December 2018 (What is going on with Interest Rates)

December 3rd, 2018

Instructions on how to read this blog: Below is the news for the month when it happened and the market’s reaction.  For a full view of the month start at the bottom and work your way up. If want to know what just happened start at the top. All Times are Eastern Standard Time.  When the price of Mortgage Backed Securities (MBS) goes down rates go up, and when the price goes up rates come down. Remember in the bond market Bad News is Usually Good News and Good News is Usually Bad news. 

Views You Can Use updated monthly: http://www.mmgweekly.com/m/index.html?SID=78421a2e0e1168e5cd1b7a8d23773ce6

Newsletter updated weekly: http://www.mmgweekly.com/w/index.html?SID=

Friday - December 14

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Late Morning Review:

The consumer continued to spend in November after some impressive numbers in October. November Retail Sales rose 0.2%, which was inline with expectations, but that doesn't tell the whole story. When looking under the hood, there was a 0.5% decline in receipts at gas stations, which is good for the consumer as we are paying less at the pumps to fill our vehicles. October Retail Sales were revised higher to 1.1% from 0.8%. The national average price for a regular gallon of gasoline at the pumps is $2.39, down from $2.67 a month ago.

The two-day Federal Open Market Committee meeting kicks off on Tuesday and ends Wednesday at 2:00 p.m. ET with the release of the monetary policy statement. The benchmark short-term Fed Funds Rate is expected to increase by 0.25% to 2.75% but what is in the statement is key. The Fed has come under fire by some on Wall Street and the White House for too many hikes, which could slow the economy in the near future. However, recent chatter from Fed members is signaling rate hikes may begin to slow in 2019 or maybe even not a hike at all next year.

After years of low numbers of homes for sale on the market, housing inventories have begun to increase. Online real estate brokerage Redfin reports that housing inventory rose 5% from November 2017 to November 2018, the fastest pace since June 2015. The report also revealed that home prices rose 3.3% year-over-year to a median price of $298,800. "The tide has turned," said Redfin Chief Economist Daryl Fairweather. "Sellers are now competing for buyers, but they haven't all realized it yet. Sellers who have adjusted their price expectations downward are still finding plenty of willing buyers."

 

 

Thursday December 13

MARKET WRAP:

Not much movement for Mortgage Bonds today as they traded in a tight range near unchanged levels while Stocks gave up early morning gains and closed mixed. The Fannie Mae 30-yr 4% coupon closed at $101.03, near unchanged. The Dow closed higher by 70.11 points to 24,597.38, the S&P closed near unchanged at 2,650.54 while the NASDAQ closed at 7,070.33, down 27.97 points. WTI oil was last seen at $53.09/barrel, +$1.94. 10-yr yield 2.91%. Retail sales will be released tomorrow morning.

Late Morning Review:

Applications to purchase new homes plunged in November from October due in part to affordability issues and as wage growth continues to trail behind home-price growth. The Mortgage Bankers Association (MBA) reports that its Builder Application Survey fell 14% in November from October and declined 11% from a year ago. The MBA's Builder Application Survey tracks application volume from mortgage subsidiaries of home builders across the country.

Mortgage rates declined this week falling to their lowest levels in three months and have either declined or remained flat for five consecutive weeks. Freddie Mac reports that the 30-year fixed-rate mortgage fell 12 basis points this week to 4.63% with an average 0.50 in points and fees added on top of the rate. Freddie Mac says, "While the housing market softened in response to higher rates through most of this year, the combination of a low unemployment and recent downdraft in rates should support home sales heading into the early winter months."

Americans filing for first-time unemployment benefits continue to hover near 50-year lows as the labor market is now at or just above full employment. Weekly Initial Jobless Claims fell by 27,000 to 206,000, just above the 49-year low of 202,000 hit in mid-September. The four-week moving average of claims, which irons out seasonal abnormalities, fell 3,750 to 224,750. Employers have said that it has been hard finding workers to fill positions in this tight labor market.

