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ADP Employment Report

Nov 3, 2016

adp-info11-2-2016

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The stock and bond markets both struggled this past week.  Stocks fell for the second consecutive week as some encouraging domestic economic news was offset by a China Trade Balance report showing a 10% drop in exports and a 2% decline in imports during September.  This report renewed investor worries of a possible slowdown in global growth.  Also, the third quarter corporate earnings season got off to a disappointing start when Alcoa reported lower than expected revenue and profits in addition to softer earnings guidance.

 

Favorable economic news included continued strength in the job market with Weekly Jobless Claims falling to 246,000, a decline of 9,000 below the consensus forecast of 255,000 claims.  The underlying trend remains consistent with healthy labor market conditions as claims have now been below the 300,000 level for 84 consecutive weeks.  The four-week moving average of claims fell by 3,500 to 249,250 claims last week.  Furthermore, the Commerce Department reported Retail Sales were robust in September, rebounding from disappointing sales in August.  Retail Sales increased 0.6% in September while Retail Sales excluding autos increased 0.5%.  Both readings matched their respective consensus forecasts.  The Retail Sales numbers eased investor concerns over the current status of discretionary spending and its potential impact on 3rd quarter GDP.

 

The Wednesday release of the minutes from the Federal Reserve’s September FOMC meeting triggered some bond market volatility with the yield of the benchmark 10-year Treasury note rising to 1.80%, its highest level in four months.

 

The minutes showed “Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the committee expected.  It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.”  Among the participants who supported awaiting further evidence of continued progress toward the committee’s objectives, several stated that the decision at this meeting was a “close call.”  Based on the current prices of fed funds futures, the market is now pricing in a 64.3% chance of a rate increase by the Fed’s December 14 FOMC meeting.  The bond market was also hit with some selling pressure on Friday when Fed Chair Janet Yellen remarked in a speech that she was comfortable with the Fed “overshooting” their inflation target.

 

In housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 7th showing the overall seasonally adjusted Market Composite Index decreased 6.0%.  The seasonally adjusted Purchase Index fell 3.0% from the prior week, while the Refinance Index decreased 8.0%.  Overall, the refinance portion of mortgage activity decreased to 62.4% of total applications from 63.8% in the prior week.  The adjustable-rate mortgage share of activity decreased to 4.1% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased from 3.62% to 3.68% with points increasing to 0.35 from 0.32.

 

For the week, the FNMA 3.0% coupon bond lost 54.7 basis points to end at $102.98 while the 10-year Treasury yield increased 6.9 basis points to end at 1.8048%.  Stocks ended the week lower with the Dow Jones Industrial Average falling 102.11 points to end at 18,138.38.  The NASDAQ Composite Index dropped 78.25 points to close at 5,214.16, and the S&P 500 Index lost 20.76 points to close at 2,132.98.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 3.93%, the NASDAQ Composite Index has added 3.97%, and the S&P 500 Index has advanced 4.17%.

 

This past week, the national average 30-year mortgage rate increased to 3.58% from 3.53% while the 15-year mortgage rate increased to 2.89% from 2.85%.  The 5/1 ARM mortgage rate rose to 2.91% from 2.90%.  FHA 30-year rates increased to 3.40% from 3.35% and Jumbo 30-year rates increased to 3.73% from 3.68%.

 

Economic Calendar – for the Week of October 17, 2016

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Oct 17 08:30 New York Empire State Manufacturing Index Oct 2.0 -2.0
Oct 17 09:15 Industrial Production Sept 0.2% -0.4%
Oct 17 09:15 Capacity Utilization Sept 75.6% 75.5%
Oct 18 04:00 Net Long-Term TIC Flows Aug 0.3% $103.9B
Oct 18 08:30 Consumer Price Index (CPI) Sept 0.2% 0.2%
Oct 18 08:30 Core CPI Sept 59.0 0.3%
Oct 18 10:00 NAHB Housing Market Index Oct NA 65
Oct 19 07:00 MBA Mortgage Index 10/15 NA NA
Oct 19 08:30 Housing Starts Sept 1,168K 1,142K
Oct 19 08:30 Building Permits Sept 1,164K 1,139K
Oct 19 10:30 Crude Oil Inventories 10/15 NA 4.900M
Oct 19 14:00 Fed’s Beige Book Oct NA NA
Oct 20 08:30 Initial Jobless Claims 10/15 249,000 246,000
Oct 20 08:30 Continuing Jobless Claims 10/08 NA 2,046K
Oct 20 08:30 Philadelphia Fed Manufacturing Index Oct 5.5 12.8
Oct 20 10:00 Existing Home Sales Sept 5.30 5.33M

