Monday Market Update – 06/24/2019

What do you call two hippos on a bicycle? Optimists.

Speaking of optimism, there’s a lot of it recently with some speculating that mortgage rates may continue to decline into the fall of this year. The Fed last week, in their meeting minutes, indicated that they may cut the overnight rate in July, which doesn’t exactly correlate but does add to the mix of the ongoing trade war with China, geopolitical instability in the middle east, the confusion over Brexit and who will lead the United Kingdom after Theresa May’s resignation and the European Central Bank suggesting new stimulus for the EU is on the way. All of these together have the potential to create a recipe for money moving towards the bond market and potentially lower rates. But not so fast, the stock market continues to perform, making the flight to safe money (mortgage backed securities) tentative. Even with the uncertainty of the market, average 30 year fixed rate mortgages today are the lowest we’ve seen since 2017, making now a great time to buy or refinance. Call me to discuss your specific situation.

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Several catalysts during the week powered the stock market higher with the broader S&P 500 Index gaining 2.2%, the technology-laden Nasdaq Composite Index gaining 3.0%, the small-cap Russell 2000 Index adding 1.8%, and the Dow Jones Industrial Average advancing 2.4%. The most significant catalyst arrived Wednesday when the Federal Reserve strengthened investor expectations for an interest rate cut later on this year by removing the word “patient” from their monetary policy statement referencing interest rate adjustments and stated they “will act as appropriate to sustain the (economic) expansion,” indicating a willingness to cut interest rates if necessary.

The bond market also responded very favorably to the Fed’s new policy language and was also buoyed by European Central Bank (ECB) President Mario Draghi’s statement saying the ECB “could introduce new stimulus measures, possibly including renewed purchases of corporate debt, to lift growth and inflation.” In response to all the recent central bank news citing low inflation levels as a reason for easier monetary policy, the fed funds futures market is now showing a 100% implied probability of an interest rate cut at the Fed’s July 31 FOMC meeting. The expectations for lower interest rates sent bond yields lower across the globe with the yield on U.S. 10-year treasuries briefly falling below 2.00% for the first time since 2016 before closing the week at 2.059%.

Another catalyst providing a boost to stocks, this time in the energy sector, occurred when Iran decided to shoot down a U.S. Global Hawk surveillance drone over the Strait of Hormuz. This news pushed crude oil 9.2% higher on Thursday while increasing geopolitical tension in the Middle East. President Trump initially ordered a retaliatory military strike on Iran, but then cancelled it at the last moment after learning the damage inflicted and estimated loss of 150 Iranian lives wasn’t proportional to the downing of an unmanned drone.

Additional positive investor sentiment happened when news broke there would be “an extended meeting” at the G-20 conference scheduled to be held June 28–29 in Japan between President Trump and Chinese President Xi Jinping. Investors are hoping progress can be made toward resolving the ongoing trade war between the U.S. and China.

In housing last Tuesday, the U.S. Census Bureau and the Department of Housing and Urban Development released their latest Housing Starts and Building Permits report showing Housing Starts declined 0.9% month-over-month in May to a seasonally adjusted annual rate of 1.269 million. This was slightly above the consensus forecast of 1.240 million but below April’s upwardly revised 1.281 million in April.  

Single-family housing starts declined 6.4% month-over-month to 820,000 and were 12.5% lower year-over-year. Multi-unit starts increased 10.9% month-over-month in May. Regionally, single-family starts were 25.8% lower in the Northeast; 5.8% lower in the Midwest; 3.3% higher in the South; and 19.9% lower in the West.

Meanwhile, Housing Permits increased 0.3% month-over-month in May to a seasonally adjusted annual rate of 1.294 million. This was marginally below the consensus forecast of 1.295 million and just above an upwardly revised 1.290 million in April. Single-family building permits increased 3.7% month-over-month to 815,000 but were 3.3% lower year-year. Multi-unit permits declined 5.0% month-over-month in May. Regionally, single-family permits were 2.0% lower in the Northeast, 0.9% lower in the Midwest, 7.7% higher in the South, and 1.0% lower in the West.

Despite the slip in the number of Starts, Housing Permits increased to their best level since January suggesting the housing market is primed to hold steady during the traditionally strong summer months.

Friday, the National Association of Realtors (NAR) released their Existing Home Sales report showing sales increased 2.5% month-over-month in May to a seasonally adjusted annual rate of 5.34 million. This was above the consensus forecast of 5.30 million and above an upwardly revised 5.21 million in April. However, total sales were 1.1% lower year-over-year. Single-family home sales increased 2.6% month-over-month to a seasonally adjusted annual rate of 4.75 million but were 0.8% lower year-over-year.

Regionally, existing home sales were 4.7% higher in the Northeast; 3.4% higher in the Midwest; and 1.8% higher in both the South and West.