Wednesday - December 12  

MARKET WRAP:

Mortgage Bonds traded in a tight range today near unchanged weighed down by rising Stock prices and tepid demand from today's 10-yr offering. The Fannie Mae 30-yr 4% coupon closed at 101.0, -3bp. Stocks closed higher but well off session highs on trade optimism headlines. The Dow closed at 24,527.27 up 157.03 points, the S&P 500 rose 14.29 points to 2,651.07 while the NASDAQ gained 66.48 points to 7,098.31. WTI oil settled at $51.15/barrel, -$0.50. 10-yr yld 2.91%. Economic data tomorrow is limited to Weekly Initial Jobless Claims. The Treasury will sell $16B 30-yr Bonds, results at 1:00 p.m. ET.

Late Morning Review:

Consumer inflation remained contained in November due in part to declining energy prices. The November Consumer Price Index was unchanged while year-over-year fell to 2.2% from 2.5% in October. The Core CPI, which strips out food and energy, was also inline at 0.2%, while year over year rose 2.2% from 2.1%. The Fed will break down the inflation numbers when considering interest rate policy at next week’s Federal Open Market Committee meeting that begins on Tuesday and ends Wednesday at 2:00 p.m. ET when the monetary policy statement is released.

Mortgage rates had their biggest weekly decline since 2017 in the latest survey as Bond prices rose and Stocks declined. The Mortgage Bankers Association (MBA) reports that the 30-year fixed-rate mortgage fell 12 basis points last week to 4.96% with an average 0.50 in points and fees. The report showed that the refinance index rose 1.8% while the purchase index increased 2.5%. The MBA's survey covers over 75% of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990.

 

Tuesday - December 11  

CLOSING TECHNICAL SIGNAL:

The Fannie Mae 30-yr 4% coupon remains below strong resistance at the 200-day Moving Average, currently at 101.41, while the 10-year yield remains above strong support at 2.82%. History has shown the 200-day MA to be a significant barrier to cross - both to the upside and downside.

MARKET WRAP:

Volatility reigned supreme once again today as Stocks seesawed from positive to negative several times during today's session finally ending near unchanged levels. The Fannie Mae 30-yr 4% coupon closed at 101.12, -9bp. The Dow saw a meager 53.02 point loss to 24,370.24 after an early 365 point gain, the S&P closed near unchanged at 2,636.78 while the NASDAQ gained a mere 11.31 points to end at 7,031.83. WTI oil closed at $51.65/barrel, +$0.65. 10-yr yield 2.88%. Tomorrow's data is limited to the high impact Consumer Price Index. The Treasury will sell $24B 10-yr Notes and the results will be more closely watched than today's 3-yr offering.

Late Morning Review:

Fannie Mae released its Home Purchase Sentiment Index (HPSI) showing that the index rose slightly in November due in part to rising incomes. The HPSI rose 0.5 points to 86.2. Within the report it showed that Americans who said it is a good time to buy a home rose 2 percentage points, while the net share who said it was a good time to sell was unchanged. Doug Duncan, senior vice president and chief economist at Fannie Mae said, “Consumers’ perceptions of growth in their household income reached a survey high this month, helping to absorb some of the impact of increasing mortgage rates on housing market activity."

Wholesale inflation from the Producer Price Index (PPI) declined in November to 0.1% from 0.6% and just above expectations of 0.0% due to falling energy prices. The Core Rate, which excludes volatile food and energy, fell to 0.3% from 0.5%. On an annual basis, headline PPI fell to 2.5% from 2.9%. Inflation is not getting hotter, but it may actually be getting cooler, like in other parts of the globe. Tomorrow, the more closely watched Consumer Price Index will be released. The Fed will be watching this number for any signs of consumer inflation.

Volatility is the name of the game in the stock markets for the past few months and it hasn't been easing up one bit. Yesterday, the Dow Jones Industrial Average fell by 507 points only to close with a modest 34 point gain. This morning, the index was up 350 points then gave back two-thirds of the gains. The big swings have been caused by trade headlines between the U.S. and China and fears of slowing global growth along with uncertainty surrounding the interest rate hikes from the Federal Reserve.

Monday - December 10  


MARKET WRAP:

U.S. Stocks continued their volatility as an early morning 500-point loss for the Dow turned into a small gain by the close of trading. The tech wreck reversed and wiped out the losses. Mortgage Bonds did have some early morning gains but closed flat to lower by the close. The Fannie Mae 30-yr 4% coupon closed at 101.25, -3bp. The Dow closed at 24,423.26, +34.31 points, the S&P closed higher by 4.64 points to 2,637.72 while the NASDAQ finished with a 51.26 points gain to end at 7,020.52. WTI oil settled at $51/barrel, -$1.61. 10-yr yield 2.85%. Wholesale inflation data from the Producer Price Index will be released tomorrow. The Treasury will sell $38B 3-yr Notes, results at 1:00 p.m. ET.

