Bond and stock prices saw an increase in volatility this past week, rising early in the week before plunging over Thursday and Friday.  Treasury yields jumped on expectations for higher rates. The yield on the 10-year Treasury note reached its highest level since June as prices fell.

 

A surprising contraction in the Institute for Supply Management’s (ISM) Services Index propelled both bond and stock prices higher on Tuesday as traders felt the disappointing report would make the Federal Reserve less likely to raise interest rates at its upcoming meeting on September 21.

 

The ISM reported their Services Index retreated to 51.4 in August from July’s reading of 55.5.  The August ISM Services Index was the lowest since February 2010.  Digging a little deeper into the report showed the Business Activity Index falling considerably lower to 51.8 in August from 59.3 in July.  The New Orders Index also fell substantially to 51.4 from 60.3 in July and the Employment Index slipped to 50.7 in August from 51.4 in July.  The services sector of the economy is becoming more important as over 80% of Americans are employed in service-oriented businesses.

 

Near the end of the week, the stock and bond markets were hit with selling following the European Central Bank’s (ECB) decision to maintain its zero interest rate policy while leaving its quantitative easing program at its current level.  The ECB left its deposit rate unchanged at -0.40%; its main refinance rate unchanged at 0.0%; the marginal lending rate unchanged at 0.25%; and its asset purchase program unchanged at 80 billion euros per month.  Traders were disappointed the ECB decided not to extend the program’s asset purchases beyond its March 2017 expiration date.

 

Also weighing heavily on investor sentiment were “hawkish” comments made by Boston Fed President and FOMC voting member Eric Rosengren, who is traditionally seen as a prominent Fed “dove.”  Rosengren said a rate hike may be necessary as a preventative measure so certain sectors of the economy won’t overheat.  Rosengren noted the labor market continues to “gradually tighten” and “the combination of the relatively strong domestic demand and the restocking of inventories should provide a basis for growth to exceed 2% over the next two quarters.”

 

Rosengren also said he would be in favor of gradual interest-rate hikes, saying waiting too long risks some asset markets, like commercial real estate, becoming “too ebullient.”  These comments coming from a Fed official normally seen as “dovish” increased the belief that the Fed seems determined on hiking interest rates even if the economic data continues to be inconsistent and not that supportive for a rate hike.  The 30-day Fed Funds futures prices are currently predicting the probability for a September 21 rate hike at 24.0%.

 

In housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending September 2nd showing the overall seasonally adjusted Market Composite Index increased 0.9%.  The seasonally adjusted Purchase Index rose 1.0% from the prior week, while the Refinance Index also increased 1.0%.  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 12.5 basis points to end at $103.50 while the 10-year Treasury yield increased 6.74 basis points to end at 1.6749%.  Stocks ended the week lower with the Dow Jones Industrial Average losing 406.51 points to end at 18,085.45.  The NASDAQ Composite Index dropped 123.99 points to close at 5,125.91, and the S&P 500 Index lost 52.17 points to close at 2,127.81.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 3.65%, the NASDAQ Composite Index has added 2.31%, and the S&P 500 Index has advanced 3.94%.

 

This past week, the national average 30-year mortgage rate increased to 3.46% from 3.42% while the 15-year mortgage rate increased to 2.80% from 2.76%.  The 5/1 ARM mortgage rate rose to 2.90% from 2.85%.  FHA 30-year rates held steady at 3.25% and Jumbo 30-year rates increased to 3.60% from 3.53%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.50, -12.5 basis points) traded within a wider 63 basis point range between a weekly intraday high of $104.08 on Wednesday and a weekly intraday low of $103.45 on Friday before closing the week at $103.50.

 

A sell signal on Thursday from a three-day Evening Star candlestick pattern forecast market weakness on Friday and turned out to be accurate as the bond continued to decline, falling below a dual level of support provided by the 50-day and 25-day moving averages at $103.74 and $103.72 respectively.  These moving averages will now revert to overhead resistance levels.  The next level of support is found at the 38.2% Fibonacci retracement level at $103.15.  Also, the slow stochastic oscillator now shows a negative crossover sell signal suggesting further market weakness lies ahead.  If this signal proves to be reliable we could see a slight worsening in mortgage rates this week.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

09122016chasrt1

 

Economic Calendar – for the Week of September 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
Sept 13 14:00 Treasury Budget Aug NA -$64.4B
Sept 14 07:00 MBA Mortgage Index 09/10 NA 0.9%
Sept 14 08:30 Export Prices excluding agriculture Aug NA 0.3%
Sept 14 08:30 Import Prices excluding oil Aug NA 0.3%
Sept 14 10:30 Crude Oil Inventories 09/10 NA -14.513M
Sept 15 08:30 Initial Jobless Claims 09/10 263,000 259,000
Sept 15 08:30 Continuing Jobless Claims 09/03 NA 2,144K
Sept 15 08:30 Retail Sales Aug -0.1% 0.0%
Sept 15 08:30 Retail Sales excluding automobiles Aug 0.3% -0.3%
Sept 15 08:30 Producer Price Index (PPI) Aug 0.1% -0.4%
Sept 15 08:30 Core PPI Aug 0.1% -0.3%
Sept 15 08:30 Philadelphia Fed Manufacturing Index Sept 0.0 2.0
Sept 15 08:30 Current Account Balance 2nd Qtr. -$122.8B -$124.7B
Sept 15 08:30 New York Empire State Manufacturing Index Sept 0.0 -4.2
Sept 15 09:15 Industrial Production Aug -0.3% 0.7%
Sept 15 09:15 Capacity Utilization Aug 75.7% 75.9%
Sept 15 10:00 Business Inventories July 0.1% 0.2%
Sept 16 08:30 Consumer Price Index (CPI) Aug 0.1% 0.0%
Sept 16 08:30 Core CPI Aug 0.2% 0.1%
Sept 16 10:00 Univ. of Michigan Consumer Sentiment Index Sept 91.5 89.8

 

 

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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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homeratesign
This week brings us the release of only four pieces of monthly economic data with one being considered highly important. In addition to the economic data, the minutes from the last FOMC meeting will also be posted. There is nothing of relevance to mortgage rates scheduled for release tomorrow, so look for the stock markets to drive bond trading and mortgage rates until we get to the start of this week’s activities.

