This past week the major stock market indexes ended mixed for the week while bond prices plunged, with yields and interest rates rising.  The week’s most significant piece of economic news was the Federal Reserve’s decision to raise the target for the fed funds rate by 25 basis points to a range of 0.50 – 0.75%.

 

While this rate hike was widely anticipated, the financial markets were surprised by the Fed signaling their intention to raise rates an additional three times in 2017 which was higher than market expectations for only two rate hikes next year.  This forward guidance on interest rate hikes sent a strong hawkish signal to the bond market, sparking a sell-off in Treasuries and mortgage bonds while strengthening the U.S. dollar.  Selling in the 10-year Treasury note pushed yields to 2.599% on Friday to its highest level since September 2014 while the U.S. Dollar Index soared 1.3% to its highest mark since early 2003.

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending December 9 showing the overall seasonally adjusted Market Composite Index fell 4.0%.  The seasonally adjusted Purchase Index declined 3.0% from the prior week, while the Refinance Index fell 4.0%.  Overall, the refinance portion of mortgage activity increased to 57.2% of total applications from 56.2%.  The adjustable-rate mortgage share of activity accounted for 6.2% 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 4.27% to 4.28% with points decreasing to 0.36 from 0.37.

 

In housing, the Commerce Department reported Housing Starts fell more than forecast in November, dropping 18.7% at a seasonally adjusted annual rate of 1.09 million versus a consensus forecast of 1.225 million.  However, the rate of Housing Starts in October was revised higher to 1.340 million from 1.323 million.

 

Meanwhile, Building Permits declined 4.7% at an annual rate of 1.201 million while the consensus forecast had predicted a decline of about 1.6% to a rate of 1.236 million.  October’s Building Permits were revised higher to an annual rate of 1.260 million from 1.229 million.

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For the week, the FNMA 3.5% coupon bond lost 103.2 basis points to end at $101.11 while the 10-year Treasury yield increased 13.30 basis points to end at 2.599%.  Stocks ended the week mixed with the Dow Jones Industrial Average gaining 86.56 points to end at 19,843.41.  The NASDAQ Composite Index dropped 7.34 points to close at 5,437.16, and the S&P 500 Index lost 1.46 points to close at 2,258.07.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 12.19%, the NASDAQ Composite Index has added 7.90%, and the S&P 500 Index has advanced 9.48%.

 

This past week, the national average 30-year mortgage rate increased to 4.38% from 4.20% while the 15-year mortgage rate increased to 3.57% from 3.40%.  The 5/1 ARM mortgage rate rose to 3.25% from 3.06%.  FHA 30-year rates increased to 4.10% from 3.90% and Jumbo 30-year rates increased to 4.40% from 4.25%.

 

Economic Calendar – for the Week of December 19, 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
Dec 21 07:00 MBA Mortgage Index 12/17 NA -4.0%
Dec 21 10:00 Existing Home Sales Nov 5.50M 5.60M
Dec 21 10:30 Crude Oil Inventories 12/17 NA -2.600M
Dec 22 08:30 3rd Estimate for 3rd Qtr. GDP Qtr.3 3.3% 3.2%
Dec 22 08:30 3rd Estimate for 3rd Qtr. GDP Deflator Qtr.3 1.4% 1.4%
Dec 22 08:30 Initial Jobless Claims 12/17 256K 254K
Dec 22 08:30 Continuing Jobless Claims 12/10 NA 2018K
Dec 22 08:30 Durable Goods Orders Nov -4.5% 4.8%
Dec 22 08:30 Durable Goods Orders Excluding Transportation Nov 0.2% 1.0%
Dec 22 09:00 FHFA Housing Price Index Oct NA 0.6%
Dec 22 10:00 Index of Leading Economic Indicators Nov 0.1% 0.1%
Dec 22 10:00 Personal Income Nov 0.3% 0.6%
Dec 22 10:00 Personal Spending Nov 0.4% 0.3%
Dec 22 10:00 Core PCE Price Index Nov 0.1% 0.1%
Dec 23 10:00 Final Univ. of Michigan Consumer Sentiment Index Dec 98.2 98.0
Dec 23 10:00 New Home Sales Nov 573K 563K

 

Mortgage Rate Forecast with Chart

 

FNMA 30-Year 3.5% Coupon Bond

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Bond prices edged higher on Monday and Tuesday only to plunge on Wednesday and Thursday before recovering slightly on Friday. The FNMA 30-year 3.5% coupon bond ($101.11, -103.2 basis points) traded within a wider 160 basis point range between a weekly intraday high of $102.44 on Wednesday and a weekly intraday low of $100.84 on Thursday before closing the week at $101.11.  Friday the bond bounced marginally higher off of the 100% Fibonacci retracement support level located at $100.91.  Nearest overhead resistance is found at $101.36 while stronger resistance is located at the 76.4% Fibonacci retracement level at $102.07.

 

Overall, the bond chart shows significant technical damage has taken place since the end of September, and especially since stock prices have rocketed higher in response to the presidential election.  The black circles on the chart show multiple negative moving average crossovers.  Although these are “lagging indicators” they can be powerful sell signals.  The first negative crossover on October 24 shows the 25-day and 50-day moving averages crossing below the longer term 100-day moving average – a sell signal.  The second on December 12 shows the 100-day moving average crossing beneath the 200-day moving average, another sell signal.

 

The bond remains deeply “oversold” while stocks seem significantly “overpriced,” but it is difficult to predict when the “tables will be turned” with stock prices undergoing a correction or at least a consolidation while bonds undergo a relief rally.  To that end, there is a weak buy signal for the bond with a positive stochastic crossover taking place on Friday.  However, any bounce higher will be met by formidable technical resistance, and it will likely take a meaningful pull-back in stock prices to fuel a recovery in bond prices leading to lower yields and lower mortgage rates

 

 

 

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This past week the major stock market indexes traded to new all-time highs as investors became more optimistic about the incoming Trump administration’s plans for economic stimulus through deregulation, reduced corporate tax rates, and leveraged infrastructure spending.  The stock market may have also received a boost from traders who had taken short positions having to buy back borrowed stock to cover losing positions after the S&P 500 Index crossed above a key technical threshold at 2,225 on Wednesday.

 

For the bond market it was a different story.  The week’s economic data were, overall, supportive for investing in stocks over bonds, with positive readings for the November ISM Services Index (57.2), October Factory Orders (+2.7%), and the December Consumer Sentiment Index (98.0).

Moreover, the bond market was sent reeling after the European Central Bank (ECB) decision on Thursday to reduce the amount of monthly asset purchases from 80 billion euros to 60 billion euros after March 2017, to continue through December 2017.  The ECB also rejected a 12-month extension of asset purchases at the 60 billion euros per month rate because monetary policy “hawks” wanted only six months at that pace.  They ended up compromising on a nine month extension and this disappointed bond traders who were looking for a longer extension period.

 

In the realm of housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending December 2 showing the overall seasonally adjusted Market Composite Index fell 0.7%.  The seasonally adjusted Purchase Index rose 0.4% from the prior week, while the Refinance Index decreased 1.0%.  Overall, the refinance portion of mortgage activity increased to 56.2% of total applications from 55.1%.  The adjustable-rate mortgage share of activity accounted for 6.0% 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 4.23% to 4.27% with points decreasing to 0.37 from 0.41.

