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

 07052016#3

 

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

06272016#3

 

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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A few factors potentially impacting mortgage rates right now include:

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

Read more

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Mortgage Rate Update

Jun 20, 2016

Concerns over the upcoming “Brexit” vote in Great Britain scheduled for June 23 drove much of the week’s investor sentiment, not only on Wall Street, but in many foreign equity and bond markets.  Polls early in the week showed an increase in support for Britain leaving the European Union (EU) and this weighed on equities while providing a rally for bonds.  However, the tragic shooting death of British Parliament member Ms. Jo Cox appeared to heighten the prospects for the “remain” vote as Ms. Cox was an outspoken proponent for Britain remaining in the EU.

 

The bond market also got a shot in the arm from the Federal Reserve’s latest interest rate decision on Wednesday.  Once the Fed’s Federal Open Market Committee (FOMC) announced monetary policy would remain unchanged while downgrading its forecast for 2017 GDP growth, bond prices shot higher and yields fell.  The policy statement was dovish in tone and stated slowing growth in labor markets and persistently low inflation as reasons for leaving rates unchanged.

 

The FOMC is now forecasting 2016 GDP growth of 1.9-2.0% (down from 2.1-2.3% in March); Unemployment at 4.6-4.8% (unchanged from March); PCE inflation between 1.3-1.7% (up from 1.0-1.6% in March); and Core PCE inflation between 1.6-1.8% (up from 1.4-1.7% in March).  The FOMC is also predicting 1-2 rate hikes in 2016, down from 2 hikes in March and 2-4 rate hikes in 2017, down from 4 hikes in March.  Also, the FOMC maintained its dot-plot projection of two interest rate hikes with a target rate of 0.9% by the end of 2016.  Yet, the FOMC lowered its projection for the fed funds rate by the end of 2017 to 1.6% from 1.9% and lowered its projection for 2018 to 2.4% from 3.0%.

 

Other reports during the week showed economic data were mixed.  Industrial Production fell by a larger than forecast 0.4% in May following a downwardly revised 0.6% increase in April while Capacity Utilization declined to 74.9% from a revised 75.3%.  However, the Commerce Department reported May Retail Sales came in higher than expected with an increase of 0.5%, exceeding the consensus forecast of 0.3%.

 

May’s Producer Price Index (PPI) also came in higher than expected at 0.4% in May, rising at its fastest rate in a year.  While this partially reveals the impact of rising energy prices, a strong increase in producer services inflation also suggests companies are successfully passing on higher costs.  However, the Core PPI, which excludes volatile food and energy prices, increased marginally last month by 0.3% and 1% year-on-year to remain well below the Fed’s 2.0% inflation target.

 

Meanwhile, the Consumer Price Index (CPI) rose 0.2% in May after advancing 0.4% in April.  The consensus forecast called for the CPI to rise by 0.3%.  The Core CPI, which excludes food and energy prices, rose 0.2% to match the increase seen in April as well as the consensus forecast.  On an annual basis, CPI growth slowed to 1.0% in May from 1.1% in April while Core CPI growth increased to 2.2% from 2.1%.

 

Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending June 11th showing the overall seasonally adjusted Market Composite Index fell 2.4%.  The seasonally adjusted Purchase Index increased 5.0%, while the Refinance Index decreased 1.0%.  Overall, the refinance portion of mortgage activity increased to 55.3% of total applications from 53.8%.  The adjustable-rate mortgage share of activity increased to 5.3% from 5.0% 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 3.83% to 3.79%, the lowest level since January 2015.

 

Furthermore, the National Association of Home Builders reported a slight improvement in their Housing Market Index with a seasonally adjusted level of 60 in June from May’s reading of 58.  This was the highest reading since January, and indicated builders expect favorable home building conditions to continue as the sales expectations index rose five points to 70, the highest level since last October.  The consensus forecast had called for a reading of 59.