 

INDEXES AFFECTING RATE LOCK

Consumer Price Index (CPI)

The first piece of data will be July’s Consumer Price Index (CPI) early Tuesday morning. The CPI is one of the most important reports we see each month as it measures inflation at the consumer level of the economy. As with last week’s Producer Price Index, there are also two readings in the report. Analysts are expecting to see no change in the overall index and a 0.2% rise in the more important core data reading. Declines in the readings like we saw in last week’s Producer Price Index, should lead to lower mortgage rates since it would mean inflation is still not a threat to the economy and a Fed rate hike may come later than sooner. On the other hand, stronger than expected readings will likely lead to an increase in mortgage pricing Tuesday.

Housing Starts (New Residential Construction)

July’s Housing Starts will also be released 8:30 AM ET Tuesday, giving us an indication of housing sector strength and future mortgage credit demand. It usually doesn’t cause much movement in mortgage rates unless it varies greatly from forecasts. Tuesday’s release is expected to show a decline in construction starts of new homes last month. The lower the number of starts, the better the news for the bond market, as it would indicate a weaker than expected new home portion of the housing sector.

Industrial Production and Capacity Utilization

The third release of the morning will be July’s Industrial Production report at 9:15 AM ET Friday. This report measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.3% increase from June’s level. A decline would be considered favorable news for bonds and mortgage rates because it would indicate manufacturing sector weakness and broader economic growth would be more difficult if manufacturing activity is slipping.

Federal Open Market Committee (FOMC) Minutes

Wednesday does not have any morning reports to be concerned with but does have something during afternoon trading. That is when we will get the minutes from the last FOMC meeting. There is a pretty good possibility of the markets reacting to them following their release. Market participants will be looking for how Fed members voted during the last meeting and any comments about inflation concerns in the economy, economic growth and the Fed’s plans for raising short-term interest rates. Since the minutes will be released at 2:00 PM ET, if there is a market reaction to them it will be evident during afternoon trading. This is one of those events that can cause significant movement in rates after its release or be a non-factor. Therefore be prepared for a move, but not surprised if the impact on rates is minimal.

Leading Economic Indicators (LEI) from the Conference Board

The Conference Board is a New York-based business research group that will post its Leading Economic Indicators (LEI) for July late Thursday morning. This index attempts to measure economic activity over the next three to six months and is considered to be moderately important. A higher than expected reading is bad news for the bond market because it indicates that the economy may be strengthening more than thought. However, a weaker reading means that the economy may not grow as much as predicted, making stocks less appealing to investors. This also eases economic growth concerns in the bond market and could lead to slightly lower mortgage rates Thursday. It is expected to show an increase of 0.4% in the index, indicating moderate economic growth over the next couple of months. It will take a sizable difference between forecasts and its actual reading for this report to noticeably influence mortgage rates.

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Overall, Tuesday is likely to be the most active day for mortgage rates with three reports set for release and Friday appears to be the best candidate for least important. Stocks will probably be a contributing factor to bond movement several days with only one important economic report coming this week. I believe bond yields are going to be making a move one direction or another very soon. Unfortunately, it is my opinion that the risk of moving higher outweighs the potential gains of floating for a lower rate. Therefore, I would still proceed cautiously if floating an interest rate and closing in the near future.

 

 

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Bond prices improved and yields declined with 10-year Treasury note yields falling to their lowest level since the beginning of August after the release of economic news on Friday morning showing flat retail sales in July and the largest drop in producer prices in almost a year.

 

Also, the major stock market indexes – the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite Index, all set record highs on Thursday, a conjunction that hasn’t happened since December 31, 1999.  Before we cheer this occurrence, within three months after the last time it happened in 1999, the stock market began a free-fall through September 2002.  By then, the NASDAQ ended up losing nearly 80% of its value, the S&P 500 ended up losing 43% of its value and the Dow Jones Industrial Average ended with a 27% decline.

 

On Tuesday, what little economic news there was wasn’t particularly encouraging.  The Labor Department reported 2nd quarter Preliminary Productivity, measured as the output of goods and services produced by American workers per hour worked, fell at a 0.5% seasonally adjusted annual rate as hours worked increased faster than output.  This is the third consecutive quarter of declining Productivity, the longest such string of declines since 1979.  Productivity was also down 0.4% from the year ago period, the first annual decline in three years and just the sixth year-over-year decline recorded since 1982.  The dismal Productivity report suggests worker income could stagnate along with economic growth in coming years.

 

Wednesday, equity markets were generally lower on a drop in crude oil prices while weaker economic news in Europe helped to send bond prices higher and yields moving lower as investors continued to try and acquire the best yielding sovereign bonds globally.

 

In housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending August 5th showing the overall seasonally adjusted Market Composite Index increased 7.1%.  The seasonally adjusted Purchase Index rose 3.0% from the prior week, while the Refinance Index increased 10.0%.  Overall, the refinance portion of mortgage activity increased to 62.4% of total applications from 60.7%.  The adjustable-rate mortgage share of activity was unchanged at 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 3.67% to 3.65% with points decreasing to 0.34 from 0.30.

 

Thursday, bond prices tumbled following a sharp 4% bounce higher in oil prices, solid economic data, and a lackluster Treasury auction of 30-year bonds.  The Treasury also conducted a $15 billion 30-year bond auction having a high yield of 2.274% with a bid-to-cover ratio of 2.24 that was less than the 12-auction average of 2.36 indicating tepid demand.  Indirect bidders (foreign central banks) bought 61.5% of the supply while direct bidders took 10.9% of the issue.  Bond prices fell following the auction.