 

For the week, the FNMA 3.5% coupon bond lost 46.8 basis points to end at $ 102.14 while the 10-year Treasury yield increased 7.60 basis points to end at 2.47%.  Stocks ended the week significantly higher with the major indexes setting new all-time highs.  The Dow Jones Industrial Average gained 586.43 points to end at 19,756.85.  The NASDAQ Composite Index added 188.85 points to close at 5,444.50, and the S&P 500 Index rose 67.58 points to close at 2,259.53.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 11.80%, the NASDAQ Composite Index has added 8.03%, and the S&P 500 Index has advanced 9.54%.

 

This past week, the national average 30-year mortgage rate increased to 4.20% from 4.13% while the 15-year mortgage rate increased to 3.40% from 3.34%.  The 5/1 ARM mortgage rate rose to 3.06% from 3.03%.  FHA 30-year rates increased to 3.90% from 3.85% and Jumbo 30-year rates increased to 4.25% from 4.20%.

 

Economic Calendar – for the Week of December 12, 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
Dec 12 14:00 Treasury Budget Nov -$135.0B -$56.8B
Dec 13 08:30 Export Prices excluding agriculture Nov NA 0.2%
Dec 13 08:30 Import Prices excluding oil Nov NA -0.1%
Dec 14 07:00 MBA Mortgage Index 12/10 NA -0.7%
Dec 14 08:30 Retail Sales Nov 0.3% 0.8%
Dec 14 08:30 Retail Sales excluding automobiles Nov 0.4% 0.8%
Dec 14 08:30 Producer Price Index (PPI) Nov 0.1% 0.0%
Dec 14 08:30 Core PPI Nov 0.2% -0.2%
Dec 14 09:15 Industrial Production Nov -0.1% 0.0%
Dec 14 09:15 Capacity Utilization Nov 75.1% 75.3%
Dec 14 10:00 Business Inventories Oct -0.1% 0.1%
Dec 14 10:30 Crude Oil Inventories 12/10 NA -2.389M
Dec 14 14:00 FOMC Rate Decision Dec 0.625% 0.375%
Dec 15 08:30 Consumer Price Index (CPI) Nov 0.2% 0.4%
Dec 15 08:30 Core CPI Nov 0.2% 0.1%
Dec 15 08:30 Initial Jobless Claims 12/10 256,000 258,000
Dec 15 08:30 Continuing Jobless Claims 12/03 NA 2,005K
Dec 15 08:30 Philadelphia Fed  Manufacturing Index Dec 9.0 7.6
Dec 15 08:30 N.Y. Empire State Manufacturing Index Dec 3.0 1.5
Dec 15 08:30 3rd Quarter Current Account Balance Qtr. 3 -$111.6B -$119.9B
Dec 15 10:00 NAHB Housing Market Index Dec 63 63
Dec 15 16:00 Net Long-Term TIC Flows Oct NA -$26.2B
Dec 16 08:30 Housing Starts Nov 1,225K 1,323K
Dec 16 08:30 Building Permits Nov 1,236K 1,229K

 

Mortgage Rate Forecast with Chart

FNMA 30-Year 3.5% Coupon Bond

chart112122016

 

Bond prices swung higher Monday through Wednesday only to tumble lower on Thursday and Friday.  The FNMA 30-year 3.5% coupon bond ($102.14, -46.8 basis points) traded within a 77 basis point range between a weekly intraday high of $102.91 on Wednesday and a weekly intraday low of $102.14 on Friday before closing the week at $102.14.  Friday’s close was the week’s low price and right on the 100% Fibonacci retracement support level.  A close below this level this coming week may result in a continuation lower to the next support level at $101.36 – 78 basis points lower.  Should this happen, mortgage rates would move higher.

 

The bearish case for mortgage bonds is this.  The three-day candlestick pattern formed between Tuesday and Thursday was an “Evening Star” pattern and is considered to be a moderately powerful sell signal.  Furthermore, the slow stochastic oscillator is showing a negative stochastic crossover sell signal.

 

On a more bullish outlook for bonds, the stock market is “overbought” and susceptible to a correction which would help bond prices improve.  The catalyst for a move lower in stocks could arrive on Wednesday when the Federal Reserve will likely raise interest rates by 25 basis points.  Also, mortgage rates have historically tended to decline in the beginning of a rate increase cycle so we could see mortgage rates improve following the next rate hike.  Further, the bond closed right on support while in an “oversold” position so we could see a technical bounce higher off of the $102.14 support level and this would help stabilize rates.

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This past week there were numerous economic reports released to influence stock and bond traders highlighted by a somewhat disappointing November employment report.  Other influential reports included the second estimate of 3rd Quarter GDP; the October Personal Income and Spending report; and the Institute for Supply Management’s (ISM) Manufacturing Index for November.  These latter reports generally exceeded consensus forecasts to lend support for a Federal Reserve interest rate hike of 25 basis points at the Fed’s next FOMC meeting on December 14.  The current probability for a rate hike at this meeting based on the CME Group 30-Day Fed Fund futures prices is 97.2%.

 

The Labor Department’s November jobs report showed Nonfarm Payrolls missed the consensus forecast of 180,000 with a reading of 178,000.  Also, October’s initially reported 161,000 new jobs were downwardly revised to 142,000.  Nonfarm Private Payrolls came in at 156,000 to miss the consensus estimate of 170,000, and October’s number was downwardly revised to 135,000 from 142,000.

 

Average Hourly Earnings disappointed with a decline of 0.1% month-over-month to miss the consensus forecast calling for +0.2% growth.  The Unemployment Rate fell more than expected to 4.6% from 4.9%, but this was due to 450,000 people falling out of the labor force and not from the month-over-month gain of 160,000 additionally employed people.  The November labor force participation rate dropped slightly to 62.7% but remains near 40-year lows.  The number of people not in the labor force increased to 95.05 million, up from 94.6 million in October 2016, and 94.4 million in November 2015.

 

In housing, the S&P/Case-Shiller national home price index climbed to a record high of 184.80 in September to exceed the previous high of 184.62 set in July 2006 – the peak of the housing boom.

The 20-city Home Price Index increased by 5.1% year-over-year while the national index increased 5.5% year-over-year.

 

Further, the National Association of Realtors reported home buyers showed more caution in October as Pending Home Sales increased just 0.1% month-over-month when the consensus forecast had called for a 0.7% increase.  On a year-over-year basis, Pending Home Sales are 1.8% higher.

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Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending November 25 showing the overall seasonally adjusted Market Composite Index fell 9.4%.  The seasonally adjusted Purchase Index fell 0.2% from the prior week, while the Refinance Index decreased 16.0%.  Overall, the refinance portion of mortgage activity fell to 55.1% of total applications from 58.2%.  The adjustable-rate mortgage share of activity accounted for 5.7% 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 4.16% to 4.23% with points increasing to 0.41 from 0.39.