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($102.98, -54.7 basis points) traded within a  53 basis point range between a weekly intraday high of $103.47 on Tuesday and a weekly intraday low of $102.94 on Friday before closing the week at $102.98.  The potential breakout pointed out in last week’s newsletter took place this week, and unfortunately it was a downward rather than an upward breakout despite the stock market losing ground.  The bond appears to be settling into a new trading range between technical resistance at its 23.6% Fibonacci retracement level and support at the 200-day moving average at $102.73.  A continuing move toward support this coming week will result in slightly higher mortgage rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

chart110172016

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Bond prices fell and yields rose, predominately on Friday, as a greater number of investors came to the realization that the Federal Reserve’s Federal Open Market Committee (FOMC) could raise interest rates as soon as their next meeting on September 20-21.  The financial markets essentially “tread water” during the week in anticipation of what Fed Chair Janet Yellen would say about future monetary policy during the Fed’s annual Jackson Hole symposium late Friday morning.

 

While Yellen didn’t specify when the FOMC might raise interest rates, she stated the FOMC “continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.  Indeed, In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”  She also commented that the Fed still believes future rate increases should be “gradual” and data dependent.

 

Speaking of data dependency, Fed Vice Chair Stanley Fischer previously said the August Employment Situation Summary (Jobs Report) would be a major factor in determining the FOMC’s decision on whether or not to raise rates at their September meeting on September 21.  As a result, the next jobs report scheduled to be released on Friday, September 2 will take on added significance for investors.

 

In housing news, New Home Sales reached their highest level in almost nine years during July by climbing an extremely robust 12.4% to a seasonally adjusted annual rate of 654,000 units.  The consensus forecast had been for a reading of 580,000 homes.  June’s sales rate was revised lower to 582,000 units from the previously reported 592,000 units.  On an annual basis, New Home Sales were 31.3% higher than a year ago.  New home inventory fell 2.9% to 233,000 units, the lowest level since November 2015 and at July’s sales pace it would only take 4.3 months to clear the current supply of new houses on the market.  The median sale price for a new home was reported at $294,600, a 0.5% decline from a year ago.

 

Additionally, the US Federal Housing Finance Agency (FHFA) released their Housing Price Index for June showing a 0.2% increase following a 0.2% gain in May.  Economists had expected a slightly stronger gain of 0.3%.  According to the FHFA, housing prices have gained 5.6% from the second quarter of 2015.

 

Furthermore, the National Association of Realtors reported Existing Home Sales fell 3.2% in July to a seasonally adjusted annual rate of 5.39 million units.  Existing Sales were 1.6% lower than the year ago period and were below the consensus forecast of 5.54 million but still remain strong.  The median home price increased to $244,100, a 5.3% gain from the year ago period.  The dip in sales in July may be temporary however as there may have been a bottleneck in the sales process due to delays with appraisals.  Many real-estate agents have complained about delays with appraisals so if this problem gets resolved, sales going forward could pick up.

chart08292016#1

 

As for mortgage lending, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending August 19th showing the overall seasonally adjusted Market Composite Index decreased 2.1%.  The seasonally adjusted Purchase Index fell 0.3% from the prior week, while the Refinance Index decreased 3.0%.  Overall, the refinance portion of mortgage activity increased to 62.4% of total applications from 62.6%.  The adjustable-rate mortgage share of activity was unchanged from 4.6% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased from 3.64% to 3.67% with points increasing to 0.34 from 0.31.

 

For the week, the FNMA 3.0% coupon bond lost 1.5 basis points to end at $103.52 while the 10-year Treasury yield increased 4.81 basis points to end at 1.6279%.  Stocks ended the week lower with the Dow Jones Industrial Average losing 157.17 points to end at 18,395.40.  The NASDAQ Composite Index dropped 19.46 points to close at 5,218.92, and the S&P 500 Index fell 14.83 points to close at 2,169.04.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 5.28%, the NASDAQ Composite Index has added 4.05%, and the S&P 500 Index has advanced 5.77%.