 

Also, the Commerce Department reported Housing Starts fell in May by 0.3% to a 1.164 million annualized rate from a downwardly revised 1.167 million rate in April, but exceeded the consensus forecast of 1.150 million.  Although this was a strong housing report, it may be another sign the economy is beginning to stagnate along with other major sectors, and may be another reason St. Louis Fed President and FOMC voter James Bullard (a noted monetary policy “hawk”) has just slashed his U.S. economic growth projection.  Bullard is now saying that only one rate hike may be appropriate through 2018!  One has to wonder how Bullard can change from being one of the most hawkish FOMC members to one of the most dovish members in about a two week time span.

 

Additionally, Building Permits increased 0.7% in May to a 1.138 million annualized rate versus a consensus forecast of 1.150 million.  Because Building Permit applications trail Housing Starts, it is unlikely we will see additional gains in construction over the next month or two.  Construction of single-family houses increased by 0.3% to a 764,000 rate, the most in three months, but the often volatile multifamily home segment declined by 1.2% to a 400,000 unit rate after a 11.9% jump in April.

 

For the week, the FNMA 3.0% coupon bond gained 9.4 basis points to end at $102.97 while the 10-year Treasury yield fell 3.3 basis points to end at 1.611%.  Stocks ended the week with the Dow Jones Industrial Average losing 190.18 points to end at 17,675.16.  The NASDAQ Composite Index dropped 94.21 points to close at 4,800.34, and the S&P 500 Index fell 24.85 points to close at 2,071.22.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 1.42%, the NASDAQ Composite Index has lost 4.31%, and the S&P 500 Index has gained 1.32%.

This past week, the national average 30-year mortgage rate fell to 3.53% from 3.58% while the 15-year mortgage rate decreased to 2.84% from 2.88%.  The 5/1 ARM mortgage rate fell to 2.96% from 2.97%.  FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.58% from 3.60%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($103.00, -1.6 bp) traded within a 49 basis point range between a weekly intraday high of $103.33 and a weekly intraday low of $102.84 before closing at $102.97 on Friday.

 

Thursday’s candlestick was a “bearish” shooting star and this negative signal carried over to Friday with another similar candlestick showing a long upper shadow or wick indicating market weakness.  The 103.00 line failed to hold as the bond slipped just below this support level.  Further support is found at the 25-day moving average at $102.58.  Furthermore, the slow stochastic oscillator is showing a negative crossover sell signal from an extremely “overbought” level suggesting further weakness may lie ahead early next week.  Should the bond continue lower this coming week, we could see mortgage rates edge slightly higher.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

#1chart06202016

 

 

Economic Calendar – for the Week of June 20, 2016

 

The economic calendar focuses on the housing sector and durable goods orders this coming week.  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 22 07:00 MBA Mortgage Index 06/18 NA -2.4%
Jun 22 09:00 FHFA Housing Price Index Apr NA 0.7%
Jun 22 10:00 Existing Home Sales May 5.50M 5.45M
Jun 22 10:30 Crude Oil Inventories 06/18 NA -0.933M
Jun 23 08:30 Initial Jobless Claims 06/18 273,000 277,000
Jun 23 08:30 Continuing Jobless Claims 06/11 NA 2,157K
Jun 23 10:00 New Home Sales May 560,000 619,000
Jun 24 08:30 Durable Goods Orders May -0.6% 3.4%
Jun 24 08:30 Durable Goods Orders excluding transportation May 0.1% 0.4%
Jun 24 10:00 Final Univ. of Michigan Consumer Sentiment June 94.0 94.3

 

 

 

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

July 2016 26-27, (Tuesday-Wednesday) 7% Chance
September 2016 20-21, (Tuesday-Wednesday) * 24% Chance
November 2016 1-2, (Tuesday-Wednesday) 24% Chance
December 2016 20-21 (Tuesday-Wednesday)* 23% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 27% 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 major stock market indexes ended “mixed” for the week as global economic worries reappeared toward the end of the week to send the indexes lower from their best levels.

Global equity markets fell on Thursday following investor concerns about economic growth in the eurozone.

