Tuesday Market Update – 05/28/2019

Welcome back from your late spring stormy weekend. If the weather has you down, take a look at the mortgage market. It might turn that frown upside down.

Your Market Update Begins here…

Investors switched to defense this past week seeking safe-haven assets such as Treasuries and bonds due to a forecast of weaker manufacturing growth and international trade concerns. The stock market’s broader indexes suffered their third consecutive weekly decline, and for the narrower Dow Jones Industrial Average it was the fifth consecutive weekly drop.

Thursday, an IHS Markit “flash” survey of U.S. manufacturers plunged to a nine-and-a-half year low of 50.6 in May from 52.6 in April. Even more alarming, Markit’s survey of U.S. service-oriented companies employing approximately 80% of all U.S. workers fell to a 39-month low of 50.8 from 52.7. Manufacturing weakness was also seen with Friday’s release from the Commerce Department showing a decline in April durable goods orders, especially the 0.9% drop in core capital goods which exclude aircraft and defense orders. This data suggests the U.S. economy could continue to slow in the coming months, especially if the trade war with China remains much longer to foster economic uncertainty among U.S. companies.

The result of all this disappointing economic news was a drop in the yield of the benchmark 10-year Treasury note down to around 2.32%, its lowest level since late 2017. The drop pushed the 10-year yield back below the three-month Treasury bill yield—a yield curve inversion that has historically preceded an economic recession within seven to 24 months.

In housing, the National Association of Realtors reported Existing Home Sales declined 0.4% month-over-month in April to a seasonally-adjusted annual rate of 5.19 million. This was below the consensus forecast calling for a rate of 5.35 million and was slightly below an unrevised 5.21 million reported for March. Total sales were 4.4% lower than the same period a year ago.

The median existing home price for all housing types increased 3.6% year-over-year to $267,300, recording the 86th consecutive month of year-over-year gains.  The median existing single-family home price was $269,300, up 3.7% year-over-year.

Regionally, Existing Home Sales were 4.5% lower in the Northeast; unchanged in the Midwest; 0.4% lower in the South; and 1.8% higher in the West. Meanwhile, median home prices climbed 0.9% higher in the Northeast to $277,700; 5.5% higher in the Midwest to $210,500; 4.4% higher in the South to $236,800; and were 1.3% higher in the West rising to $395,100.

Single-family home sales declined 1.1% month-over-month to a seasonally adjusted annual rate of 4.62 million and were 4.0% lower year-over-year. The inventories of homes for sale at the end of April increased to 1.83 million from 1.67 million in March, and were 1.7% higher than a year ago. 

Unsold inventory reached a 4.2-month supply at the current sales rate compared to 3.8 months in March. This remains below the 6.0-months’ supply typically associated with a more balanced market. The data suggests lower than typical inventory coupled with relatively high home prices continues to hinder existing home sales despite a decline in mortgage rates.

Thursday, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced New Home Sales fell 6.9% month-over-month in April to a seasonally adjusted annual rate of 673,000. However, this was above the consensus forecast of 665,000 following a large upwardly revised reading of 723,000 for March. On a year-over-year basis, new home sales were 7.0% higher.

Regionally, April new home sales were lower in all regions except the Northeast where they were up 11.5%. Sales were 7.4% lower in the Midwest; 7.3% lower in the South; and 8.3% lower in the West.

The median sales price increased 8.8% year-year to $342,200 while the average sales price increased 2.2% to $393,700. The inventory of new homes for sale at the April sales rate increased to a 5.9-month supply from a 5.6-month supply in March.

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) rose 2.4% for the week ended May 17, 2019. The seasonally adjusted Purchase Index decreased 2% from a week prior while the Refinance Index increased 8%. Overall, the refinance portion of mortgage activity increased to 40.5% from 37.9% of total applications from the prior week.

The adjustable-rate mortgage share of activity increased to 6.8% of total applications from 6.3%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased to 4.33% from 4.40% with points increasing to 0.43 from 0.40 for 80 percent loan-to-value ratio (LTV) loans.

For the week, the FNMA 4.0% coupon bond gained 7.8 basis points to close at $102.859 while the 10-year Treasury yield decreased 7.00 basis points to end at 2.324%. The Dow Jones Industrial Average dropped 178.31 points to close at 25,585.69. The NASDAQ Composite Index fell 179.27 points to close at 7,637.01. The S&P 500 Index lost 33.47 points to close at 2,826.06. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 9.68%, the NASDAQ Composite Index has gained 15.10%, and the S&P 500 Index has advanced 12.73%.

This past week, the national average 30-year mortgage rate fell to 4.05% from 4.15%; the 15-year mortgage rate decreased to 3.88% from 3.90%; the 5/1 ARM mortgage rate decreased to 4.03% from 4.06%; and the FHA 30-year rate remained unchanged at 4.00%. Jumbo 30-year rates declined to 4.00% from 4.07%.

Economic Calendar – for the Week of May 27, 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 28 09:00 FHFA Housing Price Index Mar 0.3% 0.3%
May 28 09:00 S&P Case-Shiller Home Price Index Mar 2.9% 3.0%
May 28 10:00 Consumer Confidence Index May 130.0 129.2
May 29 07:00 MBA Mortgage Applications Index 05/25 NA 2.4%
May 30 08:30 Advance International Trade in Goods Apr -$72.0B -$71.4B
May 30 08:30 Advance Retail Inventories Apr NA -0.3%
May 30 08:30 Advance Wholesale Inventories Apr 0.1% 0.0%
May 30 08:30 Initial Jobless Claims 05/25 217,000 211,000
May 30 08:30 Continuing Jobless Claims 05/18 NA 1,676K
May 30 08:30 2nd Estimate of 1st Quarter GDP Qtr. 1 3.1% 3.2%
May 30 08:30 2nd Estimate of 1st Quarter GDP Deflator Qtr. 1 0.9% 0.9%
May 30 10:00 Pending Home Sales Apr 1.0% 3.8%
May 30 10:30 EIA Crude Oil Inventories 05/25 NA +4.7M
May 31 08:30 Personal Income Apr 0.3% 0.1%
May 31 08:30 Personal Spending Apr 0.2% 0.9%
May 31 08:30 PCE Price Index Apr 0.3% 0.2%
May 31 08:30 Core PCE Price Index Apr 0.2% 0.0%
May 31 10:00 Final Univ. of Michigan Consumer Sentiment Index May 101.5 97.2

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

The FNMA 30-year 4.0% coupon bond ($102.859 +7.8bp) traded within a wider 32.8 basis point range between a weekly intraday low of $102.641 on Tuesday and a weekly intraday high of 102.969 on Thursday before closing the week at $102.859 on Friday. Mortgage bonds traded up to resistance Wednesday through Friday following a dip lower and bounce off of support on Monday and Tuesday. The strong triple layer of technical support remains at the 50% Fibonacci retracement level ($102.618), the 25-day moving average ($102.665), and the 50-day moving average ($102.633). Further support is found at the 100-day moving average at $102.582. Technical resistance remains at $102.922, the intraday high of May 15 and at $103.109, the intraday high of March 27. The slow stochastic indicator indicates the bond is re-entering “overbought” status after taking a dip below the “80” trigger line earlier in the week and is currently trading on a buy signal. The chart suggests a move higher to re-test resistance levels and this may result in slightly lower mortgage rates this coming week.

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