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Lynette Vine

MARKET UPDATE

Retail Sales Disappoint
With the announcement at the beginning of the week of a Greek bailout deal, the focus returned to the economic data. The major retail sales and manufacturing data was weaker than expected, causing mortgage rates to end the week a little lower.
The Greek debt drama is not over, but its strong daily influence on global financial markets may be. After months of negotiations, Greece and its creditors have agreed to the framework of a badly needed bailout deal. Many steps remain, but the major hurdles have been overcome. The main issue remaining is whether the Greek government can successfully implement the unpopular reform measures required by creditors.
One of the best measures of U.S. economic activity is the monthly Retail Sales report.  After a large increase in May, continued improvement was forecast for June.  This did not happen. Instead of the expected increase of 0.5% from May, June retail sales, excluding volatile auto sales, declined slightly, and the figures from May were revised downward as well. Slower economic growth reduces inflationary pressures, which is favorable for mortgage rates.
Looking ahead, the only significant economic data next week will come from the housing sector. Existing Home Sales will be released on Wednesday and New Home Sales is scheduled for Friday. The next Fed meeting will take place on July 29.  In addition, investors will be watching to make sure there are no disruptions in the remaining steps in the Greek bailout deal.

 

 

Q1 GDP Surprise

It was another good week for mortgage rates.  Weaker than expected economic growth data and increased concerns about Iraq were favorable for mortgage rates.  These factors outweighed the negative impact of improving data in the housing sector and mortgage rates ended the week a little lower.

The biggest surprise this week took place when first quarter Gross Domestic Product (GPD), the broadcast measure of economic growth, was revised substantially lower from -1.0% to -2.9%.  This was the fastest rate of decline since the first quarter of 2009.  The news caused mortgage rates to move lower.

The improvement in the mortgage rates may have been even greater, but investors took into account that unusually bad winter weather was the main cause.  Consumers postponed shopping and businesses scaled back inventories.  Much of the missed economic activity during the first quarter was simply delayed and GDP growth is expected to rebound to around 3.5% during the second quarter.

The housing data released this week showed nice improvement.  May Existing Home Sales increased 5% from April, which was the largest monthly gain since August 2011.  Total inventory of existing homes available for sale rose 2% to 5.6 month supply.  May New Homes Sales jumped 19% from April to the highest level since May 2008.  The April Case-Shiller 20-city home price index showed that home prices were 11% higher than one year ago.

Next week, the important monthly Employment report will come out on Thursday due to the holiday on Friday.  As usual, this data on the number of jobs, the Unemployment Rate and wage inflation will be the most highly anticipated economic data of the month.  Before that, Pending Home Sales and Chicago PMI Manufacturing will be released on Monday.  ISM Manufacturing will come out on Tuesday, ADP Employment will be released on Wednesday, and ISM Services also will come out on Thursday.  Mortgage markets will be closed on Friday in observance of Independence Day.

INFLATION DRIVES RATES

Inflation concerns were the main influence on mortgage rates this week. A surprising jump in CPI caused mortgage rates to rise on Tuesday. The Fed downplayed the threat of high inflation on Wednesday, however, causing mortgage rates to decline. The net result was that mortgage rates finished the week a little lower.

The May Consumer Price Index (CPI), one of the most widely watched inflation indicators, was 2.1% higher than one year ago. Core CPI, which excludes food and energy, was 2.0% higher, up from an annual rate of 1.6% just two months ago. Core CPI has now reached the Fed’s stated target level for core inflation of 2.0%. Another inflation indicator released this week, the prices
paid component of the Philly Fed report, also showed a sharp increase.  Since expectations for future inflation are a primary factor in setting mortgage rates, this data was unfavorable for rates.