 

Friday brought disappointing economic news out of China, and here domestically, to put a damper on the stock market despite higher crude oil prices, allowing a rebound to take place in the bond market with the yield on 10-year Treasuries falling during the morning to their lowest level since August 1.  Bond prices then subsequently pulled back from their best levels during afternoon trading.  Weaker than forecast industrial production, retail sales, and fixed-asset investment in China helped to curb investor enthusiasm while softer-than-expected readings on U.S. Producer Prices and Retail Sales suggested U.S. inflation may not be gaining enough steam to meet the Federal Reserve’s stated target of 2%.

 

Producer prices as measure by the Producer Price Index (PPI) recorded their largest decline in nearly a year in July on declining costs for services and energy products.  The PPI easily missed the consensus forecast of a flat 0.0% with a reading of -0.4%.  Also, when excluding costs for food and energy, the so-called Core PPI fell 0.3% versus a forecast of +0.2%.

 

Meanwhile, the Commerce Department reported Retail Sales were at a flat 0.0% for July, missing the consensus forecast calling for a 0.4% increase, as consumers cut back on purchases of clothing and other goods.  Retail Sales excluding auto and truck sales declined 0.3% compared to expectations for a +0.2% increase.  Overall, Retail Sales have risen 2.3% on a year-over-year basis.

 

Bond investors savored the sour PPI and Retail Sales news because economists who had been predicting a surge in third-quarter growth might have to trim their forecasts.  Bond investors also know this data feeds into the equation where lower inflation plus lower economic growth equals lower interest rates.  This latest batch of economic data could also give the Federal Reserve pause to raise interest rates.  The latest readings from the CME Group’s FedWatch tool shows investors have reduced their expectations the Fed would raise rates before the end of the year.  Traders now see a 40% chance the Fed will hike interest rates by its December 14 meeting, versus a 44.9% chance on Thursday.

 

For the week, the FNMA 3.0% coupon bond gained 14.0 basis points to end at $103.78 while the 10-year Treasury yield decreased 7.2 basis points to end at 1.5101%.  Stocks ended the week higher with the Dow Jones Industrial Average adding 32.94 points to end at 18,576.47.  The NASDAQ Composite Index advanced 11.78 points to close at 5,232.90, and the S&P 500 Index gained 1.18 points to close at 2,184.05.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 6.20%, the NASDAQ Composite Index has added 4.31%, and the S&P 500 Index has advanced 6.42%.

 

This past week, the national average 30-year mortgage rate decreased to 3.37% from 3.41% while the 15-year mortgage rate decreased to 2.73% from 2.75%.  The 5/1 ARM mortgage rate fell to 2.80% from 2.85%.  FHA 30-year rates dropped to 3.15% from 3.25% while Jumbo 30-year rates decreased to 3.47% from 3.55%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.78, +14 basis points) traded within a narrower 40 basis point range between a weekly intraday high of $103.95 and a weekly intraday low of $103.55 before closing at $103.78 on Friday.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

Chart08152016#1

 

Choppy, see-saw trading was evident Wednesday through Friday when most of the week’s economic news was released.  Thursday’s substantial downward move was partially erased when the bond shot 23 basis points above the 25-day moving average located at $103.72 on Friday only to pull back 15 basis points by the close of trading.  This pullback on Friday from the intraday high price resulted in a weak “shooting star” type of candlestick with a long upper shadow or wick calling into question the ability of the 25-day moving average to hold as support when trading resumes on Monday.

 

If the bond can bounce higher from the 25-day moving average and continue toward resistance located at the 23.6% Fibonacci retracement level this coming week, mortgage rates should improve.  If the 25-day moving average fails to hold as support and the bond continues to decline from that point, mortgage rates would slightly increase.

 

 

Economic Calendar – for the Week of August 15, 2016

 

The economic calendar features a couple of reports on regional manufacturing and housing that will be of interest to traders including the New York Empire State Manufacturing Index on Monday; the Philadelphia Fed Manufacturing Survey on Thursday; and Housing Starts and Building Permits on Tuesday.  Inflation at the consumer level as measured by the Consumer Price Index will also be of interest on Tuesday as will the latest set of minutes from the Federal Reserve’s July 27 FOMC meeting on Wednesday.  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 15 08:30 N.Y. Empire State Manufacturing Index Aug 4.0 0.55
Aug 15 10:00 NAHB Housing Market Index Aug 59 59
Aug 15 16:00 Net Long-Term TIC Flows June NA $41.1B
Aug 16 08:30 Consumer Price Index (CPI) July 0.0% 0.2%
Aug 16 08:30 Core CPI July 0.2% 0.2%
Aug 16 08:30 Housing Starts July 1,167K 1,189K
Aug 16 08:30 Building Permits July 1,153K 1,153K
Aug 16 09:15 Industrial Production July 0.3% 0.6%
Aug 16 09:15 Capacity Utilization July 75.7% 75.4%
Aug 17 07:00 MBA Mortgage Index 08/13 NA 7.1%
Aug 17 10:30 Crude Oil Inventories 08/13 NA 1.055M
Aug 17 14:00 FOMC Minutes July 27 NA  
Aug 18 08:30 Initial Jobless Claims 08/13 265,000 266,000
Aug 18 08:30 Continuing Jobless Claims 08/06 NA 2,155K
Aug 18 08:30 Philadelphia Fed Manufacturing Survey Aug 0.5 -2.9
Aug 18 10:00 Index of Leading Economic Indicators July 0.4% 0.3%

 

 

 

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

September 2016

20-21, (Tuesday-Wednesday) * 6.0% Chance
November 2016 1-2, (Tuesday-Wednesday) 7.8% Chance
December 2016 20-21 (Tuesday-Wednesday)* 40.0% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday) 40.6% Chance
March 2017 14-15 (Tuesday-Wednesday) * 41.9% Chance
May 2017 02-03 (Tuesday-Wednesday) 42.0% Chance
June 2017 13-14 (Tuesday-Wednesday) * 42.7% Chance
July 2017

25-26, (Tuesday-Wednesday)

42.7% 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.

