Jan 3, 2017

Weekly Review

 

The major stock market indexes posted moderate losses for the week and the psychological milestone of 20,000 for the Dow Jones Industrial Average remained elusive.  The indexes recorded the majority of their losses on Wednesday with the S&P 500 Index charting its largest drop since last October.  The selling in stocks was likely due to large institutional investors such as pension funds rebalancing their portfolios and locking in equity gains realized since the election.

 

Meanwhile, bond prices rose and yields fell following a surprisingly strong and robust $34 billion 5-year Treasury note auction that saw a high yield of 2.057% with a strong bid-to-cover ratio 2.72.  Indirect bidders (primarily foreign central banks) snapped up 71.4% of this supply while direct bidders (bond dealers, hedge funds, pension funds, mutual funds, insurers, banks, and individuals) bought 4.1% of the issue.  Bond prices also improved on news of an unexpected decline in Pending Home Sales.

 

Wednesday, the National Association of Realtors reported their Pending Home Sales Index fell to a 10-month low during November, falling 2.5% to 107.3.  Analysts had forecast the Index to increase 0.5% for the month.  The Index was also 0.4% lower than in November 2015.  This might be a sign that rising mortgage rates coupled with a shortage of home inventory available for sale could be weighing on the housing market.

 

However, home prices continue to remain strong.  According to the latest report from S&P CoreLogic Case-Shiller, home prices reached a new high, rising 5.6% in October.  The S&P/Case-Shiller U.S. National Home Price Index was also 5.6% higher in October from the prior year.  The Case-Shiller 20-City Composite Home Price Index increased 5.1% in October from the same time a year ago.

 

For the week, the FNMA 3.5% coupon bond gained 89.1 basis points to end at $102.42 while the 10-year Treasury yield fell 9.66 basis points to end at 2.446%.  Stocks ended the week lower with the Dow Jones Industrial Average falling 171.21 points to end at 19,762.60.  The NASDAQ Composite Index dropped 79.57 points to close at 5,383.12, and the S&P 500 Index lost 24.96 points to close at 2,238.83.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average (DJIA) has gained 11.83%, the NASDAQ Composite Index has added 6.98%, and the S&P 500 Index has advanced 8.70%.  When including dividends, the DJIA gained 13.4%, the NASDAQ Composite gained 7.5% and the S&P 500 gained 9.5% for the year.

 

This past week, the national average 30-year mortgage rate decreased to 4.21% from 4.33% while the 15-year mortgage rate decreased to 3.40% from 3.51%.  The 5/1 ARM mortgage rate fell to 3.05% from 3.15%.  FHA 30-year rates decreased to 3.75% from 3.85% and Jumbo 30-year rates decreased to 4.23% from 4.35%.

 

Economic Calendar – for the Week of December 26, 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
Jan 03 10:00 Construction Spending Nov 0.5% 0.5%
Jan 03 10:00 ISM Index Dec 53.6 53.2
Jan 04 07:00 MBA Mortgage Applications Index 12/31 NA 2.5%
Jan 04 14:00 FOMC Minutes Dec NA NA
Jan 05 07:30 Challenger Job Cuts Dec NA -13.0%
Jan 05 08:15 ADP Employment Change Dec 170,000 216,000
Jan 05 08:30 Initial Jobless Claims 12/31 265,000 265,000
Jan 05 08:30 Continuing Jobless Claims 12/24 NA 2,102K
Jan 05 10:00 ISM Services Index Dec 56.6 57.2
Jan 05 11:00 Crude Oil Inventories 12/30 NA 0.600M
Jan 06 08:30 Nonfarm Payrolls Dec 175,000 178,000
Jan 06 08:30 Nonfarm Private Payrolls Dec 170,000 156,000
Jan 06 08:30 Unemployment Rate Dec 4.7% 4.6%
Jan 06 08:30 Hourly Earnings Dec 0.3% -0.1%
Jan 06 08:30 Average Workweek Dec 34.4 34.4
Jan 06 08:30 Trade Balance Nov -$42.2B -$42.6B
Jan 06 10:00 Factory Orders Nov -2.1% 2.7%

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

 

Bond prices shot higher and broke above two levels of resistance during the week.  The FNMA 30-year 3.5% coupon bond ($102.42, +89.1 basis points) traded within a wider 120 basis point range between a weekly intraday low of $101.30 on Tuesday and a weekly intraday high of $102.50 on Friday before closing the week at $102.42.  Trading volumes will get back toward normal levels during this coming week, and coupled with major economic news headlined by December’s Employment Situation Summary, we could see an increase in market volatility.  The chart is showing the bond is not yet “overbought” while in a favorable upward trend, so we could see a continuation higher toward the next resistance level at the 61.8% Fibonacci retracement level at $102.79.  As a result, we should see slightly lower mortgage rates in the coming week.

 

 

 

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