 

These concerns were triggered by comments made by European Central Bank President Mario Draghi who warned about “lasting economic consequences” after years of weak business output and productivity.  Draghi claimed if structural reforms were not imposed by governments “without undue delay”, the Eurozone economy was at risk of “suffering lasting economic damage.”

 

Investors also showed concern later in the week following a significant drop in European markets that was triggered by growing fears Great Britain would vote on June 23 to leave the European Union.  A decline in oil prices below $50 per barrel on Friday also seemed to weigh on sentiment after oil hit over $51 per barrel on Wednesday and Thursday.

 

However, bond prices improved modestly to send yields lower more in response to falling global yields rather than to the week’s scarce economic data.

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending June 4th showing the overall seasonally adjusted Market Composite Index rose 9.3%.  The seasonally adjusted Purchase Index increased 12.0%, while the Refinance Index increased 7.0%.

 

Overall, the refinance portion of mortgage activity decreased to 53.8% of total applications from 54.3%.  The adjustable-rate mortgage share of activity was unchanged at 5.0% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 3.85% to 3.83%.

 

For the week, the FNMA 3.0% coupon bond lost 1.6 basis points to end at $102.88 while the 10-year Treasury yield decreased 5.8 basis points to end at 1.6438%.  Stocks ended the week with the Dow Jones Industrial Average gaining 58.28 points to end at 17,865.34.  The NASDAQ Composite Index lost 47.97 points to close at 4,894.55, and the S&P 500 Index fell 3.06 points to close at 2,096.07.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 2.46%, the NASDAQ Composite Index has lost 2.31%, and the S&P 500 Index has gained 2.49%.

 

This past week, the national average 30-year mortgage rate fell to 3.58% from 3.62% while the 15-year mortgage rate decreased to 2.88% 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 ($102.88, -1.6 bp) traded within a narrower 44 basis point range between a weekly intraday high of $103.14 and a weekly intraday low of $102.70 before closing at $102.88 on Friday.

 

Thursday’s large red candlestick reflects a monthly FNMA 30-year 3.0% coupon bond rollover of minus 27 basis points that distorts the technical chart and must be disregarded.  Monthly rollovers usually occur on the 9th or 10th of each month.

 

The bond rebounded Friday on stock market weakness and approached the $103.00 resistance level before pulling back.  The doji candlestick formed Friday shows some market indecision among traders.  Support is found at the 25-day moving average at $102.53.  The slow stochastic oscillator continues to show the bond is “overbought” and will be susceptible to a pullback unless the stock market undergoes a correction.

 

This week coming week the economic calendar heats up with several economic releases that could have a meaningful impact on the bond market including the Federal Reserve’s latest interest rate decision and commentary on monetary policy on Wednesday June 15.  Disappointing economic news may propel bond prices higher to challenge overhead resistance at $103.00 and should this happen rates would remain low or improve slightly.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

chart#106132016

 

Economic Calendar – for the Week of June 13, 2016

 

The economic calendar broadens this coming week with a number of reports likely to 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 14 08:30 Export Prices excluding agriculture May NA 0.5%
Jun 14 08:30 Import Prices excluding oil May NA 0.1%
Jun 14 08:30 Retail Sales May 0.3% 1.3%
Jun 14 08:30 Retail Sales excluding automobiles May 0.4% 0.8%
Jun 14 10:00 Business Inventories Apr 0.2% 0.4%
Jun 15 07:00 MBA Mortgage Index 06/11 NA 9.3%
Jun 15 08:30 Producer Price Index (PPI) May 0.3% 0.2%
Jun 15 08:30 Core PPI May 0.1% 0.1%
Jun 15 08:30 NY Empire State Manufacturing Index Jun -4.7 -9.0
Jun 15 09:15 Capacity Utilization May -0.2% 0.7%
Jun 15 09:15 Industrial Production May 75.2% 75.4%
Jun 15 10:30 Crude Oil Inventories 06/11 NA -3.226M
Jun 15 14:00 FOMC Rate Decision Jun 0.37% 0.37%
Jun 15 16:00 Net Long-Term TIC Flows Apr NA $78.1B
Jun 16 08:30 Consumer Price Index (CPI) May 0.3% 0.4%
Jun 16 08:30 Core CPI May 0.2% 0.2%
Jun 16 08:30 Initial Jobless Claims 06/11 270,000 264,000
Jun 16 08:30 Continuing Jobless Claims 06/04 NA 2,095K
Jun 16 08:30 Philadelphia Fed Manufacturing Index Jun 1.2 -1.8
Jun 16 08:30 Current Account Balance Q1 -$125.0B -$125.3B
Jun 16 10:00 NAHB Housing Market Index Jun 59 58
Jun 17 08:30 Building Permits May 1,155K 1,172K