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Bond prices fell and yields rose steadily throughout the week as the major stock market indexes advanced with the Dow Jones Industrial Average and S&P 500 Index reaching new all-time highs.  Generally positive economic and corporate earnings reports along with news of possible new monetary stimulus in Japan and Great Britain encouraged investors to flee lower risk assets for stocks to trigger selling in the bond market.

 

The week’s economic news was viewed favorably as a sign the economy may be picking up some steam.  The Fed’s Beige Book for July, summarizing economic conditions within each of the 12 Fed banking districts, concluded “economic activity continued to expand at a modest pace across most regions from mid-May through the end of June… Labor market conditions remained stable as employment continued to grow modestly since the previous report and wage pressures remained modest to moderate.  Price pressures remained slight.  Consumer spending was generally positive but with some signs of softening.  Manufacturing activity was mixed but generally improved across Districts.  Real estate activity continued to strengthen, and banks reported overall increases in loan demand.”

 

On the inflation front, the Labor Department reported inflation at the producer level recorded its largest gain in a year in June.  The Producer Price Index (PPI) increased 0.5% last month after gaining 0.4% in May, reflecting the impact of higher oil prices during the month.  The consensus forecast called for a gain of 0.3%.  Over the past 12 months through June, the PPI has increased 0.3% after retreating 0.1% in May on an annual basis.  When excluding the more volatile categories of food and energy prices, the so-called Core PPI rose 0.4% last month after rising 0.3% in May.  The Core PPI was up 1.3% in the 12 months through June after being up 1.2% in May.

 

Moreover, the Consumer Price Index (CPI) increased by 0.2% in June, just below the consensus forecast of 0.3%.  After factoring out more volatile food and energy prices, the Core CPI held steady at 0.2% to match the consensus forecast and last month’s reading.  Year-over-year, the Core CPI is up to 2.3%, the highest level in almost eight years to match the post-recession high.  However, these latest inflation numbers are not likely to convince the Federal Reserve to raise interest rates when it meets later this month on Wednesday, July 27, but a year-end rate hike will remain on the table.

 

Elsewhere, the Commerce Department reported Retail Sales jumped 0.6% higher in June.  This was unquestionably better than the 0.2% consensus forecast.  Sales were up 2.7% in the past year. Backing out the automobile component, to get the so-called core rate of retail spending, Sales were 0.7% higher, exceeding expectations for a 0.4% gain.  Helping the June sales gains were increases in spending at building materials and furniture stores, at department stores, and on the Internet.

 

In housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending July 8th showing the overall seasonally adjusted Market Composite Index increased 7.2%.  The seasonally adjusted Purchase Index was unchanged from the prior week, while the Refinance Index increased 11%.  Overall, the refinance portion of mortgage activity increased to 64.0% of total applications from 61.6%.  The adjustable-rate mortgage share of activity decreased to 5.2% from 5.6% 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 3.66% to 3.60%, its lowest level since May 2013.

 

Further, the CoreLogic National Foreclosure report for May showed that the foreclosure inventory was down 24.5% from May 2015 to May 2016 and that only 1.0% of all homes with a mortgage are in some state of foreclosure.  The seriously delinquent rate is at 2.8%, which is the lowest level since October 2007.

 

And… in another example of how easy it is to spend other people’s money, the White House announced today the 2016 budget deficit for the federal bureaucracy will be around $600 billion, up from a previously reported $438 billion.

 

For the week, the FNMA 3.0% coupon bond lost 59.3 basis points to end at $103.56 while the 10-year Treasury yield rose 19.9 basis points to end at 1.5578%.  Stocks ended the week with the Dow Jones Industrial Average gaining 369.81 points to end at 18,516.55.  The NASDAQ Composite Index added 72.83 points to close at 5,029.59, and the S&P 500 Index advanced 31.84 points to close at 2,161.74.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 5.89%, the NASDAQ Composite Index has added 0.44%, and the S&P 500 Index has advanced 5.45%.

 

This past week, the national average 30-year mortgage rate rose to 3.42% from 3.37% while the 15-year mortgage rate increased to 2.76% from 2.71%.  The 5/1 ARM mortgage rate rose to 2.86% from 2.84%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates increased to 3.55% from 3.46%.

 

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.56, -59.3 basis points) traded within a wider 72 basis point range between a weekly intraday high of $104.16 and a weekly intraday low of $103.44 before closing at $103.56 on Friday.

 

The bond trended lower during the week for a test of support at $103.47 while the stock market rallied to new highs.  If technical support holds this coming week, we could see a bounce higher off of support resulting in a slight improvement in interest rates.  However, if the stock market continues to rally support may not hold, and this would lead to a slight deterioration in rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

 chart#107182016

 

Economic Calendar – for the Week of July 18, 2016

 

The economic calendar features several reports coving the housing sector in addition to weekly Initial Jobless Claims and the Philadelphia Fed Manufacturing Index.  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
July 18 10:00 NAHB Housing Market Index July 61.0 60
July 18 16:00 Net Long-Term TIC Flows May NA -$79.6B
July 19 08:30 Building Permits June 1,165K 1,164K
July 19 08:30 Housing Starts June 1,150K 1,138K
July 20 07:00 MBA Mortgage Index 07/16 NA 7.2%
July 20 10:30 Crude Oil Inventories 07/16 NA -2.546M
July 21 08:30 Initial Jobless Claims 07/16 265,000 254,000
July 21 08:30 Continuing Jobless Claims 07/09 NA 2,149K
July 21 08:30 Philadelphia Fed Manufacturing Index July 5.0 4.7
July 21 09:00 FHFA Housing Price Index May NA 0.2%
July 21 10:00 Existing Home Sales June 5.50M 5.53M

 

 

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

 
July 2016 26-27, (Tuesday-Wednesday) 2.4% Chance
September 2016 20-21, (Tuesday-Wednesday) * 13.8% Chance
November 2016 1-2, (Tuesday-Wednesday) 15.3% Chance
December 2016 20-21 (Tuesday-Wednesday)* 38.3% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday) 38.6% Chance
March 2017          14-15 (Tuesday-Wednesday) * 40.1% Chance
May 2017          02-03 (Tuesday-Wednesday) 40.5% Chance
June 2017          13-14 (Tuesday-Wednesday) * 41.2% 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

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The stock market ended the week on the plus side, driven higher primarily by a solid rally on Friday triggered by a better than expected jobs report for June.  In fact, the S&P 500 Index ended the week within one point of its all-time closing high from May 21, 2015.  Bond prices also advanced with yields declining.  The 10-year Treasury yield spiked in the minutes following Friday’s jobs report, but soon declined below where it had ended Thursday’s trading day ending up not far above the all-time low of 1.341% established on Wednesday.

