Mortgage Market & Rate Update

Mar 6, 2017

The major stock market indexes continued moving higher to record new all-time highs for the fourth consecutive week as investor sentiment was boosted following President Trump’s highly anticipated and successful first speech before both houses of Congress.  Bonds did not fare as well with prices falling and yields rising in response to the week’s positive economic data and President Trump’s speech proposing increased infrastructure spending and greater economic stimulus.

 

In economic news, a robust reading on manufacturing activity improved investor sentiment.  The Institute for Supply Management’s Purchasing Managers’ Index recorded its highest level since late 2014 with the New Orders Index reaching its highest level in almost four years.  Moreover, weekly Initial Jobless Claims fell to 223,000, the lowest level in 43 years.  On Friday, a speech by Fed Chair Janet Yellen made it fairly certain the central bank will raise interest rates at their next meeting on March 15.  Yellen stated “we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect. Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”  The two-year Treasury yield spiraled to its highest level in nearly 10 years following Yellen’s speech, but it didn’t seem to have much impact on longer-dated Treasury yields as these had already risen earlier in the week.

 

This past week in housing the National Association of Realtors (NAR) reported their Pending Home Sales Index, based on contract signings of previously owned homes, unexpectedly fell 2.8% to 106.4 in January, led by a shortage of housing inventory in the West and Midwest regions.  Furthermore, the December Pending Sales Index was revised lower from 1.6% to 0.8% to a value of 109.5.  Although this was the lowest reading since January 2016, the Index is now 0.4% higher since then.  NAR chief economist Lawrence Yun remarked “The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay.”

Mortgage application volume declined during the week ending February 24.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose by 5.8%.  The seasonally adjusted Purchase Index advanced 7.0% from the prior week, while the Refinance Index increased 5.0%.  Overall, the refinance portion of mortgage activity decreased to 45.1% of total applications from 46.2% from the prior week, the lowest activity since June 2009.  The adjustable-rate mortgage share of activity remained unchanged at 7.3% 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 4.36% to 4.30% with points increasing to 0.38 from 0.35.

 

For the week, the FNMA 3.5% coupon bond dropped 90.6 basis points to close at $101.88 while the 10-year Treasury yield increased 16.64 basis points to end at 2.4816%.  Stocks ended the week higher with the major indexes continuing to set new record all-time highs on Wednesday.  The Dow Jones Industrial Average gained 183.95 points to end at 21,005.71.  The NASDAQ Composite Index rose 25.44 points to close at 5,870.75 and the S&P 500 Index advanced 15.78 points to close at 2,383.12.  Year to date, the Dow Jones Industrial Average has gained 6.29%, the NASDAQ Composite Index has advanced 9.06%, and the S&P 500 Index has gained 6.44%.

 

This past week, the national average 30-year mortgage rate rose to 4.25% from 4.12%; the 15-year mortgage rate increased to 3.45% from 3.33%; the 5/1 ARM mortgage rate rose to 3.10% from 3.01%; and the FHA 30-year rate increased to 3.85% from 3.75%.  Jumbo 30-year rates rose from 4.25% to 4.39%.

 

 

Economic Calendar – for the Week of March 6, 2017

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
Mar 06 10:00 Factory Orders Jan 1.0% 1.3%
Mar 07 08:30 Balance of Trade Jan -$48.5B -$44.3B
Mar 07 15:00 Consumer Credit Jan $17.0B $14.2B
Mar 08 07:00 MBA Mortgage Index 03/04 NA 5.8%
Mar 08 08:15 ADP Employment Change Feb 180,000 246,000
Mar 08 08:30 Revised Productivity Q4 1.5% 1.3%
Mar 08 08:30 Revised Unit Labor Costs Q4 1.6% 1.7%
Mar 08 10:00 Wholesale Inventories Jan -0.1% 1.0%
Mar 08 10:30 Crude Oil Inventories 03/04 NA +1.5M
Mar 09 07:30 Challenger Job Cuts Feb NA -38.8%
Mar 09 08:30 Export Prices excluding agriculture Feb NA 0.1%
Mar 09 08:30 Import Prices excluding oil Feb NA -0.2%
Mar 09 08:30 Initial Jobless Claims 03/04 240,000 223,000
Mar 09 08:30 Continuing Jobless Claims 2/25 NA 2,066K
Mar 10 08:30 Nonfarm Payrolls Feb 188,000 227,000
Mar 10 08:30 Nonfarm Private Payrolls Feb 185,000 237,000
Mar 10 08:30 Unemployment Rate Feb 4.7% 4.8%
Mar 10 08:30 Average Hourly Earnings Feb 0.2% 0.1%
Mar 10 08:30 Average Workweek Feb 34.4 34.4
Mar 10 14:00 Treasury Budget Feb NA -$192.6B

 

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

 

The FNMA 30-year 3.5% coupon bond ($101.88, -90.6 bp) traded within a wider 117 basis point range between a weekly intraday high of $102.70 on Monday and a weekly intraday low of $101.53 on Friday before closing the week at $101.88.  The chart shows the bond failed to continue higher through overhead resistance, and instead pivoted lower as stocks continued their historic run higher while being extremely overbought technically.

 

The bond fell through several layers of support during the week until bouncing higher off of support found at $101.69 on Friday.  In fact, Friday’s action resulted in a small engulfing lines candlestick pattern, a buy signal suggesting higher prices in the short-term.  Overhead technical resistance is now found at the 76.4% Fibonacci retracement level at $102.07.

 

The slow stochastic oscillator shows bonds are becoming “oversold” suggesting bond prices could soon continue to move higher.  Meanwhile, the stock market remains extremely “overbought” with more pronounced sell signals being generated by numerous momentum indicators.  Although the stock market has probably already priced in the next rate hike by the Federal Reserve, as the Fed’s next policy meeting on March 15 approaches, investors may get nervous and begin to sell positions to lock in some of their profits.  Should this scenario take place, we may see a slight improvement in mortgage rates as bond prices improve

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