The impact of the negative news did not last long, however. While Wednesday’s highly anticipated Fed statement was very similar to the prior one, Fed officials indicated little concern about inflation. Comments from Fed Chair Yellen suggested that current readings reflected normal volatility in monthly inflation data and that the recent uptick did not change the Fed’s long-term forecast.

market update

In addition, Fed officials place more weight on a separate monthly inflation report, the Core PCE price index. Core PCE measures a different basket of goods than Core CPI, and Core PCE recently has provided readings a good deal lower than Core CPI. In short, looking at Core PCE, inflation remains well below the Fed’s 2.0% target, giving them comfort in maintaining an accommodative monetary policy. Not all investors are as confident as the Fed that inflation will remain low, though, and this will be an important area to watch in coming months.

With the current focus on inflation, Thursday’s report on the May Core PCE price index will be significant. Investors also will be watching the housing data next week. Existing Home Sales will be released on Monday and New Home Sales will come out on Tuesday. Durable Orders, an important indicator of economic activity, will be released on Wednesday. There will be Treasury
auctions on Tuesday, Wednesday, and Thursday. Outside the US, the situation in Iraq will remain the primary focus.

market update 2

 

SOLID JOB GAINS

Ahead of two major economic events, mortgage rates moved higher early in the week.  When there were few surprises in either the Employment report or the ECB announcement, though, mortgage rates recovered some of their losses and ended the week just a little higher. This was the first weekly increase in rates in six weeks.

After slowing over the winter due to unusually severe weather, the economy has seen job gains above 200K over the last several months. This was the first time in 14 years that job gains exceeded 200K for four straight months. Against a consensus forecast of 210K, the economy added 217K jobs in May.

The Unemployment Rate was flat at 6.3%. Average Hourly Earnings, a proxy for wage growth, were a moderate 2.1% higher than one year ago. The May Employment data was right on target with the forecasts in nearly every area.  The European Central Bank (ECB) took a middle of the road approach in easing its monetary policy. After weeks of hinting that further monetary stimulus is
needed to boost economic growth, ECB officials announced a rate cut on Thursday. They also will implement measures to encourage bank lending.  Investors were most interested in hearing about a bond purchase program, but ECB President Draghi essentially just suggested that they were holding this key option in reserve to use in the future if necessary. The ECB stimulus did
cause bond yields around the world to move a little lower. Next week, the biggest report will be Retail Sales, which will be released on Thursday. Retail Sales account for about 70% of economic activity. Before that, the JOLTS report, measuring job openings and labor turnover rates, will come out on Tuesday. The Producer Price Index (PPI) focuses on the increase
in prices of “intermediate” goods used by companies to produce finished products and will come out on Friday. Consumer Sentiment and Import Prices will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

JOB GAINS SURGE

The major economic date released this week continued to show an event better than expected bounce back from a weather related slowdown during the winter.  Despite the economic strength, though, there were few signs of inflationary pressures, helping mortgage rates end the week lower, near the best levels of the year.

The economy added 288k jobs in April, far more than expected, and the largest monthly increase since January 2012.  Average job gains over the last three months were a healthy 238K up, from 167K over the prior three months.

The Unemployment Rate unexpectedly dropped from 6.7% to 6.3%, the lowest level since September 2008.  Looking below the surface, though, a large part of the decline in the Unemployment Rate was due to people leaving the labor force.  Average Hourly Earnings, a proxy for wage growth, were flat, limiting the upward pressure on inflation.

The impact of unusually severe winter weather appears to have taken an even bigger bite out of economic activity during the first three months of this year than what had been expected.  The initial reading for first quarter Gross Domestic Product, the broadest measure of economic growth, was just 0.1%, down from 2.6% during the fourth quarter.  This report often receives large revisions, though, as more data is collected.

Next week, ISM Services will be released on Monday. The JOLTS report, measuring job openings and labor turnover, will come out on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. A meeting of the European Central Bank (ECB) on Thursday also may influence US markets. The ECB is considering a bond purchase program similar to the one in the US that is currently being wound down.

BIG WEEK AHEAD !!!