 

This past week, the national average 30-year mortgage rate decreased to 3.41% from 3.42% while the 15-year mortgage rate decreased to 2.75% from 2.76%.  The 5/1 ARM mortgage rate rose to 2.86% from 2.85%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.51% from 3.53%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.52, -1.50 basis points) traded within a wider 44 basis point range between a weekly intraday high of $103.88 on Friday and a weekly intraday low of $103.44, also on Friday, before closing the week at $103.52.

 

The bond initially moved higher ahead of Janet Yellen’s speech Friday morning and continued to trade a little higher immediately afterward.  However, when traders heard subsequent comments made by Vice Chair Stanley Fischer during an interview on CNBC two hours later, they felt there was increased “hawkish” sentiment among Fed officials.  Fischer said the comments in Yellen’s speech “were consistent with the idea there could be a rate hike in September and again later in the year,” and this helped to trigger a sell-off in bonds Friday afternoon.

 

The day’s action resulted in move below the 25 and 50-day moving averages (MA) located at $103.696 and $103.61 respectively.  The 50-day MA reverts to closest resistance while the 38.2% Fibonacci retracement level at $103.15 becomes the next support level.  The slow stochastic oscillator now shows a solid negative crossover sell signal with the %K line falling below the %D line suggesting a continuing move lower in bond prices that may result in slightly higher rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

 chart08292016#2

 

Economic Calendar – for the Week of August 29, 2016

 

The economic calendar features several reports on the labor sector highlighted by the August Employment Situation Summary (Jobs Report) on Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Aug 29 08:30 Personal Income July 0.4% 0.2%
Aug 29 08:30 Personal Spending July 0.3% 0.4%
Aug 29 08:30 Core PCE Prices July 0.1% 0.1%
Aug 30 09:00 Case-Shiller 20-city Index June 5.1% 5.2%
Aug 30 10:00 Consumer Confidence Aug 97.0 97.3
Aug 31 07:00 MBA Mortgage Index 08/27 NA NA
Aug 31 08:15 ADP Employment Change Aug 170K 179K
Aug 31 09:45 Chicago Purchasing Managers Index Aug 54.5 55.8
Aug 31 10:00 Pending Home Sales July 0.7% 0.2%
Aug 31 10:30 Crude Oil Inventories 08/27 NA NA
Sep 01 07:30 Challenger Job Cuts Aug NA -57.1%
Sep 01 08:30 Initial Jobless Claims 08/27 265K 261K
Sep 01 08:30 Continuing Jobless Claims 08/20 NA 2145K
Sep 01 08:30 Revised Productivity 2nd Qtr. -0.6% -0.5%
Sep 01 08:30 Unit Labor Costs – Revised 2nd Qtr. 2.1% 2.0%
Sep 01 10:00 Construction Spending July 0.6% -0.6%
Sep 01 10:00 ISM Index Aug 52.2 52.6
Sep 02 08:30 Nonfarm Payrolls Aug 180K 255K
Sep 02 08:30 Nonfarm Private Payrolls Aug 175K 217K
Sep 02 08:30 Unemployment Rate Aug 4.8% 4.9%
Sep 02 08:30 Hourly Earnings Aug 0.2% 0.3%
Sep 02 08:30 Average Workweek Aug 34.5 34.5
Sep 02 08:30 Trade Balance July -$43.0B -$44.5B
Sep 02 10:00 Factory Orders July 2.0% -1.5%

 

 

 

Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability **

September 2016 20-21, (Tuesday-Wednesday) * 36.0% Chance
November 2016 1-2, (Tuesday-Wednesday) 38.3% Chance
December 2016 20-21 (Tuesday-Wednesday)* 46.1% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday) 45.5% Chance
March 2017          14-15 (Tuesday-Wednesday) * 44.0% Chance
May 2017          02-03 (Tuesday-Wednesday) 43.4% Chance
June 2017          13-14 (Tuesday-Wednesday) * 40.6% Chance
July 2017 25-26, (Tuesday-Wednesday) 40.2% Chance

 

* Meeting associated with a Summary of Economic Projections and a press conference by the Fed Chairman.