 

The week’s economic news was generally favorable for the stock market and helped to ease investors’ lingering fears concerning the outcome of Great Britain’s Brexit vote.  Investors were also heartened by the release of the minutes from the Federal Reserve’s June 15 FOMC meeting.  The minutes reduced the outlook for interest rate increases and showed even the most “hawkish” Fed officials were concerned about the exceptionally weak jobs growth reported for May.  Most FOMC members would like to see more data showing improving employment and economic growth with inflation rising to their 2% target before they would be prepared to hike interest rates.

 

Friday, the latest Employment Situation Summary revealed job growth bounced back in June following a dismal showing in May that was negatively impacted by a Verizon workers strike.  Those 35,000 workers have now returned to work and were included in June’s employment report.

Nonfarm Payrolls grew by 287,000 jobs while Nonfarm Private Payrolls increased by 265,000 jobs.  These payrolls numbers easily exceeded the consensus forecasts of 175,000 and 170,000 jobs respectively.  The Unemployment Rate edged higher to 4.9% from May’s level of 4.7% and was a little higher than the consensus estimate of 4.8%.  Hourly Earnings grew at a 0.1% rate, less than the forecast of 0.2% growth.  Over the year, Average Hourly Earnings have risen at a 2.6% pace and are higher than workers have experienced over the last few years resulting in an increase in purchasing power.  The Average Workweek held steady at 34.4 hours.  The labor force participation rate (the percentage of the population that has a job or actively looked for one in the past month) increased from 62.6% in May to 62.7% in June.

 

Delving deeper into the jobs data reveals there were 94,517,000 Americans not participating in the labor force in June, a decline of 191,000 people from May.  Of those outside the labor force, a record-high number were women 16 years and over.  Women’s participation rate declined from 56.7% in May to 56.6% in June, an increase of 130,000 to reach a total of 56,855,000.  The U-6 measure or “real” unemployment rate, a measure of discouraged workers and those working part time instead of full time for economic reasons and more representative of the labor market, was reported at 9.6%.  This was a slight decline from May’s level of 9.7%.  The payrolls numbers for the first six months of 2016 show job growth has slowed to an average of 172,000 per month.  However, economists don’t expect this rate of employment growth to last.  Sometime in the not too distant future, job growth will fall more into line with the natural growth in the labor force, and the Bureau of Labor Statistics estimates this to be approximately 65,000 people a month over the next 10 years.

 

In housing, CoreLogic reported its Home Price Index (HPI) showed home prices in the U.S., including distressed sales, increased 1.3% month-over-month for May and 5.9% between May 2015 and May 2016.  Also, CoreLogic’s HPI Forecast is predicting home prices will rise by 0.8% on a month-over-month basis from May 2016 to June 2016, and will increase by 5.3% on a year-over-year basis from May 2016 to May 2017.  CoreLogic Chief Economist Frank Nothaft stated “Housing remained an oasis of stability in May with home prices rising year over year between 5 percent and 6 percent for 22 consecutive months.”  Nothaft also said the steady growth in home prices was the result of fast-paced resale activity and the limited supply of available homes on the market.  Furthermore, the uncertainty surrounding global financial markets will likely keep mortgage rates consistently low and this should add to the housing sector’s growth.

 

Furthermore, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending July 1st showing the overall seasonally adjusted Market Composite Index increased 14.2%.  The seasonally adjusted Purchase Index increased 4.0%, while the Refinance Index increased 21%.  Overall, the refinance portion of mortgage activity increased to 61.6% of total applications from 58.1%.  The adjustable-rate mortgage share of activity decreased to 5.6% from 5.9% 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 3.75% to 3.66%.

 

For the week, the FNMA 3.0% coupon bond gained 32.8 basis points to end at $104.16 while the 10-year Treasury yield fell 9.8 basis points to end at 1.3579%.  Stocks ended the week with the Dow Jones Industrial Average gaining 197.37 points to end at 18,146.74.  The NASDAQ Composite Index added 94.19 points to close at 4,956.76, and the S&P 500 Index advanced 26.95 points to close at 2,129.90.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 3.98%, the NASDAQ Composite Index has declined 1.02%, and the S&P 500 Index has advanced 4.04%.

 

This past week, the national average 30-year mortgage rate fell to 3.37% from 3.40% while the 15-year mortgage rate decreased to 2.71% from 2.74%.  The 5/1 ARM mortgage rate rose to 2.84% from 2.81%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.46% from 3.47%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($104.16, +32.8 basis points) traded within a narrower 47 basis point range between a weekly intraday high of $104.38 and a weekly intraday low of $103.91 before closing at $104.16 on Friday.

 

The bond moved higher on Tuesday and continued higher on Wednesday above technical resistance located at $104.27 before reversing direction and closing below this key technical level.  The bond then tested a minor support level located at $104.00 on Thursday and Friday before rising and closing above this level on Friday.

 

Trading on Thursday and Friday demonstrated a degree of market uncertainty among traders, especially on Friday following the release of the June jobs report which showed the highest job growth rate in eight months.  Friday’s trading action resulted in the formation of a small bullish “engulfing lines” candlestick pattern – a moderate buy signal.