 

 

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

June 2016 14-15, (Tuesday-Wednesday)* 2% Chance
July 2016 26-27, (Tuesday-Wednesday) 21% Chance
September 2016 20-21, (Tuesday-Wednesday) * 35% Chance
November 2016 1-2, (Tuesday-Wednesday) 36% Chance
December 2016 20-21 (Tuesday-Wednesday)* 54% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 57% 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 major stock market indexes struggled during the week while the bond market performed well from mid-week on.  Corporate earnings and economic reports were mixed throughout the week and contributed to an increase in bond prices and lower yields as investors sought a safer refuge in lower risk assets.

 

In economic news, New Home Sales were reported softer than expected with a 1.5% decline in March from February to 511,000 annualized units while economists had been looking for a slightly higher reading of 521,000.  This decline isn’t quite as bad as it seems as February’s originally reported 512,000 in new home sales was revised higher to 519,000.  The Western Region led sales lower with a sharp 23.6% decline.  This region has experienced explosive housing growth and is prone to volatile swings in housing sales.  The median New Home Sales price dropped 1.8% from the year ago period to $288,000.

 

However, the National Association of Realtors reported some encouraging news for the housing sector with Pending Home Sales reaching their highest level in almost a year by rising 1.4% in March over February’s level.  The consensus forecast had been for a 0.3% increase.  The sales index rose to 110.5, the highest level since May 2015.  A reading of 100 is equal to the average level of contract activity during 2001.

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As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending April 22nd showing the overall seasonally adjusted Market Composite Index decreased 4.1%.  The seasonally adjusted Purchase Index fell 2.0%, while the Refinance Index decreased 5.0%.  Overall, the refinance portion of mortgage activity decreased to 54.4% of total applications from 55.4%.  The adjustable-rate mortgage share of activity increased to 5.2% from 5.0% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance increased from 3.83% to 3.85% with 0.35 points paid.

 

Elsewhere, Durable Goods Orders for March were uninspiring with an increase of only 0.8% versus a consensus forecast of 1.7% and would have been flat had it not been for higher defense spending.  Also, the advance estimate for 1st quarter Gross Domestic Product (GDP) was reported at a weak 0.5%.  Initial Jobless Claims rose by 9,000 for the week but remained among the lowest level on record for total claims, with the four-week average of claims at its lowest level in 42 years.

 

There were a couple of inflation measures reported during the week and both were rather tame.

Core PCE Prices, the Fed’s favorite inflation measurement, was reported at a small 0.1% gain month-over-month to match the consensus estimate.  Furthermore, the year-over-year number fell to 1.6% from 1.7% in a slightly deflationary move.  The Labor Department released another inflation measure, the Employment Cost Index (ECI) for the first quarter of 2016.  This broad measure of workers’ wages and benefits grew at a seasonally adjusted rate of 0.6% to match the consensus forecast.  On a year-over-year basis, total compensation increased 1.9% during the 1st quarter, slowing from the 2% annual gain recorded during each of the prior three quarters.

 

The bond market did not immediately respond to these tame inflation reports, but did favorably react with increased buying activity following the Fed’s FOMC meeting and policy statement on Wednesday.  The Fed left interest rates unchanged in a range between 0.25% and 0.50% as widely anticipated and the accompanying policy statement was nearly a carbon copy of the last one.  However, Wednesday’s policy statement removed all references to global economic risks, suggesting these risks are not strong enough to rule out a rate hike in June.  The FOMC statement noted “labor market conditions have improved further even as growth in economic activity appears to have slowed.”

