Monday Market Update – 2/25/2019

Fed rate hikes are likely ‘coming to an end,’ says St. Louis Fed President James Bullard

The Federal Reserve is likely near the end of interest rate increases and the program to reduce the bonds it holds on its balance sheet, St. Louis Fed President James Bullard said Thursday.

“I think the message from my point of view is the normalization process in the United States is coming to an end,” the central bank official told CNBC in a “Squawk Box” interview.

Bullard added that he thinks rates are actually too high now but acknowledged that his view is in the minority on the policymaking Federal Open Market Committee. Bullard is a voting member of the FOMC and said he has tried to convince his fellow central bankers that they’ve gone “too far.”

Weekly Review

Mortgage rates trended slightly downward last week. Home builders are feeling optimistic to start out the year, as rates start to level off and economic conditions remain favorable. The release of the housing starts and building permits report was delayed, due to the lasting effects of the partial government shutdown. Existing home sales fell.

The National Association of Home Builders’ (NAHB) housing market sentiment index rebounded in February, reaching a level of 62, and signaling builder optimism heading into 2019. Any reading above 50 is considered positive. For the second month in a row, all components of the index improved. Current sales conditions increased to 67, expectations for the next six months jumped to 68, and buyer foot traffic is up to 48. MarketWatch contributor Andrea Riquier wrote, “builders are in a sweet spot: economic conditions like a strong job market are helping them sell more homes and falling mortgage rates are making that job even easier?

The release of the housing starts and building permits report has been delayed until next Tuesday. Existing home sales or resales declined in January, down 1.2%month-over-month to a seasonally adjusted annual rate of 4.94 million units. The figure marks the lowest level in three years. Although the housing market has grappled with rising rates since 2016, home buyers are expected to see some relief in the first few months of 2019. The report showed the median existing home price increased at the smallest rate since February 2012, signaling a slowdown in home price appreciation. At January’s pace it would take approximately 3.9 months to sell off all inventory, up from December’s 3.7 months, showing that inventory levels are increasing slightly.

Spring and Summer typically mark the busiest home buying and selling seasons of the year. With mortgage rates leveling off and home price appreciation settling down, many prospective buyers may have better luck this year than last year. If your clients are looking to buy in the Spring, please let me know. Getting preapproved before they start shopping will help them make a more competitive offer.

Sources: CNBC, CNBC, Econoday, MarketWatch, MarketWatch, Mortgage News Daily, The Wall Street Journal

The major stock market indexes recorded modest gains during this past holiday-shortened trading week (President’s Day) despite some disappointing economic data.  Investors were encouraged Wednesday following the release of minutes from the Federal Open Market Committee’s (FOMC) January meeting.  The minutes suggested the Fed will continue to be patient and take a “wait and see” approach for future rate hikes.  Fed policymakers also indicated they would stop reducing the assets on the central bank’s balance sheet by the end of the year, thus ending the process that has slowly been removing liquidity from the financial system since late 2017.

Investors also noticed trade talks between the U.S. and China are progressing to a higher level with a meeting scheduled Friday between President Trump and Chinese Vice-Premier Liu He, China’s top trade negotiator.  Also, Bloomberg reported U.S. and Chinese trade officials have begun drafting language on multiple memorandums of understanding containing proposed Chinese reforms that would lead to a final trade deal – a deal China would like to solidify by March 1, when the U.S. is set to raise tariffs to 25% from 10% on $200 billion in Chinese-made goods.

The week’s economic data were mostly disappointing.  Durable Goods Orders, excluding transportation, slowed in December, continuing a pattern of decelerating business investment.  Also, the Philadelphia Fed Manufacturing Index for February surprised to the downside by falling to -4.1 when a consensus forecast had called for a reading of 12.0.  On the positive side, weekly jobless claims at 216,000 were less than an expected 225,000, and IHS Markit’s gauge of service sector activity surprised to the upside.

Thursday, the National Association of Realtors (NAR) reported Existing Home Sales declined by 1.2% month-over-month in January to a seasonally-adjusted annual rate of 4.94 million from an upwardly revised 5.00 million in December.  The consensus forecast was for 5.05 million.  January marked the third consecutive month of declining sales and total sales were 8.5% lower than the same period a year ago.

The median existing home price for all housing types increased 2.8% year-over-year to $247,500, the 83rd consecutive month of year-over-year gains.  The median existing single-family home price increased 3.1% year-over-year to $249,400.