 

However, with the slow stochastic oscillator showing the market remains “overbought” and trending gradually lower to indicate a minor loss of momentum; it may be difficult for the bond to move above the $104.27 level in the short-term.  If the bond does somehow manage to break above the $104.27 level, mortgage rates could improve slightly, but a pullback toward support at $103.47 would result in a slight deterioration in mortgage rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

 chart07112016#1

  

Economic Calendar – for the Week of July 11, 2016

 

The economic calendar features reports on inflation and retail sales plus the Federal Reserve’s latest take on the economy with their Beige Book for July.  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
July 12 10:00 Wholesale Inventories May 0.2% 0.6%
July 13 07:00 MBA Mortgage Index 07/09 NA NA
July 13 08:30 Export Prices excluding agriculture June NA 1.0%
July 13 08:30 Import Prices excluding oil June NA 0.3%
July 13 10:30 Crude Oil Inventories 07/09 NA NA
July 13 14:00 Fed’s Beige Book July NA NA
July 13 14:00 Treasury Budget June NA $50.5B
July 14 08:30 Initial Jobless Claims 07/09 265,000 254,000
July 14 08:30 Continuing Jobless Claims 07/02 NA 2,124K
July 14 08:30 Producer Price Index (PPI) June 0.3% 0.4%
July 14 08:30 Core PPI June 0.1% 0.3%
July 15 08:30 NY Empire State Manufacturing Index July 5.0 6.0
July 15 08:30 Retail Sales June 0.2% 0.5%
July 15 08:30 Retail Sales excluding automobiles June 0.4% 0.4%
July 15 08:30 Consumer Price Index (CPI) June 0.3% 0.2%
July 15 08:30 Core CPI June 0.2% 0.2%
July 15 09:15 Capacity Utilization June 75.0% 74.9%
July 15 09:15 Industrial Production June 0.2% -0.4%
July 15 10:00 Business Inventories May 0.2% 0.1%
July 15 10:00 Univ. of Michigan Consumer Sentiment Index July 93 94.3

 

 

 

 

 

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

 
July 2016 26-27, (Tuesday-Wednesday) 0% Chance
September 2016 20-21, (Tuesday-Wednesday) * 11.7% Chance
November 2016 1-2, (Tuesday-Wednesday) 11.5% Chance
December 2016 20-21 (Tuesday-Wednesday)* 25.4% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday) 25.0% Chance
March 2017          14-15 (Tuesday-Wednesday) * 26.9% Chance
May 2017          02-03 (Tuesday-Wednesday) 27.7% Chance
June 2017          13-14 (Tuesday-Wednesday) * 29.4% 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

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After plunging on Friday, June 24 and Monday, June 27 in response to Great Britain’s “Brexit” vote to leave the European Union, U.S. stocks strongly rebounded during the rest of the week.  The updated table below shows how close the major stock market indexes are to fully recovering from the Brexit-induced market plunge.

07052016#1

 

Bond prices on the other hand, slipped slightly lower Monday through Wednesday before rallying higher on Thursday and Friday.  The 10-year Treasury note yield briefly reaching a record low in premarket trading on Friday morning before rebounding in a move The Wall Street Journal ascribed to trader positioning around the new quarter and other technical factors.

 

In economic news, the Commerce Department released several relevant reports during the week.  The Department reported economic growth slowed in the first quarter, but not as abruptly as prior estimates suggested.  GDP increased at a 1.1% annual rate in the first quarter rather than the 0.8% annual rate reported in May.  First-quarter GDP growth has now been revised upward by 0.6% since the advance estimate was reported in April.  The consensus forecast had called for first-quarter GDP growth of 1.0%.  However, inflation is being held in check with the GDP Deflator declining to 0.4% from the prior reading of 0.6%.  For the upcoming second-quarter GDP, the Atlanta Federal Reserve is currently estimating GDP rising at a 2.6% rate.

 

The Commerce Department also released their Personal Income and Spending report for May showing Personal Spending moderated in May with a 0.4% increase after consumers increased spending by an upwardly revised 1.1% in April.  The consensus forecast had called for 0.3% spending growth.  Rising gasoline prices were partly responsible for the rise in spending.  To fund their spending, consumers had to tap into their savings as take-home income didn’t rise as fast.

 

Incomes increased by 0.2% in May, the smallest gain in three months and below the consensus forecast of 0.3%.  When considering the effects of inflation, income grew by only 0.1%, the smallest increase in 14 months.  Inflation as measured by the PCE Index increased 0.2% in May while the Core PCE Index that excludes volatile food and energy prices also increased by 0.2%.  For the prior 12 months ended with May, inflation has increased only 0.9% and was lower than April’s annual rate of 1.1%.  As far as the Fed is concerned, inflation is moving in the wrong direction and away from their 2% target.

 

Furthermore, the Commerce Department reported Construction Spending fell 0.8% in May following a 2% decline in April which was the largest monthly setback in five years.  The consecutive monthly declines in overall construction caught economists by surprise.  Analysts had been looking for a rebound of 0.5% following the big drop in April.  Overall spending on housing was flat with a 1.8% increase in apartment construction being offset by a 1.3% decline in single-family construction. Nonresidential construction was down 0.7% while government activity fell 2.3% to mark the third straight monthly decline.

 

In housing, the S&P/Case Shiller 20-city Index showed annualized single-family home prices increased 5.4% in April, but were down slightly from March’s 5.5% annualized gain.  The consensus forecast had been for a 5.5% rise.  David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, stated “The home price increases reflect the low unemployment rate, low mortgage interest rates, and consumers’ generally positive outlook.  However, the outlook is not without a lot of uncertainty and some risk.  Last week’s vote by Great Britain to leave the European Union is the most recent political concern while the U.S. elections in the fall raise uncertainty and will distract home buyers and investors in the coming months.”

 

The National Association of Realtors (NAR) reported fewer Americans signed contracts to buy homes in May resulting in home sales sliding lower year-over-year for the first time in nearly two years.  The NAR’s seasonally adjusted Pending Home Sales Index fell 3.7% in May to 110.8, just below its May 2015 reading of 111.