Although Today the 10 year note closed at 2.67 initiating lower mortgage rates, the   last two weeks have been relatively light ones for economic news. Mortgage   rates moved a little higher late last week ahead of Easter weekend, and they reversed that increase during this week. Headlines from Ukraine added  a short burst of volatility but had little lasting impact.
Overall, the economic data released this month has been better than expected. After slowing due to unusually severe winter weather, most sectors of the economy appear to be picking up. The economy added jobs at a healthy pace. Retail Sales and manufacturing posted solid gains. This week, Consumer Sentiment jumped to the highest level since July of last year.
Despite the good results this month, however, investors require more evidence that the improvement is sustainable before they will raise their long-term outlook for economic growth. The steady economic outlook over the last several months has helped keep mortgage rates in a fairly narrow range.
One sector which has lagged in its pace of improvement is housing. March Existing Home Sales were roughly the same level as February, which was very close to the consensus forecast. A tight supply of inventory in many regions was one factor holding back sales. Offering potential for future activity, the total inventory of existing homes available for sale rose 5% in March. March New Home Sales showed a sharp drop from February, but this data is extremely volatile month to month.
Next week will be packed with major economic events. The next Fed meeting will take place on Wednesday. Investors expect the Fed to continue scaling back its bond purchases, but comments about the strength of the economy or the timing of the first fed funds rate hike could have a large impact. First quarter Gross Domestic Product (GDP), the broadest measure of economic
growth, will be released the same day. The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Pending Home Sales, ISM Manufacturing, Construction Spending, Core PCE inflation, and ISM Services will round out a crowded schedule.

SHIFT FROM STOCKS TO BONDS

The stock market was the biggest influence on mortgage rates this week, as investors shifted assets from stocks to bonds. The Fed Minutes also were favorable for mortgage rates, and rates ended the week lower, near the lowest levels of the year.

Beginning with the Jobs report last week, investors became more bearish about the stock market, and investors grew more concerned this week that upcoming earnings releases will be weak. As a result, investors have reduced their positions in stocks, causing the Dow stock index to fall over 500 points from last week’s record high.

Some of the proceeds from the stock sales were used to purchase bonds, including mortgage-backed securities (MBS). MBS prices increased from the added demand, leading to an improvement in mortgage rates.

Wednesday’s release of the FOMC Minutes from the March 19 Fed meeting also helped mortgage rates. In the Minutes, some Fed officials expressed concern that inflation would remain below the Fed’s target level of 2.0% for years. While this may be bad from the Fed’s point of view, low inflation is positive for mortgage rates.

Next week, Retail Sales will be released on Monday. Retail Sales account for about 70% of economic activity. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Tuesday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts and Industrial Production will come out on Wednesday. Philly Fed and Empire State will round out the schedule.

FUTURE INFLATION

It was a very quiet week for mortgage rates. There were few surprises in the economic data. Talk of easing by the European Central Bank (ECB) was positive for US mortgage rates, helping rates end the week a little lower.

Mortgage rates are primarily set based on expectations for future inflation. The Fed has an inflation target of 2.0%. Most economists think that inflation rates well above or well below this level could have negative consequences for the economy. Recent readings for core inflation have been holding steady, below 2.0%. The Core PCE price index released this week revealed that core inflation was just 1.1% over the past year. Last week’s widely followed Core Consumer Price Index (CPI) showed an annual rate of 1.6%.

The majority view on the Fed, though, is that inflation in the US will gradually climb due to an improving economy and a tighter labor market. To prevent inflation from rising too far, the Fed is on track to end its bond purchase program later this year, and Fed Chair Yellen has indicated that the first fed funds rate hike is expected to take place next year.

The situation in Europe is very different. The economic recovery has been much weaker there. Recent inflation readings have been low and appear to be heading even lower. Traditionally, the ECB is known as a stricter inflation fighter than the Fed, meaning that it is more reluctant to add stimulus. Given current economic conditions, though, officials across the euro zone have suggested that the ECB may cut rates or begin to buy bonds to help stimulate the economy and increase inflation. Increased expectations for additional ECB stimulus helped push bond yields lower around the world, including US mortgage-backed securities (MBS).