** Probability generated from the CME Group FedWatch tool based on the 30-day Fed Funds futures prices.

 

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Bond prices slipped lower during the week and yields increased slightly while the major stock market indexes ended mixed and little changed.

 

Investors primarily focused their attention on comments made by Federal Reserve officials throughout the week who said they would like to see a rate hike ‘sooner rather than later.”  The potential negative implications a rate hike would have on both stocks and bonds prompted investors to “take some money off of the table” in both stocks and bonds.

 

After the close of trading on Thursday, San Francisco Fed President John Williams echoed the case made earlier in the week by colleagues William Dudley (New York Fed President) and Dennis Lockhart (Atlanta Fed President) for an interest rate hike presumably sometime during the fourth quarter of this year.

 

Williams stated in remarks to the Anchorage Economic Development Corporation “In the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later.  If we wait until we see the whites of inflation’s eyes, we don’t just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark,” he said.  “And that creates its own risks of a hard landing or even a recession.”

 

Although Williams is not an FOMC voter this year, his opinions are highly respected by voting FOMC members due to his longstanding and close relationship with Fed Chair Janet Yellen, his former boss at the San Francisco Fed.  Investors were also cautious ahead of next week’s annual Jackson Hole Symposium hosted by the Federal Reserve Bank of Kansas City where it is anticipated Fed Chair Janet Yellen will present a rationale for gradually increasing interest rates.

 

The week’s economic news continued to provide a mixed view of the economy.  Housing Starts and Industrial Production were reported higher than forecast in July while the New York Empire State Manufacturing Index and the Philadelphia Fed Manufacturing Survey for August disappointed investors.  Inflation measures were benign with the Consumer Price Index (CPI) for July showing inflation growth of 0.0% while the Core CPI, which excludes volatile food and energy prices, grew at a 0.1% pace to come in below the consensus forecast of 0.2%.  However, the shelter sub-index increased 0.2% in July following a 0.4% rise in May and a 0.3% increase in June.  The sub-indexes for rent and owners’ equivalent rent both increased 0.3% in July, while the index for lodging away from home turned lower, falling 2.4% after increasing in May and June.

 

In housing, the National Association of Homebuilders (NAHB) reported homebuilder sentiment improved in August with a reading of 60.0 in their monthly housing market index.  The reading topped the consensus forecast of 59.0 and was above a downwardly revised reading of 58.0 for July.  There were improvements in two of the three index components.  The Current Sales Index climbed two points to 65 and the Future Sales Index, a measure of six-month sales outlook rose to 67 from 66.  The measure of prospective buyer traffic slipped one point to 44 from 45.

 

Elsewhere, the Census Bureau reported Housing Starts reached an annual rate of 1,211,000 homes in July, a 2.1% increase from June’s 1,186 million homes under construction and the highest level since February.  Housing Starts have been above the one million annualized pace for more than a year. The Northeast region led the way with a 15.5% surge in Starts while smaller gains were recorded in the Midwest and Southern regions.  Additionally, Building Permits were little changed in July, coming in just 1,000 less than June’s reading of 1,153K on an annualized basis.  Permits are a more forward-looking metric than Starts and the strength and steadiness seen in Permits attests to the staying power of this long and impressive recovery by the core housing sector.

 

08222016chart#1

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending August 12th showing the overall seasonally adjusted Market Composite Index decreased 4.0%.  The seasonally adjusted Purchase Index fell 4.0% from the prior week, while the Refinance Index decreased 4.0%.  Overall, the refinance portion of mortgage activity increased to 62.6% of total applications from 62.4%.  The adjustable-rate mortgage share of activity decreased to 4.6% from 4.7% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased from 3.65% to 3.64% with points decreasing to 0.31 from 0.34.

 

For the week, the FNMA 3.0% coupon bond lost 25.0 basis points to end at $103.53 while the 10-year Treasury yield decreased 6.97 basis points to end at 1.5798%.  Stocks ended the week mixed with the Dow Jones Industrial Average losing 23.90 points to end at 18,552.57.  The NASDAQ Composite Index advanced 5.48 points to close at 5,238.38, and the S&P 500 Index fell 0.18 of a point to close at 2,183.87.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 6.08%, the NASDAQ Composite Index has added 4.41%, and the S&P 500 Index has advanced 6.41%.