 

Although overall home sales have steadily improved over the past year, buyers are running into shrinking inventories that are causing homes to sell after fewer days on the market while pushing up prices and this may have reduced pending sales during May.  May’s decline implies completed home sales could slow in July or August as the number of listings fell 5.7% from a year ago suggesting prospective homebuyers have limited choices.  Meanwhile, the median sales price has risen 4.7% over the past 12 months to $239,700.

 

07052016#2

 

 

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending June 24th showing the overall seasonally adjusted Market Composite Index fell 2.6%.  The seasonally adjusted Purchase Index decreased 3.0%, while the Refinance Index decreased 2.0%.  Overall, the refinance portion of mortgage activity increased to 58.1% of total applications from 57.7%.  The adjustable-rate mortgage share of activity increased to 5.9% from 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 decreased from 3.76% to 3.75%, the lowest level since May 2013.

 

For the week, the FNMA 3.0% coupon bond gained 56.2 basis points to end at $103.83 while the 10-year Treasury yield fell 12.3 basis points to end at 1.456%.  Stocks ended the week with the Dow Jones Industrial Average gaining 548.62 points to end at 17,949.37.  The NASDAQ Composite Index added 154.59 points to close at 4,862.57, and the S&P 500 Index advanced 65.54 points to close at 2,102.95.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 2.92%, the NASDAQ Composite Index has dropped 2.98%, and the S&P 500 Index has increased 2.81%.

 

This past week, the national average 30-year mortgage rate fell to 3.40% from 3.49% while the 15-year mortgage rate decreased to 2.74% from 2.78%.  The 5/1 ARM mortgage rate fell to 2.81% from 2.92%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.47% from 3.57%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.83, +56.2 basis points) traded within a narrower 59.3 basis point range between a weekly intraday high of $104.03 and a weekly intraday low of $103.44 before closing at $103.83 on Friday.

 

The bond found some technical support on Wednesday at $103.47 before bouncing higher into a three-day holiday weekend to challenge resistance at the 0% Fibonacci retracement level at $104.00 on Friday.  There are a couple of support levels found at “rising windows” or upward gaps at $103.47 and $103.20.  The slow stochastic oscillator remains extremely “overbought” suggesting upward momentum is slowing as choppy intraday trading demonstrated during the week.  Most of the coming week’s potentially market-moving economic news arrives on Thursday and Friday culminating in the Employment Situation Summary for June on Friday.  It is likely this news will drive market action rather than technical factors.  If the news is supportive for the bond market we could see some slight improvement in rates that are near historical lows.  However, if the economic news triggers a further rally for the stock market, we could see bond prices fall and yields rise, and this would result in a slight worsening in mortgage rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

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Economic Calendar – for the Week of July 4, 2016

 

The economic calendar features the minutes from the Federal Reserve’s FOMC meeting held on June 15 and the Employment Situation Summary for June.  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
July 05 10:00 Factory Orders May -0.9% 1.9%
July 06 07:00 MBA Mortgage Index 07/02 NA -2.6%
July 06 08:30 Balance of Trade May -$40.0B -$37.4B
July 06 10:00 ISM Services Index June 53.3 52.9
July 06 14:00 Minutes from FOMC Meeting June 15 NA NA
July 07 07:30 Challenger Job Cuts June NA -26.5%
July 07 08:15 ADP Employment Change June 152K 173K
July 07 08:30 Initial Jobless Claims 07/02 268K 268K
July 07 08:30 Continuing Jobless Claims 06/25 NA 2120K
July 07 11:00 Crude Oil Inventories 07/02 NA -4.053M
July 08 08:30 Nonfarm Payrolls June 175K 38K
July 08 08:30 Nonfarm Private Payrolls June 170K 25K
July 08 08:30 Unemployment Rate June 4.8% 4.7%
July 08 08:30 Hourly Earnings June 0.2% 0.2%
July 08 08:30 Average Workweek June 34.4 34.4
July 08 15:00 Consumer Credit May $15.3B $13.4B

 

 

 

 

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

July 2016 26-27, (Tuesday-Wednesday) 0% Chance
September 2016 20-21, (Tuesday-Wednesday) * 0% Chance
November 2016 1-2, (Tuesday-Wednesday) 0% Chance
December 2016 20-21 (Tuesday-Wednesday)* 14% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 14% 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.

 

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Britain’s Exit vote as the catalyst for driving the markets, especially the early days of the week. There is a good possibility of seeing Friday’s major bond rally and stock sell-off extend into tomorrow’s trading. Therefore, even though there is no relevant economic data set for release tomorrow, it still is likely going to be a pretty active day for the financial and mortgage markets:

A few other factors potentially impacting mortgage rates right now include:

  • GDP Rev 2 (month after Rev 1)
  • Consumer Confidence Index (Conference Board)
  • Personal Income and Outlays
  • ISM Index (Institute for Supply Management)

 

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Great Britain’s referendum (the so-called Brexit vote) on whether or not the country would leave the European Union (EU) dominated market sentiment throughout the week.  Bonds trended lower for much of the week until exploding higher on Friday while stocks reached their highs on Thursday when many market investors believed the polling and betting numbers that Britons would vote to remain in the EU.

 

The Brexit poling data during the week was thought-provoking.  Last Monday, the polling data out of Great Britain suggested there had been a shift in sentiment among those likely to vote toward remaining in the EU with the probability to “remain” moving to 72% from 65%.  On Wednesday, a polling survey conducted by Opinium Research showed the “Leave” side ahead by one point, 45% to 44%, with the 9% who were undecided likely to determine the final outcome.  Thursday, an Ipsos MORI survey showed 52% of 1,592 people surveyed wanting to stay in the EU compared to 48% wanting to exit while Opinium Research’s final survey of 3,000 people before the referendum put the Leave vote at 45% and Remain at 44%.