 

For the week, the FNMA 3.5% coupon bond gained 14.0 basis points to end at $ 102.61 while the 10-year Treasury yield increased 3.32 basis points to end at 2.39%.  Stocks ended the week “mixed” with the Dow Jones Industrial Average gaining 18.28 points to end at 19,170.42.  The NASDAQ Composite Index fell 143.27 points to close at 5,255.65, and the S&P 500 Index lost 21.40 points to close at 2,191.95.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 9.10%, the NASDAQ Composite Index has added 4.72%, and the S&P 500 Index has advanced 6.75%.

 

This past week, the national average 30-year mortgage rate decreased to 4.13% from 4.19% while the 15-year mortgage rate decreased to 3.34% from 3.39%.  The 5/1 ARM mortgage rate fell to 3.03% from 3.06%.  FHA 30-year rates increased to 3.85% from 3.80% and Jumbo 30-year rates decreased to 4.20% from 4.25%.

 

Economic Calendar – for the Week of December 5, 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
Dec 05 10:00 ISM Services Index Nov 55.6 54.8
Dec 06 08:30 Revised 3rd Quarter Productivity Qtr. 3 3.3% 3.1%
Dec 06 08:30 Revised 3rd Unit Labor Costs Qtr. 3 0.2% 0.3%
Dec 06 08:30 Balance of Trade Oct -$41.8B -$36.4B
Dec 06 10:00 Factory Orders Oct 2.5% 0.3%
Dec 07 07:00 MBA Mortgage Index 12/03 NA -9.4%
Dec 07 10:00 JOLTS – Job Openings Oct NA 5.486M
Dec 07 10:30 Crude Oil Inventories 12/03 NA -0.884M
Dec 07 15:00 Consumer Credit Oct $18.7B $19.3B
Dec 08 08:30 Initial Jobless Claims 12/03 255K 268K
Dec 08 08:30 Continuing Jobless Claims 11/26 NA 2081K
Dec 08 10:30 Natural Gas Inventories 12/03 NA NA
Dec 09 10:00 Univ. of Michigan Consumer Sentiment Index Dec 94.3 93.8
Dec 09 10:00 Wholesale Inventories Oct -0.4% 0.1%

 

Mortgage Rate Forecast with Chart

FNMA 30-Year 3.5% Coupon Bond

120520162

 

It was a fairly volatile week for bond prices characterized by choppy, up and down trading.  The FNMA 30-year 3.5% coupon bond ($102.61, +14.0 basis points) traded within a  wide 112 basis point range between a weekly intraday high of $103.09 on Tuesday and a weekly intraday low of $101.97 on Thursday before closing the week at $102.61.

 

Thursday’s “Hammer” candlestick signaled a possible reversal on Friday, and the bond did bounce higher to move about mid-way within a wide trading range between the 100% Fibonacci retracement support level ($102.14) and the 76.4% Fibonacci retracement resistance level.  If the stock market loses some of its luster this coming week, we should see bond prices rise toward resistance resulting in a slight improvement in mortgage rates

 

 

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This past week the stock market advanced for the third consecutive week with all of the major indexes reaching a series of new highs while the bond market continued lower with yields rising.

In fact, this past Monday, the stock market achieved a “superfecta” for the first time in 17 years with the Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and small-cap Russell 2000 Indexes all setting new records.  Wednesday, market participants interpreted comments released in the minutes from the Federal Reserve’s last monetary policy meeting as an affirmation that a rate hike was coming when the Fed next meets on December 14 and bond prices fell in response.

 

Overall, the week’s economic reports were regarded as favorable led by a solid 4.8% or $11.0 billion increase in October Durable Goods Orders to $239.4 billion. On a year-over-year basis, Durable Goods increased 2.1% in October compared to 1.6% in September.

 

Housing market data was more mixed while still showing strength as sales of existing homes in October reached their highest level since early 2007 while new home sales unexpectedly declined.

The National Association of Realtors reported Existing Sales increased by 2.0% at a seasonally adjusted annual rate of 5.60 million, exceeding the consensus forecast of 5.40 million.  Homes continued to appreciate with the median existing home price for all housing categories increasing 6.0% year-over-year to $232,200 while the median existing single family home price surged 5.9% to $233,700.  Housing inventories remain tight with total housing inventory declining 0.5% to 2.02 million, and this helps to elevate home prices.  At the current sales pace, unsold inventory is at a 4.3 month supply and is lower than the 4.5 month supply in September and 4.6 month supply in August.  First-time buyers comprised 33.0% of sales, down slightly from 34.0% in September, but higher than the 31.0% from a year ago.

112820161

 

Going forward, rising mortgage rates may negatively impact potential home buyers.  The stock market rally since the presidential election has been enticing investors away from the relative safety of U.S. Treasuries and has driven yields higher.  When the rally falters, as all rallies do, investing in the opposite direction should occur to help stabilize or lower rates.  Although rates have risen over the past two weeks, they remain well below the historical average.

 

Meanwhile, the Commerce Department reported New Home Sales rose 1.9% during October to a seasonally adjusted annual rate of 563,000 from a downwardly revised September pace of 574,000.  October’s reading was lower than the consensus forecast of 587,000.  The median sales price increased 1.9% from a year ago to $304,500 while the average sales price fell 3.3% to $354,900.  Inventory increased slightly to a 5.2 month supply of new homes at October’s sales rate compared to a 5.0 month supply in September and 5.1 month supply in August.

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Furthermore, The Federal Housing Finance Agency (FHFA) reported home prices increased 0.6% in September after having risen 0.7% in August.  The inflation-adjusted home price has advanced 6.1% when compared to the third quarter of 2015.

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending November 18 showing the overall seasonally adjusted Market Composite Index rose 5.5%.  The seasonally adjusted Purchase Index jumped +19.0% from the prior week, while the Refinance Index decreased 3.0%.  Overall, the refinance portion of mortgage activity fell to 58.2% of total applications from 61.9%.  The adjustable-rate mortgage share of activity accounted for 5.2% 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 3.95% to 4.16% with points unchanged at 0.39.

 

For the week, the FNMA 3.5% coupon bond fell 26.5 basis points to end at $ 102.47 while the 10-year Treasury yield increased 1.14 basis points to end at 2.359%.  Stocks ended the week higher with the Dow Jones Industrial Average gaining 284.21 points to end at 19,152.14.  The NASDAQ Composite Index rose 77.41 points to close at 5,398.92, and the S&P 500 Index added 31.45 points to close at 2,213.35.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 9.02%, the NASDAQ Composite Index has added 7.25%, and the S&P 500 Index has advanced 7.65%.

 

This past week, the national average 30-year mortgage rate increased to 4.19% from 4.12% while the 15-year mortgage rate increased to 3.39% from 3.35%.  The 5/1 ARM mortgage rate rose to 3.06% from 3.05%.  FHA 30-year rates increased to 3.80% from 3.75% and Jumbo 30-year rates increased to 4.25% from 4.22%.