Late Morning Review:

Homeowners looking to tap into equity from the homes will be surprised that equity fell in October for the first time since the housing recovery. Black Knight reports that tappable equity declined by $140 billion in the third quarter of 2018 due in part to an ease in the pace of rising home prices. The company reports that a total of 43.6 million homeowners have tappable equity available, which is 272,000 fewer than in the second quarter of 2018. “Of course, there is still $9.8 trillion in total home equity in the market, some $5.9 trillion of which is tappable. That’s $571 billion more than in Q3 2017, and tappable equity remains near an all-time high," reports Ben Graboske, executive vice president of Black Knight’s Data & Analytics division.

Stocks are falling to begin the new week led lower by declining shares of Apple as well as shares in the banking sector. The Dow Jones Industrial Average, S&P and NASDAQ fell 4.5% or more last week for their biggest weekly losses since March due to trade issues, fears of slowing global growth along with uncertainty surrounding future rates hikes by the Fed. At its worst level, the Dow was down 300 points this morning. However, the closely watched S&P 500 Stock Index rose nearly 40% from November 2016 to its all-time closing high of 2,929 hit on September 21 of this year and have given back 10% up until today. Always remember, markets don't go straight up or straight down.

What has been declining, to the delight of motorists, has been the price of gas at the pumps across the country. Motor club AAA reports that the national average price for a regular gallon of gasoline is at $2.42, the lowest price for 2018. Declining oil prices, the switch to cheaper refining costs in the winter and less drivers on the road are some of the reasons for the decline. AAA predicts that gas prices could fall a few more cents by the end of the year.

 

Friday - December 7 

What to expect next week:

The Bond market, while at three-month highs, are starting the week right near a strong technical barrier (see chart below) which has prevented further rate improvement in the past. 

The last time Bond prices were at current levels, they moved lower pretty quickly causing interest rates to spike higher. 

If history repeats itself, last Thursday's intra-day and multi-month low may serve as a near-term bottom in rates. 

There is a slew of important economic reports set for release which can keep the volatility going, including the Consumer Price Index (CPI) which gives us a reading on consumer inflation. 

What will be interesting to follow is how the Bond markets react to a total of $78 billion in Treasury Notes and Bonds being sold this week with yields near 3-month lows. If investors don’t like the lower yields and the auctions don’t do well, rates may tick higher. 

Reports to watch:

  • The wholesale inflation reading Producer Price Index will be released on Tuesday with the more critical Consumer Price Index on Wednesday.
  • The other key report to watch will be Friday's Retail Sales Report.

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Week in Review:

This past Thursday, thanks to uncertainty around the U.S. and China trade deal, fear of slowing global economic growth, a roughed-up Stock market and the likelihood of fewer Fed rate hikes, the Bond market and home loan rates hit their best levels in three months. 

On Friday, the Labor Department reported that 155,000 jobs were created in November, a bit less than expectations of 189,000. The labor market remains incredibly strong and wages are rising at fastest pace in a decade. 

Low rates coupled with a solid labor market and rising wages make for great home purchase conditions.

It appears the highest home loan rates for 2018 are behind us and with low inflation and low bond yields in Europe and Asia, our home loan rates should not go too high for the foreseeable future. That is great news as we head into 2019. 


If you or someone you know has questions about home loans, give me a call. I'd be happy to help.

MARKET WRAP:

Another flight-to-quality session today as the Jobs Report seemed like a Goldilocks scenario but the Stock markets took it on the chin due in part to lingering trade issues along with a tech wreck. Mortgage Bond prices were able to gain back most of yesterday's gains. The Fannie Mae 30-yr 4% coupon closed at 101.31, +28bp ending above the 100-day Moving Average. The Dow lost 558.72 points to 24,388.95, the S&P 500 fell by 62.87 points to 2,633.08 while the NASDAQ closed at 6,969.25 down 219 points. All three major Stock indexes suffered their biggest weekly percentage decline since March. For the week the Dow was down 4.5%, S&P down 4.6%, NASDAQ down 4.9%. Both the Dow and S&P have turned negative for 2018. WTI oil gained $1.12 to $52.61/barrel after OPEC and partners agreed to cut output. 10-yr yield 2.85%. Next week the markets will receive data from the inflation reading PPI and CPI along with Retail Sales. The Treasury will sell $38B 3-yr Notes on Tuesday, $24B 10s on Wednesday and $16B 30-yr Bonds on Thursday. Have a great weekend!