 

However, stock futures plunged in Thursday overnight trading after it became clear the vote for exiting the EU would win.  Indeed, British nationalism was in full display as citizens in the island nation voted by a large four point margin to leave the EU, shocking global equity markets.  In fact, Great Britain’s exit may be the first step in the breakup of the entire EU.  Politicians in France and the Netherlands are now calling for their own referendums on EU membership while Italy’s Five Star movement is seeking a vote on the euro.  Regardless, the Brexit vote outcome triggered a plunge in global equities on Friday while bond prices soared with yields cascading lower.  The ensuing global financial turmoil will certainly put the Federal Reserve on hold with respect to another rate hike, and investors are now seeing the Fed Funds Futures showing the probability for a rate cut is higher than that of a rate hike for every FOMC meeting through February 2017!

 

During the week there were several favorable housing reports.  First, the Federal Housing Finance Agency (FHFA) reported home prices rose 0.2% year-over-year in April gaining 5.9% from April 2015.  The consensus forecast for April had called for a month-over-month increase of 0.6%.

 

Additionally, the National Association of Realtors (NAR) reported Existing Home Sales increased 1.8% in May, to a seasonally adjusted annual rate of 5.53 million.  This was the highest rate in nine years, with all major regions other than the Midwest recording strong sales increases.  The median existing home price for all housing types increased 4.7% year-over-year in May to $239,700, the 50th consecutive month of rising home prices.  Housing inventory increased by 1.4% in May, to 2.15 million homes, which is equal to a 4.7 month supply and was unchanged from April.

 

06272016#1

 

Meanwhile, New Home Sales fell 6.0% in May to a seasonally adjusted annual rate of 551,000 units.  The consensus forecast had called for an annual rate of 560,000.  Also, April’s sales level was revised lower to 586,000 units from the previously reported 619,000 units, but was still the highest sales rate since February 2008.  Still, New Home Sales were 8.7% higher from the year ago period.  New home inventory increased 1.2% in May to 244,000, the highest since September 2009, and with May’s sales rate it would take 5.3 months to clear inventory, up from 4.9 months in April.  Further, the median new home price increased 1.0% from a year ago to $290,400.

06272016#2

 

Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending June 18th showing the overall seasonally adjusted Market Composite Index rose 2.9%.  The seasonally adjusted Purchase Index decreased 2.0%, while the Refinance Index increased 7.0%.  Overall, the refinance portion of mortgage activity increased to 57.7% of total applications from 55.3%.  The adjustable-rate mortgage share of activity increased to 5.7% from 5.3% 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 3.79% to 3.76%, the lowest level since May 2013.

 

For the week, the FNMA 3.0% coupon bond gained 29.7 basis points to end at $103.27 while the 10-year Treasury yield decreased 4.96 basis points to end at 1.56%.  Stocks ended the week with the Dow Jones Industrial Average losing 274.41 points to end at 17,400.75.  The NASDAQ Composite Index lost 92.36 points to close at 4,707.98, and the S&P 500 Index fell 33.81 points to close at 2,037.41.  Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 0.14%, the NASDAQ Composite Index has dropped 6.36%, and the S&P 500 Index has declined 0.32%.

 

This past week, the national average 30-year mortgage rate fell to 3.49% from 3.53% while the 15-year mortgage rate decreased to 2.78% from 2.92%.  The 5/1 ARM mortgage rate fell to 2.97% from 3.00%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.60% from 3.65%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.27, +29.7 basis points) traded within a wider 92 basis point range between a weekly intraday high of $103.50 and a weekly intraday low of $102.58 before closing at $103.27 on Friday.

 

After trending lower ahead of the Brexit vote, the bond shot higher in a large opening gap or “rising window” on Friday above primary resistance at $103.33 and then closely approximated a secondary resistance level located at $103.52 before pulling back below primary resistance.  The session’s extreme upward move triggered a positive stochastic crossover buy signal as the slow stochastic oscillator moved toward an “overbought” level.  The pull-back below the $103.33 level may continue to back-fill more of the “rising window” as the bond seeks to stabilize in a volatile market.  It wouldn’t be too surprising to see a pull-back to the $103.00 level near the middle of the “rising window” support level.  Should this happen, mortgage rates would erode slightly from Friday’s best rate level.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

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Economic Calendar – for the Week of June 27, 2016

 

The economic calendar expands this coming week with several housing and inflation reports that will attract investor attention.  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
Jun 27 08:30 International Trade in Goods May -$59.2B -$57.5B
Jun 28 08:30 3rd Estimate of 1st Qtr. GDP Qtr. 1 1.0% 0.8%
Jun 28 08:30 3rd Estimate of 1st Qtr. GDP Deflator Qtr. 1 0.6% 0.6%
Jun 28 09:00 Case-Shiller 20-city Index Apr 5.5% 5.4%
Jun 28 10:00 Consumer Confidence Index June 93.1 92.6
Jun 29 07:00 MBA Mortgage Index 06/25 NA 2.9%
Jun 29 08:30 Personal Income May 0.3% 0.4%
Jun 29 08:30 Personal Spending May 0.3% 1.0%
Jun 29 08:30 Core PCE Price Index May 0.2% 0.2%
Jun 29 10:00 Pending Home Sales May -1.4% 5.1%
Jun 29 10:30 Crude Oil Inventories 06/25 NA -0.917M
Jun 30 08:30 Initial Jobless Claims 06/25 265K 259K
Jun 30 08:30 Continuing Jobless Claims 06/18 NA 2142K
Jun 30 09:45 Chicago Purchasing Managers Index (PMI) June 50.8 49.3
Jul 01 10:00 ISM Index June 51.4 51.3
Jul 01 10:00 Construction Spending May 0.5% -1.8%

 

 

 

 

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

July 2016 26-27, (Tuesday-Wednesday) 0% Chance
September 2016 20-21, (Tuesday-Wednesday) * 0% Chance
November 2016 1-2, (Tuesday-Wednesday) 1.8% Chance
December 2016 20-21 (Tuesday-Wednesday)* 17.8% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 18.9% 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.

 

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