 

Economic Calendar – for the Week of November 28, 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
Nov 29 08:30 2nd Estimate 3rd Qtr. GDP Qtr. 3 3.0% 2.9%
Nov 29 08:30 2nd Estimate 3rd Qtr. GDP Deflator Qtr. 3 1.5% 1.5%
Nov 29 09:00 Case-Shiller 20-city Index Sep 5.2% 5.1%
Nov 29 10:00 Consumer Confidence Index Nov 100.0 98.6
Nov 30 07:00 MBA Mortgage Index 11/26 NA -5.5%
Nov 30 08:15 ADP Employment Change Nov 160K 147K
Nov 30 08:30 Personal Income Oct 0.4% 0.3%
Nov 30 08:30 Personal Spending Oct 0.5% 0.5%
Nov 30 08:30 Core PCE Price Index Oct 0.1% 0.1%
Nov 30 09:45 Chicago Purchasing Managers Index Nov 52.0 50.6
Nov 30 10:00 Pending Home Sales Oct +0.7% 1.5%
Nov 30 10:30 Crude Oil Inventories 11/26 NA -1.255M
Nov 30 14:00 Fed’s Beige Book Nov NA NA
Dec 01 07:30 Challenger Job Cuts Nov NA -24.7%
Dec 01 08:30 Initial Jobless Claims 11/26 253K 251K
Dec 01 08:30 Continuing Jobless Claims 11/19 NA 2043K
Dec 01 10:00 Construction Spending Oct 0.6% -0.4%
Dec 01 10:00 ISM Index Nov 52.1 51.9
Dec 02 08:30 Nonfarm Payrolls Nov 180K 161K
Dec 02 08:30 Nonfarm Private Payrolls Nov 170K 142K
Dec 02 08:30 Hourly Earnings Nov +0.2% 0.4%
Dec 02 08:30 Unemployment Rate Nov 4.9% 4.9%
Dec 02 08:30 Average Workweek Nov 34.4 34.4

 

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($102.47, -26.5 basis points) traded within a  wide 93 basis point range between a weekly intraday high of $103.59 on Thursday and a weekly intraday low of $102.66 on Friday before closing the week at $102.73.

 

The bond appears to be range-bound between nearest support at the 100% Fibonacci retracement level at $102.14 and resistance at the 76.4% Fibonacci retracement level at $103.02.  Friday’s reduced trading hours and resulting Doji candlestick indicated a lack of conviction among traders, however there is a 56% chance (almost a coin flip) that Friday’s candlestick with its downward gap signals an upward reversal even though in theory this pattern is supposed to be a bearish continuation.  Hopefully, we will see bond prices and interest rates show signs of stabilizing this coming week.

 

Chart:  FNMA 30-Year 3.5% Coupon Bond

112820163

 

 

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Weekly Rate Update

Nov 21, 2016

This past week the stock market continued to advance while bond prices fell with rising yields as investors anticipate a Trump presidency will result in faster economic growth, stronger corporate earnings growth, and higher inflation.

 

This outlook to a certain extent was validated on Thursday when Federal Reserve Chair Janet Yellen testified before the Joint Economic Committee of Congress appearing to confirm recent economic data have been strong enough to persuade the Fed to raise interest rates during its December 13–14 FOMC meeting.  Yellen said the Fed could raise interest rates “relatively soon if economic data keeps pointing to an improving labor market and rising inflation.”  Yellen said the case for a rate hike had strengthened with the economy appearing on track to grow moderately, which would help bring about full employment and push inflation higher toward the Fed’s 2% target.  The Fed Funds futures market is currently pricing in a 95.6% probability for a rate hike of 25 basis points.

 

The week’s economic news was mostly positive.  October Retail Sales highlighted continuing strength in the U.S. economy with a reading of 0.8% versus a consensus estimate of 0.6%.  When excluding automobiles, Retail Sales still climbed 0.8% compared to a forecast of 0.5%.  In the area of manufacturing, the Federal Reserve Bank of New York reported its Empire State Manufacturing Index showed some expansion with a reading of 1.5 for November that was above the consensus forecast of -0.5 and notably higher than October’s -6.8 reading.

 

Inflation data was mixed.  The Department of Labor reported inflation at the producer or wholesale level was non-existent in October as the Producer Price Index (PPI) for final demand was flat at 0.0%.  Furthermore, the so called Core PPI, which excludes the volatile categories of food and energy, declined by 0.2% when the forecast had called for a gain of 0.2%.  Meanwhile, inflation at the consumer level as measured by the Consumer Price Index (CPI) increased 0.4% in October following a 0.3% rise in September.  On a year-over-year basis the CPI has risen 1.6%, the largest such increase since October 2014.  However, the Core CPI, which strips out food and energy costs, only advanced 0.1% last month to match September’s gain.  As a result, the year-on-year increase in the Core CPI fell to 2.1% from a 2.2% gain in September.

 

Housing data remains strong.  The National Association of Home Builders (NAHB) reported their Housing Market Index was unchanged for November, matching October’s level of 63.  This was close to the consensus forecast of 64.  The current sales index was unchanged at 69, while the buyer traffic index edged higher to 47 from 46.  However, the index for sales expectations in six months slipped slightly to 69 from 71.

 

Furthermore, the Commerce Department reported Housing Starts surged to a nine year high in October as homebuilders broke ground at a seasonally adjusted annual pace of 1.32 million units, a 25.5% increase, and the highest level since August 2007.  October Starts easily beat the consensus forecast of 1.178 million units and were led by a 75% surge in multifamily units.  Further, Housing Permits for new construction were reported higher than forecast with a 0.3% gain, an annual rate of 1.23 million.  Permits indicate the strength of future demand and are currently running about 5% above year-ago levels.

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending November 11 showing the overall seasonally adjusted Market Composite Index fell 9.2%.  The seasonally adjusted Purchase Index fell 6.0% from the prior week, while the Refinance Index decreased 11.0%.  Overall, the refinance portion of mortgage activity fell to 61.9% of total applications from 62.3%.  The adjustable-rate mortgage share of activity accounted for 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 increased from 3.625% to 4.00% with points increasing to 0.39 from 0.38.

 

For the week, the FNMA 3.5% coupon bond plunged 106.3 basis points to end at $ 102.734 while the 10-year Treasury yield increased 56.96 basis points to end at 2.3476%.  Stocks ended the week higher with the Dow Jones Industrial Average gaining 50.12 points to end at 18,867.93.  The NASDAQ Composite Index rose 86.59 points to close at 5,321.51, and the S&P 500 Index added 17.28 points to close at 2,181.90.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 7.65%, the NASDAQ Composite Index has added 5.90%, and the S&P 500 Index has advanced 6.32%.

 

This past week, the national average 30-year mortgage rate increased to 4.12% from 3.87% while the 15-year mortgage rate increased to 3.35% from 3.13%.  The 5/1 ARM mortgage rate rose to 3.05% from 2.92%.  FHA 30-year rates increased to 3.75% from 3.62% and Jumbo 30-year rates increased to 4.22% from 4.00%.

 

Economic Calendar – for the Week of November 21, 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
Nov 22 10:00 Existing Home Sales Oct 5.40M 5.47M
Nov 23 07:00 MBA Mortgage Index 11/19 NA -9.2%
Nov 23 08:30 Initial Jobless Claims 11/19 243,000 235,000
Nov 23 08:30 Continuing Jobless Claims 11/12 NA 1,977K
Nov 23 08:30 Durable Goods Orders Oct 1.1% -0.1%
Nov 23 08:30 Durable Goods Orders Excluding Transportation Oct 0.3% 0.2%
Nov 23 09:00 FHFA Housing Price Index Sep NA 0.7%
Nov 23 10:00 New Home Sales Oct 587,000 593,000
Nov 23 10:00 Final Univ. of Michigan Consumer Sentiment Index Nov 91.6 91.6
Nov 23 10:30 Crude Oil Inventories 11/19 NA 5.274M
Nov 23 14:00 FOMC Minutes Nov 2 NA NA
Nov 25 08:30 International Trade in Goods Oct NA -$56.1B
Nov 25 08:30 Advance Wholesale Inventories Oct 0.2% +0.2%

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($102.73, -106.3 basis points) traded within a  wide 93 basis point range between a weekly intraday high of $103.59 on Thursday and a weekly intraday low of $102.66 on Friday before closing the week at $102.73.

