Market Commentary

 

For the week of April 16, 2018

Last Week in Review

"You're gonna hear me roar." Katy Perry.  March may have come in like a lion, but consumer inflation was more of a whimper than a roar last month.

The Consumer Price Index (CPI) fell 0.1 percent in March, below the expected gain of 0.1 percent, the Bureau of Labor Statistics reported. Lower gas prices at the pump were to blame for the first decline in 10 months. When stripping out volatile food and energy prices, Core CPI was in line with expectations at 0.2 percent. However, Core CPI rose 2.1 percent on an annual basis, a 12-month high.

Inflation at the wholesale level was a bit hotter than expected, as the Producer Price Index (PPI) and Core PPI both rose 0.3 percent in March, versus the 0.2 percent expected.

Though inflation remained tame in March, the minutes from the Fed's March meeting showed that the Fed still expects inflation to rise this year. Inflation hurts the value of fixed investments like Mortgage Bonds, meaning a rise in inflation can cause Bonds to worsen. Home loan rates are tied to Mortgage Bonds, so a rise in inflation can cause rates to rise as well.  

Geopolitical headlines also garnered attention in the latest week, as heightened tensions over Syria between the U.S. and Russia helped Bonds benefit temporarily from safe-haven trading. Earnings season also began and there is a growing sense that corporate earnings for the first quarter could be strong due to the tax cuts. This could benefit Stocks at the expense of Mortgage Bonds and home loan rates. 

For now, Mortgage Bonds are trapped in a sideways trading pattern that began in mid-February. Home loan rates remain just above all-time lows. 

Forecast for the Week

Retail sales, housing news and manufacturing data highlight the week's busy economic calendar.

  • Economic data kicks off on Monday with the closely watched Retail Sales report.
  • Also on Monday, look for housing news via the NAHB Housing Market IndexHousing Starts and Building Permits follow on Tuesday.
  • Manufacturing numbers will be delivered Monday via the Empire State Index. Look for the Philadelphia Fed Index Thursday.
  • As usual, weekly Initial Jobless Claims will be reported on Thursday.

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 declined in recent days though, overall, they remain in a sideways trading pattern. Home loan rates are still historically attractive. 

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 13, 2018)


 

For the week of April 9, 2018

Last Week in Review

"Don't you shiver, shiver, shiver." Coldplay. Job growth slowed in March due in part to harsh weather across much of the country, but there's more to this story.  

Just 103,000 jobs were created in March, much lower than the 175,000 expected, the Bureau of Labor Statistics reported. February's report was revised higher to 326,000 new jobs from 313,000, while January was revised lower to 176,000 from 239,000. The Unemployment Rate was unchanged at 4.1 percent. 

Average hourly earnings came in at 0.3 percent, higher than expectations. Annual wage growth ticked up to 2.7 percent in March from 2.6 percent for the 12 months ending in February. The first quarter of 2018 also saw higher job growth than the same period last year, as an average of 202,000 new jobs were created in the first three months of 2018 compared to 177,000 in 2017. Overall, despite the disappointing headline number, there was some positive news in the report.

In housing news, home prices continued to push higher in February due in part to the ongoing theme of limited housing supply on the markets. Research firm CoreLogic reported that home prices, including distressed sales, rose 6.7 percent from February 2017 to February 2018 and were up 1 percent from January to February. Looking ahead, CoreLogic forecasts that home prices will rise 4.7 percent from February 2018 to February 2019.  

Extreme volatility continued in the markets this week, as uncertainty regarding tariffs and a trade war with China caused wild swings in Stocks. Mortgage Bonds were stuck in a sideways trading pattern, while home loan rates remain historically attractive.  

Forecast for the Week

Inflation news highlights an otherwise quiet economic calendar.

  • Wholesale inflation data via the Producer Price Index will be released on Tuesday. The more closely-watched Consumer Price Index follows on Wednesday.
  • On Thursday, weekly Initial Jobless Claims will be delivered.
  • On Friday, look for the Consumer Sentiment Index.

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 been holding steady. Home loan rates remain near historic lows.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 06, 2018)