 

This past week, the national average 30-year mortgage rate increased to 3.42% from 3.37% while the 15-year mortgage rate increased to 2.76% from 2.73%.  The 5/1 ARM mortgage rate rose to 2.85% from 2.80%.  FHA 30-year rates increased to 3.25% from 3.15% while Jumbo 30-year rates increased to 3.53% from 3.47%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.53, -23 basis points) traded within a narrower 36 basis point range between a weekly intraday high of $103.81 and a weekly intraday low of $103.45 before closing at $103.53 on Friday.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

08222016chart#2

 

The bond has displayed a sideways consolidation over the past three weeks characterized by choppy trading in and around the 25-day moving average as it converges with the 50-day moving average.  The 25 and 50-day moving averages define closest resistance and support respectively and the bond is getting squeezed between the two to set up the potential for a strong breakout in one direction or the other.

 

The direction of the pending breakout is currently unclear but may be triggered by economic news next week, especially news from the annual Jackson Hole Symposium hosted by the Federal Reserve Bank of Kansas City.  The theme of this year’s conference is “designing resilient monetary policy frameworks.”  The Jackson Hole Symposium is widely seen as a prime stage for Fed chairs to deliver important messages, and the speech next Friday from Federal Reserve Chairwoman Janet Yellen could result in a significant market move.

 

Economic Calendar – for the Week of August 22, 2016

 

The economic calendar features several reports on housing on Tuesday and Wednesday in addition to Durable Goods Orders and the 2nd estimate of GDP for the second quarter on Thursday and Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Aug 23 10:00 New Home Sales July 580,000 592,000
Aug 24 07:00 MBA Mortgage Index 08/20 NA -4.0%
Aug 24 09:00 FHFA Housing Price Index June NA 0.2%
Aug 24 10:00 Existing Home Sales July 5.54M 5.57M
Aug 24 10:30 Crude Oil Inventories 08/20 NA -2.51M
Aug 25 08:30 Initial Jobless Claims 08/20 265,000 262,000
Aug 25 08:30 Continuing Jobless Claims 08/13 NA 2,175K
Aug 25 08:30 Durable Goods Orders July 3.5% -4.0%
Aug 25 08:30 Durable Goods Orders Excluding Transportation July 0.4% -0.5%
Aug 26 08:30 2nd Estimate GDP Qtr. 2 1.1% 1.2%
Aug 26 08:30 2nd Estimate GDP Deflator Qtr. 2 2.2% 2.2%
Aug 26 08:30 International Trade in Goods July NA -$63.3B
Aug 26 10:00 Final Univ. of Mich. Consumer Sentiment Index Aug 90.6 90.4

 

 

 

Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability **

September 2016 20-21, (Tuesday-Wednesday) * 18.0% Chance
November 2016 1-2, (Tuesday-Wednesday) 23.3% Chance
December 2016 20-21 (Tuesday-Wednesday)* 43.1% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday) 43.2% Chance
March 2017          14-15 (Tuesday-Wednesday) * 43.4% Chance
May 2017          02-03 (Tuesday-Wednesday) 43.2% Chance
June 2017          13-14 (Tuesday-Wednesday) * 42.5% Chance
July 2017 25-26, (Tuesday-Wednesday) 42.2% Chance

 

* Meeting associated with a Summary of Economic Projections and a press conference by the Fed Chairman.

