Market Commentary

 

For the week of February 19, 2018

Last Week in Review

"Feeling hot hot hot." The Merrymen.  Inflation and Housing Starts heated up in January, but Retail Sales were on the chilly side. 

January Housing Starts jumped 9.7 percent from December to an annual rate of 1.326 million units, above expectations, per the Commerce Department. This was the highest level since October 2016 and up 7.3 percent from January 2017. Single-family starts, which account for the largest share of the market, rose 3.7 percent from December and are up 7.6 percent from January 2017. Multi-dwelling starts, which include five or more units, surged 19.7 percent from December. Housing Starts rose in the Northeast, South and West but declined in the Midwest.

Building Permits, a sign of future construction, rose 7.4 percent from December to an annual rate of 1.396 million units. The strong report could be a welcome sign for buyers struggling with low inventory around much of the country.

Consumer inflation also edged higher in January, with a key component spiking to a 12-month high! The Consumer Price Index (CPI) rose 0.5 percent in January, just above expectations due to higher gasoline prices, the Labor Department reported. The more closely watched Core CPI, which strips out volatile food and energy prices, rose 0.3 percent from December. This was the largest increase in a year, boosted by rising rents.

The Producer Price Index, which measures wholesale inflation, rose 0.4 percent in January, in line with expectations. Core PPI came in a bit hotter than anticipated

The increase in inflation has spooked both the Stock and Bond markets in recent weeks. Signs of inflation can hurt fixed investments like Mortgage Bonds and impact the home loan rates tied to them. The Fed, investors and anyone looking to purchase or refinance a home should keep a close eye on inflation news in the weeks and months ahead.

Retail Sales decreased 0.3 percent in January, while December's reading was revised downward to 0 percent from a 0.4 percent increase, per the Commerce Department. The key highlight was that consumer spending wasn't strong in recent months, and this could impact GDP expectations. 

Mortgage Bonds have struggled in recent weeks, though they are attempting to stabilize. Home loan rates have risen but remain near historic lows. 

Forecast for the Week

Housing news highlights an otherwise quiet economic calendar. The markets are closed Monday for Presidents Day.

  • Existing Home Sales will be released on Wednesday.
  • Look for weekly Initial Jobless Claims 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 have been trying to stabilize after their recent plunge. Home loan rates have risen but remain historically attractive.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Feb 16, 2018)


 

For the week of February 12, 2018

Last Week in Review

"I don't know why I go to extremes." Billy Joel. Extreme volatility in the markets was the norm in recent days, due in part to fears of inflation and higher rates. Plus, home prices continue to rise across the country. 

Data analytics firm CoreLogic reported that home prices nationwide, including distressed sales, rose 6.6 percent from December 2016 to December 2017. Prices also increased 0.5 percent from November to December. CoreLogic noted that rising incomes and consumer confidence have increased the number of prospective buyers. This increase in potential buyers, coupled with limited inventories of homes for sale on the market, continue to drive prices higher across the country. Looking ahead, CoreLogic forecasts that price gains may cool a bit, with a 4.3 percent gain expected from December 2017 to December 2018. 

Though there weren't any inflation reports in the latest week, inflation played a part in the volatility the markets experienced. The Jobs Report for January saw a higher-than-expected rise in wages, which came on the heels of the January FOMC meeting statement in which the Fed said that inflation could move higher in 2018. 

Inflation reduces the value of fixed investments like Mortgage Bonds, which means signs of inflation often hurt Mortgage Bonds and impact the home loan rates tied to them. Stocks also reacted negatively because inflation brings higher rates, and higher rates hurt corporate borrowing. Stocks even entered correction territory, as we saw a 10 percent decline from recent highs. 

At present, the annualized Core Personal Consumption Expenditures, the Fed's favorite inflation gauge, is still at a low 1.5 percent, below the Fed's target range of 2 percent. The Fed, and investors, will be watching the upcoming inflation reports closely to see if signs of an increase in inflation are present. 

The government briefly shutdown at midnight on Friday but re-opened several hours later after the House approved a spending bill that will fund the government until March 23.

Home loan rates rose in the latest week, reaching highs last seen in April 2014. However, rates still remain historically attractive.

Forecast for the Week

The second half of the week features key reports on inflation, housing and manufacturing.

  • Look for news on inflation with the Consumer Price Index on Wednesday and the Producer Price Index on Thursday.
  • The closely-watched Retail Sales report will also be delivered on Wednesday.
  • Housing data will be released on Thursday with the NAHB Housing Market Index, followed by Housing Starts and Building Permits on Friday.
  • Thursday also brings weekly Initial Jobless Claims and manufacturing news via the Philadelphia Fed Index and Empire State Index.
  • The Consumer Sentiment Index will be released 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 Bonds worsened in recent days. Home loan rates rose but remain historically attractive.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Feb 09, 2018)