Market Commentary

 

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)


 

For the week of February 5, 2018

Last Week in Review

"All shook up." Elvis Presley.  The Jobs Report, inflation news and the Fed meeting were a recipe for volatility in the markets this past week.

Employers added 200,000 new jobs in January while the November and December figures were revised lower by a total of 24,000 jobs, the Bureau of Labor Statistics reported. The Unemployment Rate remained at 4.1 percent. The big news within the report was a rise in annual wage growth, which surged 2.9 percent from January 2017 to January 2018. This was the biggest increase since June 2009. Wages had been stagnant, and the unexpected rise is a key metric for the economy. Overall, this was a solid report.

Inflation remained somewhat tame in December, while Personal Income and Spending matched expectations. The Fed's favorite inflation gauge, Core Personal Consumption Expenditures, was unchanged at 1.5 percent year over year. The month-over-month reading saw a 0.2 percent rise, which was expected. The core reading excludes volatile food and energy prices.

The Fed met and, as expected, made no changes to its benchmark Fed Funds Rate. This is the rate banks use to lend to each other overnight and it does not directly impact home loan rates. The Fed did note that while inflation continued to run below the 2 percent threshold it aims for, it believes inflation should evolve to rise in the next 12 months.

Inflation is always a key factor to monitor as it reduces the value of fixed investments like Mortgage Bonds and impacts the home loan rates tied to them.

Though Mortgage Bonds have worsened and home loan rates have risen recently, rates remain historically attractive.

Forecast for the Week

After last week's full economic calendar, just two reports are ahead this week.

  • The ISM Services Index will be released on Monday.
  • As usual, 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 fallen in recent days. Home loan rates have increased but remain near historic lows.

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Feb 02, 2018)