Existing home prices for all housing types continued to rise with the median price increasing 4.8% year-over-year to a record $277,700. The median existing single-family home price was 4.6% higher year-over-year rising to $280,200.

Home inventory listed for sale at the end of May increased to 1.92 million from 1.83 million in April and was 2.7% greater than a year ago. At the current sales rate, unsold inventory was at a 4.3-month supply versus 4.2 months in April and remains below the 6.0-months’ supply typically seen in a balanced real estate market.

Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications fell 3.4% from the prior week. The MBA reported their overall seasonally adjusted Market Composite Index (application volume) declined 3.4% for the week ended June 14, 2019. The seasonally adjusted Purchase Index decreased 4% from a week prior while the Refinance Index also decreased 4%. Overall, the refinance portion of mortgage activity increased to 50.2% from 49.8% of total applications from the prior week.

The adjustable-rate mortgage share of activity decreased to 6.1% of total applications from 7.9%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.14% from 4.12% with points increasing to 0.38 from 0.33 for 80 percent loan-to-value ratio (LTV) loans.

For the week, the FNMA 3.5% coupon bond gained 20.3 basis points to close at $102.125 while the 10-year Treasury yield decreased 2.70 basis points to end at 2.059%. The Dow Jones Industrial Average gained 629.52 points to close at 26,719.13. The NASDAQ Composite Index added 235.05 points to close at 8,031.71. The S&P 500 Index advanced 63.48 points to close at 2,950.46. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 14.54%, the NASDAQ Composite Index has gained 21.05%, and the S&P 500 Index has advanced 17.70%.

This past week, the national average 30-year mortgage rate dropped to 3.80% from 3.92%; the 15-year mortgage rate decreased to 3.62% from 3.71%; the 5/1 ARM mortgage rate fell to 3.72% from 3.85%; and the FHA 30-year rate declined to 3.60% from 3.71%. Jumbo 30-year rates decreased to 3.88% from 3.91%.

Economic Calendar – for the Week of June 24, 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 25 08:00 S&P Case-Shiller Home Price Index Apr 2.5% 2.7%
Jun 25 09:00 FHFA Housing Price Index Apr 0.2% 0.1%
Jun 25 10:00 Consumer Confidence Index Jun 132.0 134.1
Jun 25 10:00 New Home Sales May 683,000 673,000
Jun 26 07:00 MBA Mortgage Applications Index 06/22 NA -3.4%
Jun 26 08:30 Durable Goods Orders May -0.3% -2.1%
Jun 26 08:30 Durable Goods Orders excluding transportation May 0.1% 0.0%
Jun 26 08:30 Advance International Trade in Goods May NA -$72.1B
Jun 26 08:30 Advance Retail Inventories May NA 0.5%
Jun 26 08:30 Advance Wholesale Inventories May NA 0.7%
Jun 26 10:30 EIA Crude Oil Inventories 06/22 NA -3.1M
Jun 27 08:30 Initial Jobless Claims 06/22 219,000 216,000
Jun 27 08:30 Continuing Jobless Claims 06/15 NA 1,662K
Jun 27 08:30 3rd Estimate of 1st Quarter GDP Qtr. 1 3.1% 3.1%
Jun 27 08:30 3rd Estimate of 1st Quarter GDP Deflator Qtr. 1 0.8% 0.8%
Jun 27 10:00 Pending Home Sales May 1.0% -1.5%
Jun 28 08:30 Personal Income May 0.3% 0.5%
Jun 28 08:30 Personal Spending May 0.4% 0.3%
Jun 28 08:30 PCE Price Index May 0.2% 0.3%
Jun 28 08:30 Core CPE Price Index May 0.1% 0.2%
Jun 28 10:00 Final Univ. of Michigan Consumer Sentiment Index Jun 97.9 97.9

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

The FNMA 30-year 3.5% coupon bond ($102.125; +20.3 bp) traded within a much wider 79.7 basis point range between a weekly intraday low of $101.828 on Monday and a weekly intraday high of 102.625 on Friday before closing the week at $102.125 on Friday.

The bond showed an increase in volatility Wednesday through Friday, spiking higher on Wednesday to close just above the 23.6% Fibonacci retracement resistance level. Thursday, the bond’s price opened higher than Wednesday’s close then traded down to close just above the 23.6% Fibonacci retracement resistance level once again. Friday was volatile with a 59.4 basis point trading range between the intraday high and low before closing below the aforementioned resistance level.

What to make of all this volatility? Technically, the slow stochastic indicator shows a buy signal from Wednesday’s trading action but also shows the bond is “overbought” and susceptible to a pull-back in price. The chart suggests we will likely see the bond trade between nearest support and resistance levels resulting in little movement in mortgage rates this coming week.

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