 

The bond fell below closest support following a rally attempt earlier in the week to challenge the next level at the 100.0% Fibonacci retracement level located at $102.72.  Resistance is located at the 76.4% Fibonacci retracement level at $103.46.  The slow stochastic oscillator is now showing a negative crossover sell signal while remaining significantly “oversold.”  If support at $102.72 fails to hold, mortgage rates would likely continue to worsen as the next support level is found at $102.14.

 

Chart:  FNMA 30-Year 3.5% Coupon Bond

chart111212106

 

 

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This past week the financial markets responded to a stunning upset by Donald Trump in the presidential election.  Wall Street assumed Hillary Clinton would win the election.  When it appeared Donald Trump would win late Tuesday night, stock index futures plunged with the Dow Jones Industrial futures falling close to 900 points at one point while those for the S&P 500 Index and NASDAQ 100 Index were over 5% lower.  Bond prices were primed to move higher with a potentially plunging stock market, but Trump’s win increased investor anxiety that the federal government would go on another economic stimulus spending spree.

 

However, Trump delivered a remarkable conciliatory speech beginning at 2:50 a.m. ET Wednesday morning when he promised to work to “bind the wounds of division” and bring all Americans together and the stock index futures markets responded by erasing most of their deficits by the cash market open.  The stock market did end up opening marginally lower Wednesday morning, but then significantly improved from opening levels and turned positive in late morning trading.  Equity traders likely figured out that a Trump presidency shouldn’t be bad for certain sectors of the stock market in the long-term after all.  Regardless, when the stock market refused to crater, the bond market sold off hard with yields spiking higher.

Stocks continued to move higher during the remainder of the week while investors sold Treasuries and other bonds, including mortgage bonds, following the election as the possibility of larger government deficits and rising inflation under a Trump administration made bonds less attractive.

According to the Wall Street Journal, the 10-year Treasury note yield reached 2.15%, its highest level since January.  Additionally, the financial markets are continuing to price in a 25 basis point rate hike in December.  There is currently an 81.1% probability the Fed will come through with a rate hike when their Federal Open Market Committee (FOMC) meets on December 14.

 

In economic news, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending November 4 showing the overall seasonally adjusted Market Composite Index fell 1.2%.  The seasonally adjusted Purchase Index rose 1.0% from the prior week, while the Refinance Index decreased 3.0% to its lowest level since May.  Overall, the refinance portion of mortgage activity fell to 62.3% of total applications from 62.7%.  The adjustable-rate mortgage share of activity accounted for 4.5% 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 3.75% to 3.77% with points increasing to 0.38 from 0.36.

 

Elsewhere, St. Louis Fed President and FOMC voter James Bullard stated the Fed won’t be swayed by the presidential election and that a December rate hike would still be reasonable.  Bullard went on to say that the recently seen market volatility has not been extreme enough to affect the Fed’s economic outlook.  Also, Richmond Fed President and non-FOMC voter Jeffrey Lacker said the case for a rate hike in December remains strong and the Fed would likely raise interest rates more quickly if the federal government enacted further fiscal stimulus.

 

For the week, the FNMA 3.0% coupon bond plunged 201.5 basis points to end at $101.09 while the 10-year Treasury yield increased 35.9 basis points to end at 2.1378%.  Stocks ended the week higher with the Dow Jones Industrial Average gaining 929.53 points to end at 18,817.81.  The NASDAQ Composite Index rose 188.55 points to close at 5,046.37, and the S&P 500 Index added 79.44 points to close at 2,085.18.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 7.40%, the NASDAQ Composite Index has added 4.35%, and the S&P 500 Index has advanced 5.58%.

 

This past week, the national average 30-year mortgage rate increased to 3.85% from 3.59% while the 15-year mortgage rate increased to 3.13% from 2.90%.  The 5/1 ARM mortgage rate rose to 2.92% from 2.89%.  FHA 30-year rates increased to 3.62% from 3.40% and Jumbo 30-year rates increased to 4.00% from 3.75%.

 

Economic Calendar – for the Week of November 14, 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
Nov 15 08:30 Retail Sales Oct 0.6% 0.6%
Nov 15 08:30 Retail Sales excluding automobiles Oct 0.5% 0.5%
Nov 15 08:30 Export Prices excluding agriculture Oct NA 0.4%
Nov 15 08:30 Import Prices excluding oil Oct NA 0.0%
Nov 15 08:30 New York Empire State Manufacturing Index Nov -0.5 -6.8
Nov 15 10:00 Business Inventories Sept 0.2% 0.2%
Nov 16 07:00 MBA Mortgage Index 11/12 NA -1.2%
Nov 16 08:30 Producer Price Index (PPI) Oct 0.3% 0.3%
Nov 16 08:30 Core PPI Oct 0.2% 0.2%
Nov 16 09:15 Industrial Production Oct 0.2% 0.1%
Nov 16 09:15 Capacity Utilization Oct 75.5% 75.4%
Nov 16 10:00 NAHB Housing Market Index Nov 64 63
Nov 16 10:30 Crude Oil Inventories 11/12 NA NA
Nov 16 16:00 Net Long-Term TIC Flows Sept NA $48.3B
Nov 17 08:30 Consumer Price Index (CPI) Oct 0.4% 0.3%
Nov 17 08:30 Core CPI Oct 0.2% 0.1%
Nov 17 08:30 Housing Starts Oct 1,178K 1,047K
Nov 17 08:30 Building Permits Oct 1,200K 1,225K
Nov 17 08:30 Initial Jobless Claims 11/12 257,000 254,000
Nov 17 08:30 Continuing Jobless Claims 11/05 NA 2,041K
Nov 17 08:30 Philadelphia Fed  Manufacturing Index Nov 7.0 9.7

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($101.09, -201.5 basis points) traded within a  far wider 211 basis point range between a weekly intraday high of $103.06 on Monday and a weekly intraday low of $100.95 on Thursday before closing the week at $101.09.

 

The bond plunged in price through several technical support levels following the presidential election as traders priced in the likelihood of increased government deficit spending and rising inflation.  The slow stochastic oscillator remains at an extremely “oversold” level, and in fact can’t go any lower because its reading is at “zero” showing no upward momentum.  If the stock market continues to show strength this week bond prices could continue to slip lower to pressure mortgage rates slightly higher.  If stocks take a breather, bond prices should stabilize and find support which in turn would stabilize rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

chart111142016

 

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Stock prices fell during the week while bond prices posted modest gains with slightly lower yields as traders were confronted by heightened uncertainty surrounding the upcoming presidential election.  Plunging oil prices also weighed on stock market sentiment as the latest report from the U.S. Energy Information Administration showed a huge 14.4 million barrel buildup in crude oil inventories.  By the end of the week, the S&P 500 Index notched its ninth consecutive daily decline, its longest uninterrupted losing streak in 36 years.  The daily declines were fairly minor as the market seemed to undergo a “death by a thousand cuts.”

