The stock market surged higher during the week with the S&P 500 Index showing its best weekly performance of the year, and closing within about 3% of its all-time high. Investor enthusiasm was stimulated by expectations the Federal Reserve would cut short-term interest rates later this year if needed to keep the economy growing. Prospects for an interest rate cut originated from comments made last Tuesday by Federal Reserve Chairman Jerome Powell at a central bank conference.
Powell assured conference attendees that Fed policymakers were paying close attention to the impact of trade tensions on the economy and would “act as appropriate to sustain the expansion.” Following Powell’s comments, the Fed Funds Futures markets began pricing in a strong possibility of an interest rate cut announcement following the Fed’s July 30–31 monetary policy meeting. In fact, the futures market is currently pricing in an 87% probability for a 25 basis point cut in interest rates on July 31 and 95% probability for a rate cut on September 18 if one doesn’t happen on July 31.
Last Wednesday, evidence of a slowing U.S. economy surfaced when Automatic Data Processing (ADP) reported private sector payrolls had grown by only 27,000 in May, the smallest monthly payrolls growth seen in over nine years. Furthermore, the Labor Department reported last Friday that nonfarm payrolls had grown by only 75,000 in May, the weakest jobs number since February. The unemployment rate was unchanged at a 50 year low of 3.6%, but that was partly due to the labor force participation rate falling to its lowest level in eight months.
Average hourly earnings also rose (+0.2%) less than the forecast of +0.3%. On an annual basis over the last 12 months, average hourly earnings have risen 3.1%, versus 3.2% for the 12 months ending in April.
The poor jobs report sent the yield on the benchmark 10-year Treasury note to a 20-month low on Friday at 2.084%.
In housing last Tuesday, CoreLogic released its Home Price Index (HPI) and HPI Forecast for April 2019, showing home prices increased both year-over-year and month-over-month. On an annual basis, home prices have increased 3.6% nationally from April 2018. On a month-over-month basis, prices increased by 1% in April 2019.
After gazing into their crystal ball, CoreLogic’s HPI Forecast predicts home prices will continue to rise and increase by 4.7% from April 2019 to April 2020.
On a month-over-month basis, home prices are expected to pull back 0.3% from April 2019 to May 2019
Also Tuesday, the Data & Analytics Division of Black Knight, Inc. released its latest Mortgage Monitor Report showing home prices continued their trend of slowing down in March. However, lower interest rates during the last quarter have improved home affordability as measured by the monthly Payment to Income Ratio to its best level in more than a year.
Overall, the average front ratio is 22% versus the long-term average ratio of 25%. Lower interest rates and rising incomes are helping to lower this ratio while home prices continue to gradually appreciate. As a result, home buyers are seeing stronger gains in income to go along with the benefits from lower interest rates and this bodes well for housing.
As of May, the monthly payment required to purchase the average-priced house with 20% down is $1,173, the lowest such payment in more than a year.
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 1.5% for the week ended May 31, 2019. The seasonally adjusted Purchase Index decreased 2% from a week prior while the Refinance Index increased 6%. Overall, the refinance portion of mortgage activity increased to 42.2% from 39.7% of total applications from the prior week.
The adjustable-rate mortgage share of activity increased to 7.1% of total applications from 6.6%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance dropped to 4.23% from 4.33% with points decreasing to 0.33 from 0.42 for 80 percent loan-to-value ratio (LTV) loans.
For the week, the FNMA 3.5% coupon bond gained 21.9 basis points to close at $102.188 while the 10-year Treasury yield decreased 4.90 basis points to end at 2.084%. The Dow Jones Industrial Average soared 1,168.90 points to close at 25,983.94. The NASDAQ Composite Index climbed 288.95 points to close at 7,742.10. The S&P 500 Index gained 121.28 points to close at 2,873.34. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 11.39%, the NASDAQ Composite Index has gained 16.68%, and the S&P 500 Index has advanced 14.62%.
This past week, the national average 30-year mortgage rate fell to 3.86% from 3.94%; the 15-year mortgage rate decreased to 3.68% from 3.75%; the 5/1 ARM mortgage rate decreased to 3.85% from 3.99%; and the FHA 30-year rate declined to 3.62% from 3.75%. Jumbo 30-year rates were unchanged at 3.90%.
Economic Calendar – for the Week of June 10, 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|
|Jun 10||10:00||JOLTS Job Openings Report||Apr||NA||7.488M|
|Jun 11||08:30||Producer Price Index (PPI)||May||0.1%||0.2%|
|Jun 11||08:30||Core PPI||May||0.2%||0.1%|
|Jun 12||07:00||MBA Mortgage Index||06/08||NA||+1.5%|
|Jun 12||08:30||Consumer Price Index (CPI)||May||0.1%||0.3%|
|Jun 12||08:30||Core CPI||May||0.2%||0.1%|
|Jun 12||10:30||EIA Crude Oil Inventories||06/08||NA||+6.8M|
|Jun 12||14:00||Treasury Budget||May||NA||-$146.8B|
|Jun 13||08:30||Initial Jobless Claims||06/08||220,000||218,000|
|Jun 13||08:30||Continuing Jobless Claims||06/01||NA||1,682K|
|Jun 13||08:30||Export Prices||May||NA||0.2%|
|Jun 13||08:30||Import Prices||May||NA||0.2%|
|Jun 13||08:30||Export Prices excluding agriculture||May||NA||0.4%|
|Jun 13||08:30||Import Prices excluding oil||May||NA||-0.1%|
|Jun 14||08:30||Retail Sales||May||0.7%||-0.2%|
|Jun 14||08:30||Retail Sales excluding automobiles & small trucks||May||0.4%||0.1%|
|Jun 14||09:15||Industrial Production||May||0.2%||-0.5%|
|Jun 14||09:15||Capacity Utilization||May||78.0%||77.9%|
|Jun 14||10:00||Prelim. Univ. of Michigan Consumer Sentiment Index||Jun||98.1||100.0|
|Jun 14||10:00||Business Inventories||Apr||0.4%||
Mortgage Rate Forecast with Chart – FNMA 30-Year 4.0% Coupon Bond
The FNMA 30-year 3.5% coupon bond ($102.188 +21.9 bp) traded within a wider 39.1 basis point range between a weekly intraday low of $101.859 on Thursday and a weekly intraday high of 102.250 on Monday before closing the week at $102.188 on Friday. Mortgage bonds traded in a “U-shaped” pattern rising on Monday and dipping mid-week before bouncing back on Friday. A weak sell signal was generated on Tuesday followed by a weak buy signal on Friday. The bond remains “overbought” but we may see a challenge of overhead technical resistance located at the 23.6% Fibonacci retracement level ($102.274). A move up to resistance or a break above would result in stable to slightly lower mortgage rates this coming week.