Late Morning Review:

The Bureau of Labor Statistics reported on Friday that U.S. employers added 155,000 new workers in November, below the 189,000 expected. Revisions for September and October were revised lower by a total of a modest 12,000. The Unemployment Rate was unchanged at 3.7%, a 50-year low. Average hourly earnings rose 0.2%, just below the 0.3% expected while year over year was unchanged at 3.1%. Overall it was a Goldilocks report, not too hot, not too cold.

A recent study conducted by Freddie Mac on housing construction across the U.S. showed that the major challenge is inadequate supply. Since the Great recession ended in mid-2009, the economy has grown sharply, but the housing market has not fully recovered. Freddie Mac says, " Since 2011, residential housing construction has increased, but only gradually – and not enough to meet demand." Freddie Mac went on to report that from 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017, and this despite rising demand in a growing economy. In addition, until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households.

 

Thursday - December 6  

MARKET WRAP:

U.S. Stocks went on a steep roller coaster ride today after the news of the China tech exec may have derailed trade relations between the two global economies. However, IMF's Lagarde, JPMorgan's Dimon and dovish words from several Fed members, the Dow closed with just a modest loss. The big rebound in Stocks reversed Mortgage Bond prices from the highs, which prompted our Alert To Lock at 2:00 p.m. ET. The Fannie Mae 30-yr 4% coupon closed at $101, +9bp after hitting $101.31 early in the session. The Dow lost 79.40 points to 24,947.67 after being down 800 points, the S&P fell 4.1 points to 2,695.95 while the NASDAQ actually closed higher by 29.83 points to end at 7,188.25. WTI oil closed at $51.56/barrel, -$1.57. 10-yr yield hit 3.82% this morning before closing at 2.89%. And if you didn't know ... the November Jobs Report will be released tomorrow morning at 8:30 a.m. ET. Be sure to be tuned in to get the numbers and the market reaction.

Late Morning Review:

Mortgage rates continued to edge lower this week due in part over fears of a slowing global economy along with a big decline in the U.S. Stock markets, which boosted Bond prices. Freddie Mac reports that the 30-year fixed-rate mortgage fell six basis points this week to 4.75% with an average 0.50 in points and fees added on top of that rate. Freddie Mac said that this week's decline in rates is a welcome relief to prospective homebuyers who have recently experienced rising rates and rising home prices.

Mortgage credit availability rose for the second straight month in November, reports the MBA. The MBA's Mortgage Credit Availability Index (MCAI) gained 1.1% to 188.8 in November after the 2.5% gain in October. A decline in the MCAI indicates that lending standards are tightening, while an increase signals they are loosening. The November number of 188.8 was the highest since early 2008, and was up 3.5% from a year ago.

The service sector of the U.S. economy produced positive gains in November and is the largest portion of the U.S. economy's business activity. The Institute for Supply Management (ISM) reported today that its ISM Service Index rose for the 106th consecutive month in November to 60.7 versus the 59 expected. Within the report, the two closely watched components, new orders and employment, both rose during the month. A reading above 50 indicates the non-manufacturing sector economy is generally expanding; below 50 indicates the non-manufacturing sector is generally contracting.

Late Morning Review

Mortgage rates continued to edge lower this week due in part over fears of a slowing global economy along with a big decline in the U.S. Stock markets, which boosted Bond prices. Freddie Mac reports that the 30-year fixed-rate mortgage fell six basis points this week to 4.75% with an average 0.50 in points and fees added on top of that rate. Freddie Mac said that this week's decline in rates is a welcome relief to prospective homebuyers who have recently experienced rising rates and rising home prices.

Mortgage credit availability rose for the second straight month in November, reports the MBA. The MBA's Mortgage Credit Availability Index (MCAI) gained 1.1% to 188.8 in November after the 2.5% gain in October. A decline in the MCAI indicates that lending standards are tightening, while an increase signals they are loosening. The November number of 188.8 was the highest since early 2008, and was up 3.5% from a year ago.