 

Wall Street always favors “certainty” over “uncertainty” and many on the Street believed Hillary Clinton had the election all but wrapped up.  However, reports of new scandals and corruption surrounding the Clintons and the Clinton Foundation improved polling results for Donald Trump, showing Trump has closed the polling gap with Clinton.  For whatever reason, this amplified feelings of political uncertainty among traders resulting in lower stock and higher bond prices.

 

The week’s economic reports were generally positive with Personal Income and Spending both logging healthy gains in September.  Personal Income increased 0.3% or $46.7 billion while Personal Spending increased 0.5% or $59.7 billion.  The week’s most significant report was Friday’s Employment Situation Summary for October showing Nonfarm Payrolls increased by 161,000 while Nonfarm Private Payrolls rose by 142,000.  Although these payrolls numbers slightly missed their consensus estimates, they were offset by upward revisions for August and September that combined for 44,000 jobs more than were previously reported.  The employment data indicated the labor market remains strong and will keep the Federal Reserve on track to raise interest rates at their December 14 FOMC meeting.  The probability for a rate hike at this meeting is currently 66.8%.

 

Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 28 showing the overall seasonally adjusted Market Composite Index fell 1.2%.  The seasonally adjusted Purchase Index dropped 0.4% from the prior week, while the Refinance Index decreased 2.0%.  Overall, the refinance portion of mortgage activity was unchanged at 62.7% of total.  The adjustable-rate mortgage share of activity accounted for 4.4% 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 3.71% to 3.75% with points decreasing to 0.36 from 0.37.

 

For the week, the FNMA 3.0% coupon bond gained 18.7 basis points to end at $103.11 while the 10-year Treasury yield decreased 7.1 basis points to end at 1.7780%.  Stocks ended the week lower with the Dow Jones Industrial Average falling 272.91 points to end at 17,888.28.  The NASDAQ Composite Index dropped 143.73 points to close at 5,046.37, and the S&P 500 Index lost 41.23 points to close at 2,085.18.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 2.59%, the NASDAQ Composite Index has added 0.77%, and the S&P 500 Index has advanced 1.98%.

 

This past week, the national average 30-year mortgage rate decreased to 3.59% from 3.60% while the 15-year mortgage rate remained unchanged at 2.90%.  The 5/1 ARM mortgage rate fell to 2.89% from 2.92%.  FHA 30-year rates were unchanged at 3.40% and Jumbo 30-year rates were also unchanged at 3.75%.

 

Economic Calendar – for the Week of November 7, 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
Nov 07 03:00 Consumer Credit Sept $17.5B $25.9B
Nov 08 10:00 Job Openings / JOLTS Report Sept NA 5.443M
Nov 09 07:00 MBA Mortgage Index 11/05 NA -1.2%
Nov 09 10:00 Wholesale Inventories Sept 0.2% -0.2%
Nov 09 10:30 Crude Oil Inventories 11/05 NA 14.420M
Nov 10 08:30 Initial Jobless Claims 11/05 262,000 265,000
Nov 10 08:30 Continuing Jobless Claims 10/29 NA 2,026K
Nov 10 14:00 Treasury Budget Oct NA -$136.6B
Nov 11 10:00 Univ. of Michigan Consumer  Sentiment Index Nov 87.9 87.2

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.11, +18.7 basis points) traded within a  narrower 42 basis point range between a weekly intraday high of $103.14 on Friday and a weekly intraday low of $102.72 on Tuesday before closing the week at $103.11.

 

 

The bond traded in a “sideways” direction during the week while trading between key technical support at the 200-day moving average at $102.92 and resistance at the 23.6% Fibonacci retracement level located at $103.19.  Trading this past week was very choppy ahead of the presidential election which has introduced a heightened level of uncertainty in the financial markets.  The slow stochastic oscillator remains “oversold” but is now making a turn higher indicating a pick-up in upward momentum.  If Trump pulls out an election victory, we could see bond prices move higher with yields falling and this would help to improve mortgage rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

chartt110720161

 

 

 

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Encouraging economic news during the week resulted in rising bond yields and lower bond prices while stock prices put in an uneven performance on mixed third quarter corporate earnings reports.

Disappointing third quarter earnings reports from Apple, 3M, Caterpillar, and Sherwin-Williams in addition to poor fourth quarter earnings guidance from retailers Under Armour, Kohl’s, and Macy’s helped to weigh on the stock market.

 

In economic news, the economy unexpectedly showed signs of improvement in the 3rd Quarter by growing at the fastest pace in two years.  According to the Commerce Department’s Bureau of Economic Analysis, 3rd Quarter GDP bounced back at a 2.9% annual rate after growing by only a 1.4% annual rate in the 2nd Quarter.

 

On the inflation front, the Advance 3rd Quarter Chain Deflator was reported at 1.5%, a little higher than the consensus forecast of 1.4%, but well below the 2nd Quarter’s level of 2.3%.  The 3rd Quarter Employment Cost Index matched both the consensus forecast and the 2nd Quarter result at 0.6%.  Wages and salaries increased 0.5% while benefits increased 0.7%.  For the 12-month period ending in September, compensation costs for civilian and private industry workers both increased 2.3% while those for state and local government workers increased 2.6%.  Apparently, it pays a little better to work for the government.

 

The week’s housing news was favorable with the Case-Shiller 20-City Home Price Index, which measures price changes in residential housing in 20 major cities across the U.S., moving 0.4% higher for the month August and 5.1% higher year-over-year.  The overall Case-Shiller Index measuring price changes in all nine U.S. census divisions across the U.S. was 5.3% higher on an annual basis in August from 5.0% in July.  Also, the FHFA Home Price Index for August increased 0.7% and this exceeded the consensus forecast of 0.5%.  On an annual basis, the FHFA Home Price Index was 6.4% higher.

 

New Home Sales were mostly upbeat.  The Census Bureau reported New Home Sales increased 3.1% to a seasonally adjusted annual rate of 593,000 in September.  This was below the consensus forecast of 610,000 but higher than a downwardly revised level of 575,000 in August.  Additionally, the September 2016 rate is 29.8% higher than the September 2015 rate of 457,000.  Furthermore, the median sales price for new homes sold in September jumped by $29,500 to $313,500 from $284,000 in August while the average sales price increased by $24,100 to $377,700.  At the current sales rate, there is currently a 4.8 month supply of 235,000 new homes available for purchase.

10312016chart1

 

The National Association of Realtors reported its Pending Home Sales Index jumped 1.5% to 110.0 in September after falling 2.5% during August.  The increase was more than the consensus forecast calling for a 0.6% gain and is a sign of the underlying strength the housing market.  Year-over-year, the Index is 2.4% higher than September 2015.