** Probability generated from the CME Group FedWatch tool based on the 30-day Fed Funds futures prices.

 

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A few factors potentially impacting mortgage rates right now include:

  • Fed Talk
  • Treasury Auctions (5,7,10,30 year securities)
  • Existing Home Sales from National Assoc of Realtors
  • New Home Sales
  • Leading Economic Indicators (LEI) from the Conference Board
  • Durable Goods Orders
  • University of Michigan Consumer Sentiment (Rev)

Read more

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The economic calendar features the February Employment Situation Summary for February.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Feb 29 09:45 Chicago Purchasing Managers Index Feb 52.0 55.6
Feb 29 10:00 Pending Home Sales Jan +0.7% +0.1%
Mar 01 10:00 Construction Spending Jan +0.5% +0.1%
Mar 01 10:00 ISM Index Feb 49.0 48.2
Mar 02 07:00 MBA Mortgage Index 02/27 NA -4.3%
Mar 02 08:15 ADP Employment Change Feb 190,000 205,000
Mar 02 10:30 Crude Oil Inventories 02/27 3.0M 3.502M
Mar 02 14:00 Fed’s Beige Book Mar NA NA
Mar 03 07:30 Challenger Job Cuts Feb NA 41.6%
Mar 03 08:30 Initial Jobless Claims 02/27 270,000 272,000
Mar 03 08:30 Continuing Jobless Claims 02/27 2,258K 2,253K
Mar 03 08:30 Revised 4th Qtr. Productivity Qtr. 4 -3.3% -3.0%
Mar 03 08:30 Revised 4th Qtr. Unit Labor Costs Qtr. 4 +4.7% +4.5%
Mar 03 10:00 Factory Orders Jan +2.0% -2.9%
Mar 03 10:00 ISM Services Index Feb 53.1 53.5
Mar 04 08:30 Nonfarm Payrolls Feb 190,000 151,000
Mar 04 08:30 Nonfarm Private Payrolls Feb 180,000 158,000
Mar 04 08:30 Unemployment Rate Feb 4.9% 4.9%
Mar 04 08:30 Hourly Earnings Feb +0.2% +0.5%
Mar 04 08:30 Average Workweek Feb 34.6 34.6
Mar 04 08:30 Balance of Trade Jan -$44.0B -$43.4B

 

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by | Categories: The Economy | No Comments

Mortgage Rate Review

Feb 15, 2016

This past week was a repeat of the underlying forces impacting the financial markets so far in 2016: volatile oil prices, diverging monetary policy, and concerns about the global economy.  The stock market’s largest daily decline came on Monday, following another sharp decline in oil prices, which reached new multiyear lows by Thursday.  However, renewed prospects for production cuts by OPEC caused U.S. crude oil prices to rally more than 11% in early trading on Friday, helping to trigger a rebound in the stock market to the detriment of the bond market.

 

Additionally, cautious testimony from Federal Reserve Chair Janet Yellen before the House and Senate Banking Committees concerning the economic outlook also seemed to weigh on investor sentiment.  Yellen recognized tightening financial conditions and uncertainty over China pose risks to the U.S. economic recovery.  Yellen stated “I don’t expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates.  There is always a risk of a recession…and global financial developments could produce a slowing in the economy.  I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy.  I don’t think it is going to be necessary to cut rates.”

 

Yellen also acknowledged that negative interest rates are not off the table as a potential policy tool of accommodation, and the stock market reacted by moving to new weekly lows.

The week’s economic data were generally seen in a positive light.  December job openings increased and both initial and continuing jobless claims declined.  Retail sales increased more than forecast in January, driven by an increase in vehicle sales.  The positive retail sales data on Friday sparked a late sell-off in Treasuries to push yields higher, but not before the benchmark 10-year yield fell on Thursday to 1.529%, a level not seen since August 2012.

 

As for housing, CoreLogic released its December 2015 National Foreclosure Report showing foreclosure inventory fell by 23.8% and completed foreclosures dropped by 22.6% compared to December 2014.  The number of completed foreclosures nationwide fell year-over-year from 41,000 in December 2014 to 32,000 in December 2015.  The number of completed foreclosures in December 2015 was 72.8% lower from the peak of 117,722 in September 2010.

 

Elsewhere, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending February 6 showing the overall seasonally adjusted Market Composite Index increased 9.3%.  On an unadjusted basis, the Composite Index increased by 12% week-over-week.  The seasonally adjusted Purchase Index increased 0.2% from the prior reporting period while the Refinance Index increased 16.0%.  Overall, the refinance portion of mortgage activity increased to 61.2% of total applications from 59.2%.  The adjustable-rate mortgage segment of activity increased to 6.4% of total applications from 5.9%.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 3.97% to 3.91%.