For the week, the FNMA 3.0% coupon bond gained 40.7 basis points to end at $102.44 while the 10-year Treasury yield decreased 5.6 basis points to end at 1.835%.  Stocks ended the week with the Dow Jones Industrial Average losing 230.11 points to end at 17,773.64.  The NASDAQ Composite Index dropped 130.87 points to close at 4,775.36, and the S&P 500 Index declined 26.28 points to close at 2,065.30.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 1.96%, the NASDAQ Composite Index has lost 4.86%, and the S&P 500 Index has gained 1.03%.  This past week, the national average 30-year mortgage rate fell to 3.67% from 3.75% while the 15-year mortgage rate decreased to 2.95% from 3.02%.  The 5/1 ARM mortgage rate rose to 3.04% from 3.00%.  FHA 30-year rates fell to 3.25% from 3.35% and Jumbo 30-year rates decreased to 3.62% from 3.66%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.0% coupon bond ($102.44, +40.7 bp) traded within a slightly narrower 66 basis point range between a weekly intraday low of $101.89 and a weekly intraday high of 102.55 before closing at $102.45 on Friday.

 

The bond demonstrated greater volatility for the week by declining on Monday and Tuesday before staging a sharp rally on Wednesday through Friday.  The rally pushed the bond through multiple layers of resistance provided by the 50-day moving average at $102.25, the 23.6% Fibonacci retracement level at $102.36, and the 25-day moving average at $102.43.  The 50-day moving average now reverts to a primary support level.  The slow stochastic oscillator is trending higher from a new buy signal generated last Thursday and is far from “overbought,” so if the stock market continues to falter this coming week we could see bond prices improve and move past resistance to provide a slight improvement in mortgage rates.  The economic news this coming week, headlined by the April Employment Situation Report on Friday, could be a catalyst for a significant bond market move that is hopefully to the upside resulting in an improvement in mortgage rates.

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

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Economic Calendar – for the Week of May 02, 2016

 

The economic calendar this week features the April Employment Situation 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
May 02 10:00 ISM Index Apr 51.4 51.8
May 02 10:00 Construction Spending Mar 0.6% -0.5%
May 04 07:00 MBA Mortgage Index 04/30 NA -4.1%
May 04 08:15 ADP Employment Change Apr 196,000 200,000
May 04 08:30 Preliminary Productivity Qtr.1 -1.4% -2.2%
May 04 08:30 Preliminary Unit Labor Costs Qtr.1 2.6% 3.3%
May 04 08:30 Balance of Trade Mar -$41.4B -$47.10B
May 04 10:00 Factory Orders Mar 0.5% -1.7%
May 04 10:00 ISM Services Apr 54.5 54.5
May 04 10:30 Crude Oil Inventories 04/30 NA 1.99M
May 05 07:30 Challenger Job Cuts Apr NA 31.7%
May 05 08:30 Initial Jobless Claims 04/30 259,000 257,000
May 05 08:30 Continuing Jobless Claims 04/23 NA 2,130K
May 06 08:30 Nonfarm Payrolls Apr 207,000 215,000
May 06 08:30 Nonfarm Private Payrolls Apr 191,000 195,000
May 06 08:30 Unemployment Rate Apr 5.0% 5.0%
May 06 08:30 Hourly Earnings Apr 0.3% 0.3%
May 06 08:30 Average Workweek Apr 34.5 34.4
May 06 15:00 Consumer Credit Mar $18.0B $17.3B

 

 

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

June 2016 14-15, (Tuesday-Wednesday)* 11% Chance
July 2016 26-27, (Tuesday-Wednesday) 28% Chance
September 2016 20-21, (Tuesday-Wednesday) * 41% Chance
November 2016 1-2, (Tuesday-Wednesday) 44% Chance
December 2016 20-21 (Tuesday-Wednesday)* 60% Chance
February 2017 01/31-02/01 (Tuesday-Wednesday)* 62% 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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