10312016chart2

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 21 showing the overall seasonally adjusted Market Composite Index fell 4.1%.  The seasonally adjusted Purchase Index dropped 7.0% from the prior week, while the Refinance Index decreased 2.0%.  Overall, the refinance portion of mortgage activity increased to 62.7% of total applications from 61.5% in the prior week.  The adjustable-rate mortgage share of activity accounted for 4.2% 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 3.73% to 3.71% with points increasing to 0.37 from 0.36.

 

For the week, the FNMA 3.0% coupon bond lost 45.3 basis points to end at $102.92 while the 10-year Treasury yield increased 11.2 basis points to end at 1.8486%.  Stocks ended the week mixed with the Dow Jones Industrial Average gaining 15.48 points to end at 18,161.19.  The NASDAQ Composite Index dropped 67.30 points to close at 5,190.10, and the S&P 500 Index lost 14.75 points to close at 2,126.41.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 4.05%, the NASDAQ Composite Index has added 3.52%, and the S&P 500 Index has advanced 3.88%.

 

This past week, the national average 30-year mortgage rate increased to 3.60% from 3.54% while the 15-year mortgage rate increased to 2.90% from 2.85%.  The 5/1 ARM mortgage rate rose to 2.92% from 2.86%.  FHA 30-year rates increased to 3.40% from 3.35% and Jumbo 30-year rates increased to 3.76% from 3.70%.

 

Economic Calendar – for the Week of October 31, 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 31 08:30 Personal Income Sept 0.4% 0.2%
Oct 31 08:30 Personal Spending Sept 0.5% 0.0%
Oct 31 08:30 Core PCE Price Index Sept 0.1% 0.2%
Oct 31 09:45 Chicago Purchasing Managers Index (PMI) Oct 54.0 54.2
Nov 01 10:00 ISM Index Oct 51.7 51.5
Nov 01 10:00 Construction Spending Sept 0.5% -0.7%
Nov 02 07:00 MBA Mortgage Index 10/29 NA -4.1%
Nov 02 08:15 ADP Employment Change Oct 165,000 154,000
Nov 02 10:30 Crude Oil Inventories 10/29 NA -0.553M
Nov 02 14:00 FOMC Rate Decision Nov 0.375% 0.375%
Nov 03 07:30 Challenger Job Cuts Oct NA -24.7%
Nov 03 08:30 Initial Jobless Claims 10/29 256,000 258,000
Nov 03 08:30 Continuing Jobless Claims 10/22 NA 2,039K
Nov 03 08:30 Preliminary Productivity Qtr. 3 1.8% -0.6%
Nov 03 08:30 Unit Labor Costs Qtr. 3 1.2% 4.3%
Nov 03 10:00 Factory Orders Sept 0.2% 0.2%
Nov 03 10:00 ISM Services Index Oct 55.8 57.1
Nov 04 08:30 Nonfarm Payrolls Oct 175,000 156,000
Nov 04 08:30 Nonfarm Private Payrolls Oct 170,000 167,000
Nov 04 08:30 Hourly Earnings Oct 0.3% 0.2%
Nov 04 08:30 Unemployment Rate Oct 4.9% 5.0%
Nov 04 08:30 Average Workweek Oct 34.4 34.4
Nov 04 08:30 Trade Balance Sept -$38.5B -$40.7B

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($102.92, -45.3 basis points) traded within a  wider 72 basis point range between a weekly intraday high of $103.45 on Monday and a weekly intraday low of $102.73 on Thursday before closing the week at $102.92.

 

More favorable than anticipated economic data drove bond prices lower through technical support at the 23.6% Fibonacci retracement level at $103.19, and this level now reverts to nearest overhead resistance with technical support found at the key 200-day moving average at $102.87.  The bond is “oversold” at this point and could make a turn higher this week to stabilize mortgage rates.  However, an abundance of major economic news is scheduled for release this week, and if the data proves to be favorable for the economy, we could see bond prices pushed below the 200-day moving average toward the next level of support at the 38.2% Fibonacci retracement level at $102.46.  Should this occur mortgage rates would move slightly higher.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

10312016chart3

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Weekly Review

 

Both the stock and bond markets showed modest improvement during the week on “mixed” economic and third quarter corporate earnings reports.

 

Several economic reports showed manufacturing remains tenuous.  The New York Fed reported the October New York Empire State Manufacturing Index continued its recent decline by dropping to -6.8 from September’s reading of -2.0.  The consensus forecast had called for rise to 2.0.  Readings below zero indicate a contraction in manufacturing activity and October’s was the weakest reading since May.

 

The Philadelphia Federal Reserve Bank reported its Manufacturing Index for October fell to a reading of 9.7 after reaching a 19 month high in September with a reading of 12.8.  However, a greater pullback was expected as various consensus forecasts for October ranged from 5.5 to 7.0.

 

The Federal Reserve reported Industrial Production increased by 0.1% month-over-month for September, but this was below the consensus forecast calling for a 0.2% gain.  Capacity Utilization declined to 75.4% from 75.5% and was below the consensus forecast of 75.6% while trending 4.6% below its long-term average.  This report revealed Industrial Production remains fragile while Capacity Utilization continues to be weak.

 

However, several reports on the housing sector revealed this area of the economy remains strong.

 

The National Association of Home Builders reported their October Housing Market Index, a measure of home builder sentiment, retreated a couple of points to 63 after hitting a decade high of 65 in September.   NAHB Chairman Ed Brady remarked “Even with this month’s drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress.  However, builders in many markets continue to express concerns about shortages of lots and labor.”

 

The Commerce Department reported Housing Starts fell to their lowest level in 18 months at an annual rate of 1.047 million when the consensus forecast had estimated 1.168 million.  However, builders shifted their emphasis to building single-family homes from apartments as single-family housing starts rose 8.1% to an annual rate of 783,000, the highest in seven months.  Starts for buildings with five or more units fell 39%.  This emphasis on single-family construction is a sign of greater confidence in the economy.  There is now the largest number of single-family homes under construction since October 2008.

 

Moreover, the decline in Housing Starts was mostly offset by a strong showing in Building Permits suggesting a stronger rate of future construction.  Building Permits were reported at 1.255 million in September, a 6.3% monthly gain and the highest number since November.

201610241

Furthermore, the National Association of Realtors (NAR) reported Existing Home Sales increased 3.2% during September at a seasonally adjusted annual rate of 5.47 million, exceeding the consensus forecast of 5.30 million.  First-time home buyers led the surge in sales as this group accounted for 34% of all purchase transactions, the largest percentage of existing sales in four years.  The median sales price rose to $234,200 in September for a 5.6% year-over-year gain.  However, at the current sales rate existing housing inventory remains tight with just a 4.5 month supply of unsold homes.

201610242

 

As far as mortgages are concerned, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 14th showing the overall seasonally adjusted Market Composite Index increased 0.6%.  The seasonally adjusted Purchase Index rose 3.0% from the prior week, while the Refinance Index decreased 1.0%.  Overall, the refinance portion of mortgage activity decreased to 61.5% of total applications from 62.4% in the prior week.  The adjustable-rate mortgage share of activity accounted for 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 3.68% to 3.73% with points increasing to 0.36 from 0.35.

