Monday Market Update – 05/06/2019

Loan Scenario – Did you know?

Did you know that you can leverage the equity in your home to purchase a new home and maybe even keep your existing home as a rental? What if I told you that you could have primary occupancy interest rate on that rental property (and even have a portion of the rent collected count towards the debt ratio), while the borrower enjoys one loan for both properties at the same interest rate? Do you have clients that could use a product like the one I’m describing? I would welcome a call to review the details with either you or your clients.

Your Weekly Update Begins Here

The stock market traded fairly flat and “mixed” with the Dow Jones Industrial Average lagging the NASDAQ Composite and S&P 500 Indexes as corporate earnings reports flooded in during the week. It was the busiest earnings week so far with 163 of the S&P 500 companies reporting earnings. Although more earnings reports than usual have exceeded analysts’ estimates, overall earnings growth for the S&P 500 looks to be roughly flat versus 2018 when earnings growth came in about 20% higher than in 2017.

Furthermore, investors continued to focus their attention on trade negotiations with China and the Federal Reserve’s monetary policy. Trade talks with China began again last Tuesday in Beijing but may be bogged down if a report in the Wall Street Journal is to be believed that the U.S. was insisting on maintaining some its tariffs on Chinese goods as an enforcement mechanism.

Wednesday, the Federal Reserve’s Open Market Committee left the fed funds rate unchanged at 2.25-2.50% as widely expected. The Committee also stated overall and core inflation numbers have weakened, remaining below its 2% target. This prompted some investors to believe the Fed was setting the stage for a rate cut if inflation continues to remain consistently below target. However, Fed Chair Jerome Powell threw a wet blanket on that notion during his post-meeting news conference when he said he believed the recent deceleration in inflation is being caused by transitory factors. U.S. Treasuries prices pulled back following Powell’s press conference to send yields slightly higher.

Friday’s release of the April Employment Situation Summary (Jobs Report) revealed continuing strong growth in job formation with restrained inflationary pressure coming from wage growth. Nonfarm payrolls increased by 263,000, well above the consensus forecast of 200,000, while average hourly earnings only climbed by 0.2% for the month leaving them up 3.2% year-over-year and unchanged from the March report. The April Jobs Report should lend support for the Fed’s current monetary policy.

In housing, the National Association of Realtors (NAR) reported Pending Home Sales for March increased 3.8% but were down 1.2% from a year earlier, the 15th straight month of annual declines. Buyers had added motivation in March, as mortgage rates plunged to the lowest level in more than a year.

Regionally, three of the four regions had lower sales from a year ago with the exception of the South recording a modest sales gain of 0.7%.

The Northeast had the smallest drop in annual sales of 0.4% followed by the West with a decline of 1.6%. The Midwest showed the largest drop in contract signings of 5.0%. Month-over-month, the West region had the largest increase in sales of 8.7%. The South realized a 4.4% gain while the Midwest had a gain of 2.3%. The Northeast was the only region to have a decline in sales, falling 1.7%.

NAR chief economist Lawrence Yun remarked, “We are seeing a positive sentiment from consumers about home buying, as mortgage applications have been steadily increasing and mortgage rates are extremely favorable. Despite some affordability issues in the West, the numbers indicate that there is a reason for optimism. Inventory has increased, too. These are great conditions for the region.”

Last Tuesday, the S&P/Case-Shiller Home Price Index for February was released showing the seasonally adjusted home prices for the benchmark 20-city index were up 0.20% month-over-month. The non-seasonally adjusted national index was up 4.0% year-over-year and continues to slow from the 4.2% to 6.7% range it has hovered between for the last two-plus years.

Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, commented “The pace of increases for home prices continues to slow. Homes began their climb in 2012 and accelerated until late 2013 when annual increases reached double digits.

Subsequently, increases slowed until now when the National Index is up 4% in the last 12 months. Sales of existing single-family homes have recovered since 2010 and reached their peak one year ago in February 2018. Home sales drifted down over the last year except for a one-month pop in February 2019. Sales of new homes, housing starts, and residential investment had similar weak trajectories over the last year. Mortgage rates are down one-half to three-quarters of a percentage point since late 2018.”

Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications declined from the prior week.

The MBA reported their overall seasonally adjusted Market Composite Index (application volume) fell 4.3% for the week ended April 26, 2019. The seasonally adjusted Purchase Index decreased 4% from a week prior while the Refinance Index decreased 5%. Overall, the refinance portion of mortgage activity decreased to 38.8% from 39.4% of total applications from the prior week.

The adjustable-rate mortgage share of activity decreased to 6.2% of total applications from 6.4%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.42% from 4.46% with points increasing to 0.46 from 0.44 for 80 percent loan-to-value ratio (LTV) loans.

For the week, the FNMA 4.0% coupon bond declined 3.2 basis points to close at $102.656 while the 10-year Treasury yield increased 2.80 basis points to end at 2.530%. The Dow Jones Industrial Average dropped 38.38 points to close at 26,504.95. The NASDAQ Composite Index gained 17.60 points to close at 8,164.00. The S&P 500 Index added 5.76 points to close at 2,945.64. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 13.79%, the NASDAQ Composite Index has gained 22.77%, and the S&P 500 Index has advanced 17.27%.

This past week, the national average 30-year mortgage rate fell to 4.27% from 4.34%; the 15-year mortgage rate decreased to 3.96% from 4.04%; the 5/1 ARM mortgage rate dropped to 4.05% from 4.10%; and the FHA 30-year rate remained unchanged at 4.00%. Jumbo 30-year rates declined to 4.15% from 4.25%.

Economic Calendar – for the Week of May 6, 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
May 07 10:00 JOLTS Job Openings Report Mar NA 7.087M
May 07 15:00 Consumer Credit Mar $17.0B $15.2B
May 08 07:00 MBA Mortgage Applications Index 05/04 NA -4.3%
May 08 10:30 EIA Crude Oil Inventories 05/04 NA 9.9M
May 09 08:30 Initial Jobless Claims 05/04 220,000 230,000
May 09 08:30 Continuing Jobless Claims 04/27 NA 1,671K
May 09 08:30 Producer Price Index (PPI) Apr 0.2% 0.6%
May 09 08:30 Core PPI Apr 0.2% 0.3%
May 09 08:30 Balance of Trade Mar -$51.2B -$49.4B
May 09 10:00 Wholesale Inventories Mar 0.1% 0.2%
May 10 08:30 Consumer Price Index (CPI) Apr 0.4% 0.4%
May 10 08:30 Core CPI Apr 0.2% 0.1%
May 10 14:00 Treasury Budget Apr NA $214.3B

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

The FNMA 30-year 4.0% coupon bond ($102.656, -3.2bp) traded within a narrower 34.4 basis point range between a weekly intraday low of $102.50 on Thursday and Friday and a weekly intraday high of 102.844 on Wednesday before closing the week at $102.656 on Friday. Mortgage bonds traded “sideways” during the week along the 50% Fibonacci retracement level and the 25-day moving average. These levels represent nearest resistance that will revert to technical support if the bond can manage to carry upward from Friday’s move higher. The bond continues to trade on a buy signal and is not yet “overbought” so we could see a move higher with a corresponding slight improvement in mortgage rates this coming week.

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