The service sector of the U.S. economy produced positive gains in November and is the largest portion of the U.S. economy's business activity. The Institute for Supply Management (ISM) reported today that its ISM Service Index rose for the 106th consecutive month in November to 60.7 versus the 59 expected. Within the report, the two closely watched components, new orders and employment, both rose during the month. A reading above 50 indicates the non-manufacturing sector economy is generally expanding; below 50 indicates the non-manufacturing sector is generally contracting.

Wednesday - December 5

All U.S. markets are closed today in honor of George HW Bush.

 

Tuesday - December 4  

MARKET WRAP:

Fears of a possible economic slowdown, doubts on trade issues and drama over in Europe sent investors flocking to U.S. Treasuries today in an ultra safe haven trade while Stocks plunged here in the U.S. The Fannie Mae 30-yr 4% coupon closed at 100.88, up just +6bp. The Dow fell by a whopping 799.36 points to 25,027.07, the S&P 500 plunged 90.31 points to 2,700.06 while the NASDAQ plummeted by 283.08 points to end the day's carnage at 7,158.42. WTI oil settled at $53.25/barrel, +$0.30. 10-yr yield 2.91%. All U.S. financial markets are closed tomorrow in honor of former President George HW Bush who passed away over the weekend at the age of 94. Our next MMG Daily will be released on Thursday morning.

Late Morning Review:

CoreLogic reports that home prices, including distressed sales, rose 5.4% from October 2017 to October 2018. That is down from the 7% gain seen year over year in March of this year. On a month over month basis, prices rose 0.5% from September 2018 to October 2018. Looking ahead, CoreLogic sees a 4.8% increase from October 2018 to October 2019. Frank Nothaft, Chief Economist at CoreLogic says, “Rising prices and interest rates have reduced home buyer activity and led to a gradual slowing in appreciation (in prices).”

Gas prices at the pumps continue to decline as the price of oil has fallen to its lowest level since September 2017. A strong dollar coupled slowing demand for oil are a few reasons behind the decline in prices. The national average price for a regular gallon of gas is at $2.44, down from $2.76 a month ago and below the $2.47 seen a year ago. The highest recorded price was hit back on July 17, 2008, of $4.11.

All U.S. financial markets will be closed tomorrow in honor of former President George HW Bush, who passed away last Friday at the age of 94. That has shifted the ADP Private Payroll Report release to Thursday morning from Wednesday morning. The USPS will not be delivering mail on Wednesday. Federal offices will be closed on Wednesday as well as some banks and courts.

Monday - December 3  

MARKET WRAP:

Positive trade headlines out of the G-20 Summit between the U.S. and China lifted Stocks today while capping Mortgage Bond prices. However, with the chaos seen in Europe, Treasury yields edged lower. The Fannie Mae 30-yr 4% coupon rose 6bp to end at 100.72. The Dow gained 287.97 points to 25,826.43, the S&P was up 30.20 points to 2,790.37 while the NASDAQ closed at 7,441.51, +110.97 points. WTI oil was last seen at $53.09/barrel, +$2.16 in after hours trading. 10-yr yield 2.97%.

Late Morning Review:

The G-20 Summit Meeting took place over the weekend with the big event taking place Saturday night between President Trump and China's President Xi. The two leaders discussed trade issues and agreed to suspend any tariffs for 90 days and will enter into negotiations to try and settle the trade dispute between the world's two largest economies. The headlines are lifting U.S. Stocks this morning as the last week of 2018 begins.

Manufacturing activity across the nation grew in November for the 115th consecutive month, reports the Institute of Supply Management (ISM). The ISM Index came in at 59.3 last month, above the 57.2 expected and up from 57.7 in October. Within the report it showed that both the new orders index as well as the employment component produced positive gains during the month.

Two key labor market reports will be released this week and will be closely watched by the members of the Federal Reserve as well as traders. The ADP Private Payrolls Report will be released on Wednesday followed by the government's Jobs Report on Friday. The strength in the labor markets has been well publicized this year and the question will be whether or not the solid numbers will continue. With the U.S. economy at above average growth, the jobs market should continue to prosper into 2019.

Contact

John Marbury
jmarbury@nationalbankofcommerce.com
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