage rates this week: 1) Geopolitical and trade news, 2) The Fed, and 3) Domestic.
1) Geopolitical and trade news: China will be closed for their "National Day" this week, so any direct trade commentary out of China is unlikely. The market will then focus on our domestic tweets and reports on trade negotiations. Domestically, we'll hear from the "whistleblower" that is at the center of the recent impeachment inquiry.
2) The Fed: We have a "deluge" of Fed speakers this week, including Fed Chair Powell:
3) Domestic: We have a monster week for big-name economic releases that have the "gravitas" to move rates. Chicago PMI and ISM Manufacturing will give us a good idea on the manufacturing sector. There's a concern that the sector has been contracting, but the market is expecting readings that show expansion. The ISM Services data is also expected to show expansion. We get a ton of jobs related data with ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Non-Farm Payrolls, Unemployment Rate, and Average Hourly Earnings. YOY Earnings will get the most attention from bond traders.
Last week rates moved sideways on reduced volatility. Look for rates to continue to move sideways unless we get some unexpected economic data toward the end of the week. Of course, political and geopolitical concerns could play a role in increased volatility for the markets.