Market Commentary

 

For the week of March 20, 2017

Last Week in Review

"Just simple truth and harmony." Glen Campbell. Federal Reserve Chair Janet Yellen had one simple truth that was like music to Stock and Bond markets: "The simple message is the economy is doing well." 

When the Fed expectedly raised its benchmark Federal Funds Rate 0.25 percent at its March 14-15 meeting, Stocks and Mortgage Bonds both improved following the news.

The Fed's tame read on inflation and its decision to maintain its balance sheet of existing Mortgage Bonds helped Bonds rally. Meanwhile, Stocks responded favorably to the news that the Fed is planning two additional hikes this year, eliminating some uncertainty.

The Fed Funds Rate, with a new target rate range between 0.75 to 1.0 percent, is the rate at which banks lend money to each other overnight and is not directly tied to consumer products like purchase or refinance home loans. Instead, home loan rates are tied to Mortgage Bond market performance. Home loan rates can move lower when Mortgage Bonds improve and vice versa.

There was good news from the housing sector, as the Commerce Department reported that Housing Starts hit a four-month high, rising 3 percent from January to February to an annual rate of 1.288 million. Housing Starts measure when excavation begins on a new home. Starts on single-family homes rose to a near 10-year high. From February 2016 to February 2017, Housing Starts were up 6.2 percent. The increase is a welcome sign for those in the market for a home as limited inventory has driven home prices up in many areas, discouraging some buyers. Another welcome sign: The National Association of Home Builders reported that its Housing Market Index, a measure of home builder sentiment, jumped six points to the highest level in 12 years! 


In economic news, wholesale inflation came in hotter than expected in February, with the year-over-year Producer Price Index reading reaching 2.2 percent, the highest since March 2012. The Consumer Price Index was in line with expectations, falling in February from January to 0.1 percent due in part to lower gasoline prices. Retail Sales also met expectations, though they did decline from January.

For those in the market for a new home or a refinance, home loan rates remain attractive.

Forecast for the Week

Housing news dominates the week. Will the positive momentum continue?

  • Housing data kicks off on Wednesday with the release of Existing Home Sales, followed by New Home Sales on Thursday.
  • As usual, weekly Initial Jobless Claims will be released on Thursday.
  • The week rounds out with Durable Goods Orders 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 experienced a nice rebound following the release of the Fed's monetary policy statement. Home loan rates remain in attractive territory.

Chart: Fannie Mae 3.0% Mortgage Bond (Friday Mar 17, 2017)


 

For the week of March 13, 2017

Last Week in Review

"I've got a good job. I work hard for my money." Brooks & Dunn. The February Jobs Report had a lot to celebrate, including job and wage growth.

U.S. employers added 235,000 new jobs in February, above the 188,000 expected, the U.S. Bureau of Labor Statistics reported. Gains in construction and manufacturing, in particular, led the surge. While December's numbers were revised down and January's were revised up, combined revisions totaled 9,000 more jobs than previously reported.

The unemployment rate was 4.7 percent, down from 4.8 percent, and the Labor Force Participation Rate was at its highest in a year at 63 percent. Average hourly earnings rose by 2.8 percent from February 2016 to February 2017.

Overall, this was a robust report and likely means the Fed will raise its benchmark Fed Funds Rate at its meeting on March 14-15. This is the rate at which banks lend money to each other overnight.

In housing news, home price gains continued in January. CoreLogic, a leading provider of consumer, financial and property information, reported that January home prices, including distressed sales, rose 6.9 percent from January 2016 to January 2017. The gains were due in part to lean inventories of homes for sale on the market. From December 2016 to January 2017, prices rose 0.7 percent. CoreLogic's chief economist, Frank Nothaft, said, "Many markets have seen housing prices outpace inflation." 

While home price gains are expected to continue, the sizes of the increases are expected to be less severe. Looking ahead, CoreLogic sees a 4.8 percent increase in prices from January 2017 to January 2018.

For those in the market for a new home, home loan rates remain attractive despite recent market volatility.

Forecast for the Week

While the week is jam-packed with key economic reports, the March 14-15 Federal Open Market Committee meeting and release of the monetary policy statement will likely be the headline grabber.

  • Inflation data from Tuesday's Producer Price Index and Wednesday's Consumer Price Index will be dissected by Fed members at this week's FOMC meeting.
  • Retail Sales will be released on Wednesday along with the Fed's monetary policy statement.
  • Regional manufacturing numbers will be delivered in Wednesday's Empire State Index and Thursday's Philadelphia Fed Index.
  • On Thursday, Housing Starts and Building Permits will be released along with the usual weekly Initial Jobless Claims
  • The Consumer Sentiment Index will be reported 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 struggled to gain traction recently. Home loan rates remain attractive despite Bond market losses.

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