 

For the week, the FNMA 3.0% coupon bond gained 39.1 basis points to end at $103.38 while the 10-year Treasury yield decreased 6.8 basis points to end at 1.7364%.  Stocks ended the week higher with the Dow Jones Industrial Average gaining 7.33 points to end at 18,145.71.  The NASDAQ Composite Index added 43.24 points to close at 5,257.40, and the S&P 500 Index rose 8.18 points to close at 2,141.16.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 3.97%, the NASDAQ Composite Index has added 4.76%, and the S&P 500 Index has advanced 4.54%.

 

This past week, the national average 30-year mortgage rate decreased to 3.54% from 3.58% while the 15-year mortgage rate decreased to 2.85% from 2.89%.  The 5/1 ARM mortgage rate fell to 2.86% from 2.91%.  FHA 30-year rates decreased to 3.35% from 3.40% and Jumbo 30-year rates decreased to 3.70% from 3.73%.

 

Economic Calendar – for the Week of October 24, 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 25 09:00 Case-Shiller 20-city Index Aug 5.1% 5.0%
Oct 25 09:00 FHFA Housing Price Index Aug NA 0.5%
Oct 25 10:00 Consumer Confidence Oct 100.8 104.1
Oct 26 07:00 MBA Mortgage Index 10/22 NA -0.6%
Oct 26 08:30 International Trade in Goods Sept NA -$58.4B
Oct 26 10:00 New Home Sales Sept 610,000 609,000
Oct 26 10:30 Crude Oil Inventories 10/22 NA -5.247M
Oct 27 08:30 Initial Jobless Claims 10/22 259,000 260,000
Oct 27 08:30 Continuing Jobless Claims 10/15 NA 2,057K
Oct 27 08:30 Durable Goods Orders Sept 0.0% 0.0%
Oct 27 08:30 Durable Goods Orders Excluding Transportation Sept 0.3% -0.4%
Oct 27 10:00 Pending Home Sales Sept 0.6% -2.4%
Oct 28 08:30 Advance 3rd Qtr. GDP Qtr. 3 2.5% 1.4%
Oct 28 08:30 Advance 3rd Qtr. Chain Deflator Qtr. 3 1.4% 2.3%
Oct 28 08:30 Employment Cost Index Qtr. 3 0.6% 0.6%
Oct 28 10:00 Final Univ. Michigan Consumer Sentiment Index Oct 88.2 87.9

 

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.38, +39.1 basis points) traded within a  45 basis point range between a weekly intraday high of $103.47 on Thursday and a weekly intraday low of $103.02 on Monday before closing the week at $103.38.

 

The bond bounced back above the 23.6% Fibonacci retracement level at $103.19 and this level reverts back to nearest technical support.  A tough triple layer of overhead resistance is found beginning with the 100-day moving average at $103.50 followed by the 25-day and 50-day moving averages at $103.54 and $103.60 respectively.  The slow stochastic oscillator suggests a further advance could take place this coming week into that ceiling of resistance, but it will be difficult for the bond to move above these levels unless there is a significant meltdown in the stock market.  A more likely scenario is the bond trading in a range between its nearest support and resistance levels with little resultant change in mortgage rates this coming week.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

201610243

 

 

 

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Mortgage bond and U.S. Treasury prices finished the week close to where they began, although the yield curve steepened somewhat as shorter-term yields declined slightly.  Early in the week, Treasury yields increased, but then dropped when weaker economic data provided investors more assurance the Fed will not raise interest rates until their December 14 FOMC meeting.

 

Weaker economic data released during the week included Retail Sales falling 0.3% in August while Industrial Production for August showed a 0.4% decline as did manufacturing, which accounts for 80% of total industrial output.

 

Still, the Labor Department reported inflation edged higher at the consumer level with the August Consumer Price Index (CPI) rising 0.2% compared to the consensus forecast of a 0.1% gain.  Rising rents (+0.3%) and healthcare costs (+1.0%) were cited as reasons for the unexpected increase in the CPI.  On an annual basis through August, the CPI has increased 1.1%.  When excluding volatile food and energy costs, the so-called Core CPI increased 0.3%, the largest increase since February.  The consensus forecast had called for only a 0.2% increase in the Core CPI.  The Core CPI has now increased 2.3% during the past 12 months through August.

 

However, the financial markets have virtually rejected a rate increase next week as the Fed Funds Futures market is now showing the implied probability of a rate hike has only increased to 15.0% on Friday from 12.0% on Thursday.  Many economists now expect the Fed will hike interest rates by 25 basis points in December as the probability of a rate hike at the December FOMC meeting has increased to 45.4% from 39.6% on Thursday.

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending September 10th showing the overall seasonally adjusted Market Composite Index increased 4.2%.  The seasonally adjusted Purchase Index rose 9.0% from the prior week, while the Refinance Index increased 2.0%.  Overall, the refinance portion of mortgage activity increased to 64.0% of total applications from 63.5% in the prior week.  The adjustable-rate mortgage share of activity fell to 4.3% of total applications from 4.6% in the prior week.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased from 3.67% to 3.68% with points increasing to 0.37 from 0.33.

 

For the week, the FNMA 3.0% coupon bond lost 3.1 basis points to end at $103.47 while the 10-year Treasury yield increased 1.94 basis points to end at 1.6943%.  Stocks ended the week higher with the Dow Jones Industrial Average adding 38.35 points to end at 18,123.80.  The NASDAQ Composite Index gained 118.66 points to close at 5,244.57, and the S&P 500 Index rose 11.35 points to close at 2,139.16.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 3.86%, the NASDAQ Composite Index has added 4.52%, and the S&P 500 Index has advanced 4.45%.

 

This past week, the national average 30-year mortgage rate increased to 3.47% from 3.46% while the 15-year mortgage rate increased to 2.82% from 2.80%.  The 5/1 ARM mortgage rate fell to 2.86% from 2.90%.  FHA 30-year rates increased to 3.30% from 3.25% and Jumbo 30-year rates increased to 3.62% from 3.60%.

 

Economic Calendar – for the Week of September 19, 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
Sept 19 10:00 NAHB Housing Market Index Sept 59 60
Sept 20 08:30 Housing Starts Aug 1,186K 1211K
Sept 20 08:30 Building Permits Aug 1,160K 1152K
Sept 21 07:00 MBA Mortgage Index 09/17 NA 4.2%
Sept 21 10:30 Crude Oil Inventories 09/17 NA -0.559M
Sept 21 14:00 FOMC Rate Decision Sept 0.375% 0.375%
Sept 22 08:30 Initial Jobless Claims 09/17 262,000 260,000
Sept 22 08:30 Continuing Jobless Claims 09/10 NA 2,143K
Sept 22 09:00 FHFA Housing Price Index July NA 0.2%
Sept 22 10:00 Existing Home Sales Aug 5.50M 5.39M

 

 

 

 

 

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.47, -3.1 basis points) traded within a narrower 56 basis point range between a weekly intraday high of $103.61 on Monday and a weekly intraday low of $103.05 on Tuesday before closing the week at $103.47.

 

The bond bounced higher off of support provided by the 100-day moving average at $103.23 and advanced toward overhead resistance located at the 25-day moving average at $103.64.  The slow stochastic oscillator is continuing to trend higher after showing a positive crossover buy signal this past Wednesday.  If stocks continue to show weakness this coming week, the bond should challenge resistance early in the week.  A break above resistance would result in a slight improvement in rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

 chart109192016

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