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

 

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

 

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

 

Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 28 showing the overall seasonally adjusted Market Composite Index fell 1.2%.  The seasonally adjusted Purchase Index dropped 0.4% from the prior week, while the Refinance Index decreased 2.0%.  Overall, the refinance portion of mortgage activity was unchanged at 62.7% of total.  The adjustable-rate mortgage share of activity accounted for 4.4% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased from 3.71% to 3.75% with points decreasing to 0.36 from 0.37.

 

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

 

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

 

Economic Calendar – for the Week of November 7, 2016

 

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

 

Date Time

ET

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

 

Mortgage Rate Forecast with Chart

 

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

 

 

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

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

chartt110720161

 

 

 

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

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

 

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

 

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

 

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

 

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

10312016chart1

 

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

10312016chart2

As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 21 showing the overall seasonally adjusted Market Composite Index fell 4.1%.  The seasonally adjusted Purchase Index dropped 7.0% from the prior week, while the Refinance Index decreased 2.0%.  Overall, the refinance portion of mortgage activity increased to 62.7% of total applications from 61.5% in the prior week.  The adjustable-rate mortgage share of activity accounted for 4.2% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased from 3.73% to 3.71% with points increasing to 0.37 from 0.36.

 

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

 

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

 

Economic Calendar – for the Week of October 31, 2016

 

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

 

Date Time

ET

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

 

Mortgage Rate Forecast with Chart

 

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

 

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

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

10312016chart3

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Weekly Review

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

201610241

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

201610242

 

As far as mortgages are concerned, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending October 14th showing the overall seasonally adjusted Market Composite Index increased 0.6%.  The seasonally adjusted Purchase Index rose 3.0% from the prior week, while the Refinance Index decreased 1.0%.  Overall, the refinance portion of mortgage activity decreased to 61.5% of total applications from 62.4% in the prior week.  The adjustable-rate mortgage share of activity accounted for 4.1% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased from 3.68% to 3.73% with points increasing to 0.36 from 0.35.

 

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

 

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

 

Economic Calendar – for the Week of October 24, 2016

 

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

 

Date Time

ET

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

 

 

Mortgage Rate Forecast with Chart

 

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

 

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

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

201610243

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Economic Calendar – for the Week of September 19, 2016

 

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

 

Date Time

ET

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

 

 

 

 

 

 

Mortgage Rate Forecast with Chart

 

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

 

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

 

Chart:  FNMA 30-Year 3.0% Coupon Bond

 chart109192016

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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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