Market Commentary

 

For the week of November 13, 2017

Last Week in Review

"A little dancing and some sentiment to put your mind at ease." Lou Reed.  Home prices continued to surge, and consumers have happy feet over employment and wage prospects

Data analytics firm CoreLogic reported that home prices nationwide, including distressed sales, surged by 7 percent in September 2017 compared to September 2016. Month over month, sales were up 0.9 percent in September from August. Low inventories continue to be the catalyst driving higher home prices. Looking ahead, prices are expected to rise 4.7 percent from September 2017 to September 2018.

Although the Consumer Sentiment Index declined slightly in early November, it remained at its second highest level since January with a preliminary reading of 97.8, per the University of Michigan report. An improving labor market was spontaneously mentioned by a record number of consumers, and anticipated wage gains recorded their highest two-month level in a decade. These favorable trends were countered by expectations that inflation and interest rates will increase during the year ahead. 

In a week light on economic data, headlines were dominated by rising tensions in the Middle East, which pushed oil prices to two-year highs, and tax reform proposals out of Washington, which kept investors on guard. 

Record-high Stock prices weighed on Bond prices throughout the week, though home loan rates remained just above all-time lows.

Forecast for the Week

A deluge of economic data will vie for the spotlight.

  • Inflation data from the Producer Price Index and Consumer Price Index will be released on Tuesday and Wednesday, respectively.
  • The closely watched Retail Sales report also will be delivered on Wednesday.
  • Regional manufacturing numbers from the Empire State Index will be released on Wednesday followed by the Philadelphia Fed Index on Thursday.
  • As usual, weekly Initial Jobless Claims will be released on Thursday.
  • Finally, Building Permits and Housing Starts round out the week on Friday.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve. In contrast, strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond on which home loan rates are based.

When you see these Bond prices moving higher, it means home loan rates are improving. When Bond prices are moving lower, home loan rates are getting worse.    

To go one step further, a red "candle" means that MBS worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes are on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning. 

As you can see in the chart below, Mortgage Bond prices were no stranger to volatility recently

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Nov 10, 2017)


 

For the week of November 6, 2017

Last Week in Review

"After the storm comes the sunshine." Marty Robbins. Following September's storm-damaged job data, October job growth was a ray of sunshine.. 

Total Non-farm Payrolls rose by 261,000 new jobs in October, the Labor Department reported. The Unemployment Rate edged down to 4.1 percent, its lowest level since 2006. Data for August and September was revised higher by a total of 90,000 new jobs. Average hourly earnings were flat. Overall, the report was positive heading into the holiday shopping season. More people working equals more consumer spending, which boosts the economy.

Subdued inflation was on the minds of Federal Open Market Committee (FOMC) members when they met October 31 and November 1. Core Personal Consumption Expenditures (PCE), the Fed's favorite inflation gauge which strips out volatile food and energy prices, remained at 0.1 percent in September. Year over year, Core PCE was unchanged at 1.3 percent, well below the Fed's target of 2 percent. Continued low inflation has benefited fixed assets like Mortgage Bonds, and the home loan rates tied to them.

As expected, the FOMC left the benchmark Fed Funds Rate unchanged. This is the rate at which banks lend to one another overnight. The Fed's monetary policy statement noted the labor market has continued to strengthen and that economic activity has risen despite hurricane-related issues. Also, President Trump nominated Fed Governor Jerome Powell as the next Fed Chair to replace Janet Yellen in February. Powell is seen as somewhat dovish and aligned with current Fed Chair Yellen when it comes to interest rate policy, so his nomination likely will not be a major disruption to the markets

In housing news, home price gains remained solid in August. The S&P/Case-Shiller 20-City Home Price Index rose 5.9 percent when compared to August 2016.

Finally, home loan rates remain just above all-time lows despite recent Stock market rallies.

Forecast for the Week

Just two releases dot the economic calendar at week's end.

  • Economic data releases begin Thursday with the usual weekly Initial Jobless Claims.
  • The Consumer Sentiment Index is scheduled for Friday.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve. In contrast, strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond on which home loan rates are based. 

When you see these Bond prices moving higher, it means home loan rates are improving. When Bond prices are moving lower, home loan rates are getting worse. 

To go one step further, a red "candle" means that MBS worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes are on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.

As you can see in the chart below, Mortgage Bonds have regained ground recently following the rally in Stock markets.

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Nov 03, 2017)