Regionally, Existing Home Sales were +2.9% in the Northeast; -2.5% in the Midwest; -1.0% in the South; and -2.9% in the West.  Regional median home prices were +0.4% to $270,000 in the Northeast; +1.4% to $189,700 in the Midwest; +2.5% to $214,800 in the South; and +2.9% to $374,600 in the West.  Single-family home sales were down 1.8% month-over-month to a seasonally adjusted annual rate of 4.37 million, and were down 8.4% year-over-year.  Inventory of homes for sale is rising.  Homes for sale at the end of January increased to 1.59 million from 1.53 million in December, and inventory is up 4.6% from a year ago.  At the current sales rate, unsold inventory is at a 3.9-months supply versus 3.7 months in December.

Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications increased from the prior week.  The MBA reported their overall seasonally adjusted Market Composite Index (application volume) increased 3.6% for the week ended February 15, 2019.  The seasonally adjusted Purchase Index increased 2% from a week prior while the Refinance Index increased 6%. 

Overall, the refinance portion of mortgage activity decreased to 41.7% from 41.8% of total applications from the prior week.  The adjustable-rate mortgage share of activity was unchanged at 7.7% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.66% from 4.65% with points decreasing to 0.42 from 0.43 for 80 percent loan-to-value ratio (LTV) loans.

For the week, the FNMA 4.0% coupon bond gained 12.5 basis points to close at $102.141 while the 10-year Treasury yield decreased 1.0 basis point to end at 2.654%.  The Dow Jones Industrial Average gained 148.56 points to close at 26,031.81.  The NASDAQ Composite Index added 55.13 points to close at 7,527.54.  The S&P 500 Index advanced 17.07 points to close at 2,792.67.  Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 11.59%, the NASDAQ Composite Index has gained 13.45%, and the S&P 500 Index has advanced 11.40%.

This past week, the national average 30-year mortgage rate fell to 4.45% from 4.49%; the 15-year mortgage rate decreased to 4.05% from 4.10%; the 5/1 ARM mortgage rate dropped to 4.36% from 4.39% while the FHA 30-year rate decreased to 4.13% from 4.18%.  Jumbo 30-year rates decreased to 4.29% from 4.34%.

Economic Calendar – for the Week of February 25, 2019

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

Date Time ET Event /Report /Statistic For Market Expects Prior
Feb 25 10:00 Wholesale Inventories Dec 0.4% 0.3%
Feb 26 08:00 S&P Case-Shiller Home Price Index Dec 4.5% 4.7%
Feb 26 08:30 Housing Starts Dec 1,254K 1,256K
Feb 26 08:30 Building Permits Dec 1,290K 1,328K
Feb 26 09:00 FHFA Housing Price Index Dec NA 0.4%
Feb 26 10:00 Consumer Confidence Index Feb 125.0 120.2
Feb 27 07:00 MBA Mortgage Applications Index 02/23 NA 3.6%
Feb 28 08:30 Advance International Trade in Goods Jan NA NA
Feb 28 08:30 Advance Retail Inventories Jan NA NA
Feb 28 08:30 Advance Wholesale Inventories Jan NA NA
Feb 27 10:00 Factory Orders Dec 1.0% -0.6%
Feb 27 10:00 Fed Chair Semi-Annual Monetary Policy Test. Feb NA NA
Feb 27 10:00 Pending Home Sales Jan -0.4% -2.2%
Feb 27 10:30 EIA Crude Oil Inventories 02/23 NA +3.7M
Feb 28 08:30 Advance Gross Domestic Product (GDP) Qtr. 4 2.3% 3.4%
Feb 28 08:30 Advance GDP Deflator Qtr. 4 1.7% 1.8%
Feb 28 08:30 Initial Jobless Claims 02/23 221,000 216,000
Feb 28 08:30 Continuing Jobless Claims 02/16 NA 1,725K
Feb 28 08:30 Chicago Purchasing Managers Index (PMI) Feb 57.5 56.7
Mar 01 08:30 Personal Income Dec 0.3% 0.2%
Mar 01 08:30 Personal Spending Dec -0.2% 0.4%
Mar 01 08:30 Personal Income Jan 0.3% NA
Mar 01 10:00 ISM Manufacturing Index Feb 56.0 56.6
Mar 01 10:00 Final Univ. of Michigan Consumer Sentiment Index Feb 95.6 95.5

Mortgage Rate Forecast with Chart – FNMA 30-Year 4.0% Coupon Bond

The FNMA 30-year 4.0% coupon bond ($102.141, +12.5) traded within a narrower 26.5 basis point range between a weekly intraday low of $101.969 on Thursday and a weekly intraday high of 102.234 on Friday before closing the week at $102.141 on Friday.

Mortgage bond prices trended sideways during the week along the path of the 25-day moving average support line.  Price softness in the middle of the week generated a weak sell signal on Friday from a slow stochastic crossover signal.  This suggests mortgage bond prices will again test dual support levels as shown in the chart below with a likely outcome of trending sideways resulting in stable mortgage rates showing little change.

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