Market Commentary

 

For the week of November 20, 2017

Last Week in Review

"Who will buy my sweet red roses?" Oliver. Retailers looked to October sales for signs of a blossoming or thorny holiday shopping season ahead. Meanwhile, Housing Starts dug out from storm damage.

Retail Sales slowed in October, rising just 0.2 percent. This was down from the 1.9 percent increase registered in September, which was boosted by post-hurricane spending. Year over year, sales were up 4.6 percent. Despite the small gains in October, only a few sectors were weak: building material suppliers, gas stations and non-store retailers. Heading into the holiday shopping season, the National Retail Federation expects total sales of $678.75 billion to $682 billion, up from $655.8 billion last year. 

Housing Starts hit a one-year high in October due in part to disruptions in September caused by Hurricanes Harvey and Irma. The Commerce Department reported that Housing Starts surged to an annual rate of 1.29 million units, up 13.7 percent from September versus the 1.198 million expected. However, starts were down nearly 3 percent from a year ago. Single-family starts, which account for the largest share of the housing market, rose 5.3 percent. Starts on multi-family dwellings of five or more units rose a whopping 37.4 percent from September to October.

Building Permits, a sign of future construction, rose 5.9 percent from September to an annual rate of 1.297 million. 

Wholesale inflation came in hotter than expected in October. The Producer Price Index (PPI) rose 0.4 percent versus the 0.1 percent expected, fueled by higher costs for services. Core PPI, which excludes food and energy, also rose 0.4 percent, above expectations. Year over year, PPI saw the biggest increase since February 2012, rising 2.8 percent. Core PPI increased 2.4 percent over last year.

These inflationary pressures didn't carry over to the more closely-watched consumer inflation reading, which remained tame. The October Consumer Price Index (CPI) and Core CPI were in line with expectations.

Inflation is an important measure to watch because inflationary pressures reduce the value of fixed investments like Mortgage Bonds and can harm the home loan rates tied to them.

At this time, home loan rates remain attractive.

Forecast for the Week

Meeting minutes might be the market mover in this short week. Markets are closed Thursday for Thanksgiving. Stock markets close early at 1 p.m. ET Friday. Bond markets close at 2 p.m. ET Friday.

  • Existing Home Sales will be released on Tuesday.
  • Weekly Initial Jobless ClaimsDurable Goods Orders and the Consumer Sentiment Index will be delivered on Wednesday along with the Federal Open Market Committee meeting minutes.

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 Bond prices have been volatile. Despite the ups and downs, home loan rates remain near historic lows.

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Nov 17, 2017)


 

For the week of November 13, 2017

Last Week in Review

"A little dancing and some sentiment to put your mind at ease." Lou Reed.  Home prices continued to surge, and consumers have happy feet over employment and wage prospects

Data analytics firm CoreLogic reported that home prices nationwide, including distressed sales, surged by 7 percent in September 2017 compared to September 2016. Month over month, sales were up 0.9 percent in September from August. Low inventories continue to be the catalyst driving higher home prices. Looking ahead, prices are expected to rise 4.7 percent from September 2017 to September 2018.

Although the Consumer Sentiment Index declined slightly in early November, it remained at its second highest level since January with a preliminary reading of 97.8, per the University of Michigan report. An improving labor market was spontaneously mentioned by a record number of consumers, and anticipated wage gains recorded their highest two-month level in a decade. These favorable trends were countered by expectations that inflation and interest rates will increase during the year ahead. 

In a week light on economic data, headlines were dominated by rising tensions in the Middle East, which pushed oil prices to two-year highs, and tax reform proposals out of Washington, which kept investors on guard. 

Record-high Stock prices weighed on Bond prices throughout the week, though home loan rates remained just above all-time lows.

Forecast for the Week

A deluge of economic data will vie for the spotlight.

  • Inflation data from the Producer Price Index and Consumer Price Index will be released on Tuesday and Wednesday, respectively.
  • The closely watched Retail Sales report also will be delivered on Wednesday.
  • Regional manufacturing numbers from the Empire State Index will be released on Wednesday followed by the Philadelphia Fed Index on Thursday.
  • As usual, weekly Initial Jobless Claims will be released on Thursday.
  • Finally, Building Permits and Housing Starts round out the week 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 Bond prices were no stranger to volatility recently

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