 

For the week, the FNMA 3.5% coupon bond lost 9.4 basis points to end at $104.66 while the 10-year Treasury yield decreased 9.6 basis points to end at 1.75%.  Stocks ended the week with the Dow Jones Industrial Average losing 231.13 points to end at 15,973.84.  The NASDAQ Composite Index dropped 25.63 points to close at 4,337.51, and the S&P 500 Index fell 15.27 points to close at 1,864.78.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 9.08%, the NASDAQ Composite Index has lost 15.44%, and the S&P 500 Index has lost 9.61%.  This past week, the national average 30-year mortgage rate decreased to 3.66% from 3.77% while the 15-year mortgage rate fell to 2.98% from 3.05%.  The 5/1 ARM mortgage rate decreased to 2.87% from 2.99%.  FHA 30-year rates fell from 3.35% to 3.25% while Jumbo 30-year rates decreased to 3.48% from 3.58%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($104.66, -9.4 bp) traded within a 75 basis point range between a weekly intraday low of $104.58 and a weekly intraday high of 105.33 before closing at $104.66 on Friday.

 

From a technical viewpoint, there is a clear sign of a reversal with the bond gapping slightly lower and making a solid move toward support at the $104.516 level on Friday while remaining “overbought.”  The stochastic oscillators are showing new sell signals from negative crossovers while the candlestick patterns indicate market weakness.

 

If crude oil can sustain its current level and not sell off again or manage to move higher next week, stocks would likely mirror such performance to put additional selling pressure on bonds.  Under such a scenario, mortgage bonds would move lower for a test of primary support.  A break below the $104.516 support level could send prices toward secondary support at $104.15 resulting in a slight rise in mortgage rates.

 

 

Chart:  FNMA 30-Year 3.5% Coupon Bond

02152016#1

 

Economic Calendar – for the Week of February 15, 2016

 

The economic calendar picks up this coming week with several key reports on inflation and manufacturing.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Feb 16 08:30 N.Y. Empire State Manufacturing Index Feb -9.9 -19.4
Feb 16 10:00 NAHB Housing Market Index Feb 60 60
Feb 16 16:00 Net Long-Term TIC Flows Dec NA $31.4B
Feb 17 07:00 MBA Mortgage Index 02/13 NA 9.3%
Feb 17 08:30 Producer Price Index (PPI) Jan -0.2% -0.2%
Feb 17 08:30 Core PPI Jan 0.0% 0.1%
Feb 17 08:30 Housing Starts Jan 1,171K 1,149K
Feb 17 08:30 Building Permits Jan 1,200K 1,232K
Feb 17 09:15 Industrial Production Jan 0.3% -0.4%
Feb 17 09:15 Capacity Utilization Jan 76.6% 76.5%
Feb 17 10:30 Crude Oil Inventories 02/13 NA -0.754M
Feb 17 14:00 FOMC Minutes Jan 27 NA NA
Feb 18 08:30 Initial Jobless Claims 02/13 274,000 269,000
Feb 18 08:30 Continuing Jobless Claims 02/06 2,237K 2,239K
Feb 18 08:30 Philadelphia Fed Manufacturing Survey Feb -2.9 -3.5
Feb 19 08:30 Consumer Price Index (CPI) Jan -0.1% -0.1%
Feb 19 08:30 Core CPI Jan 0.1% 0.1%

 

 

 

 

 

Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability **

March 2016 15-16, (Tuesday-Wednesday)* 4% Chance
April 2016 26-27, (Tuesday-Wednesday) 6% Chance
June 2016 14-15, (Tuesday-Wednesday)* 14% Chance
July 2016 26-27, (Tuesday-Wednesday) 16% Chance
September 2016 20-21, (Tuesday-Wednesday) * 21% Chance
November 2016 1-2, (Tuesday-Wednesday) 23% Chance
December 2016 20-21 (Tuesday-Wednesday)* 33% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 39% Chance

 

* Meeting associated with a Summary of Economic Projections and a press conference by the Chairman.

** Probability generated from the CME Group FedWatch tool based on the 30-day Fed Funds futures prices.

 Source:  MBSHighway

 

 

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Job’s Report

Jan 8, 2016

Jobs Report1-8-2016

____________________________________________________

BLS Jobs reprot 01082016

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