There will be some big economic events in both the US and Europe next week. A key report on inflation in the euro zone will come out on Monday. The next ECB meeting will take place on Thursday. Given the wide range of investor expectations, the ECB decision could have an impact on US mortgage rates. In the US, the important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Manufacturing, Construction Spending, ADP Employment, and ISM Services will be watched by investors.

 

YELLEN SUPRISES INVESTORS !

A short comment by Fed Chair Janet Yellen caught investors off guard on Wednesday, and the reaction was not good for mortgage rates. In addition, a reduction in tensions in Ukraine caused investors to return to riskier assets, hurting safer assets such as mortgage-backed securities (MBS). As a result, mortgage rates ended the week higher.

As widely expected, the Fed scaled back its bond purchases by $10 billion to $55 billion per month. According to Yellen, if the Fed’s economic outlook does not change significantly, the bond purchases are expected to end in the fall of this year. Fed officials have long maintained that they expect that the fed funds rate, the Fed’s primary tool for monetary stimulus, will remain near zero
for a “considerable period” of time following the end of the Fed’s bond purchases. The big surprise came during Yellen’s first press conference as Fed Chair, when she defined the meaning of a “considerable period” as about six months. This would place the first fed funds rate hike in the spring of next year. Before Yellen’s comments, the market consensus was for the first rate hike to take place near the end of next year.  While mortgage rates are not directly tied to the fed funds rate, the economic strength implied by the expected timing of the first fed funds rate hike was unfavorable for bonds of all maturities.

The housing reports released this week revealed that conditions in February were little changed from January. February Existing Home Sales decreased slightly from January. Total inventory of existing homes available for sale rose 6% to a 5.2-month supply.

February Housing Starts declined slightly, while Building Permits increased 8%. The March NAHB Housing Index showed that home builder confidence increased slightly. It is widely believed that housing activity over the last couple of months has been depressed by the unusually severe winter weather, which means the pent up demand could be a positive in coming months.

There is a wide range of economic data for investors to consider next week. The primary reports will be New Home Sales, Durable Orders, Pending Home Sales, and Core PCE inflation, the Fed’s preferred inflation indicator. Personal Income, Consumer Sentiment, and Consumer Confidence will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Changes in the situation in Ukraine also could influence mortgage rates.

 

 

 

 

UKRAINE AND CHINA

Tensions in Ukraine flared up again this week, causing investors to shift assets from stocks to the relative safety of bonds. Weaker than expected economic data in China also favored bonds over stocks, while the US economic data was
roughly neutral. As a result, mortgage rates ended the week lower.

The most significant US economic report released this week, Retail Sales, contained some good news and some bad news. On the positive side, the results for February were stronger than expected. Unfortunately, the figures for January were revised lower.

Overall, this left the data over the two-month period a little weaker than expected.  Given the offsetting effects of the solid headline number and the downward revisions, combined with weather related distortions, the report caused no change in the economic outlook and had little impact on mortgage rates.

There was a lot of talk in the mortgage industry this week about a proposal out of the Senate Banking Committee that would replace Fannie Mae and Freddie Mac.  Together Fannie and Freddie purchase or insure the majority of fixed-rate mortgages, so any changes to their structure would have enormous implications for mortgage lending. In the proposal, a new government entity would take over many of the functions of Fannie and Freddie, while some of the default risk would be shifted to private insurers. Both political parties support a reduction in the risk to taxpayers, but beyond that opinions vary widely about the appropriate role of government in the housing market.  As a result, this proposal is viewed as a starting point for a long
political debate, and the implementation of major reform of Fannie and Freddie is projected by most experts to be many years away.

The biggest upcoming event may be an important vote in Ukraine’s Crimean region on Sunday. If Crimea votes to secede from Ukraine, investors will be concerned that it could lead to an escalation in the tensions between Russia and the US / Europe. In the US, the next Fed meeting will take place on Wednesday.  Investors expect the Fed to proceed with another cut in its bond
purchase program. Industrial Production will be released on Monday. Core CPI inflation and Housing Starts will come out on Tuesday. Existing Home Sales and Philly Fed will be released on Thursday.