Rates continue to decline but are still highly volatile. So long as there continues to be uncertainty in the global economy (think the China-USA trade war or the promise of a “No-Deal Brexit”), we’ll continue to see things be somewhat unsettled. But know that this is still a great time to buy a home and/or refinance an existing property. Rates are at historical lows and look to be holding that downward trend nicely for the next several weeks, barring any unusual economic or geo-political events.
This morning the discussion among the market gurus centered on a “Flattening Yield Curve, with the Yield Curve inverting for first time since 2007.” Some of you may know exactly what this means. A few of you may have even heard this flattening or inversion indicates that we are heading into an economic recession.
But what does it mean to have a flat or even inverted yield curve? First, let’s look at the Yield Curve.
Very simply, it is a plot of a bonds along a maturity spectrum. So, it could be, for example, a bunch of 10-Year US Treasury Bonds or maybe on a different curve, it’s a shorter-term bond, like the 2-Year US Treasury. The spectrum is based on various points in time at what each of these bonds were priced at a specific hour or on a specific day. That plot creates a “curve”—sometimes steep, sometimes flat, sometimes it’s upside down or “inverted”.
In looking at these two specific instruments, the 10-Year and the 2-Year treasury bonds, the market likes to watch how far apart they are in relation to one another. The financial gurus believe that when the “Yield” of the 10-Year is higher than the 2-Year, things are generally running smoothly in our economy.
However, when the 2-Year treasury bond yield is close in price, this indicates the yield curve is flattening. When the 2-Year treasury is higher than the 10-Year, (known as yield curve inversion) some believe this to be a sign that we are headed towards a recession or pullback in our economy.
Now, that’s a very simplistic analysis. Truth is that the smart folks in the business of financial analysis and prediction are looking at several indicators or metrics to make their predictions. Things like trade wars (USA and China), global economic events (rate cuts or bond instability in other countries), political uncertainties (Brexit) all play a role.
I might waste some space here talking about which is better or worse but there are arguments on both sides for each of a steep, flat or inverted curve. You can read more about that here. In that article, The Balance, has a great summary, which I will gratefully borrow:
Think of yield curves as something of a crystal ball, although not one that necessarily guarantees a certain answer. Yield curves simply offer investors some educated insight into likely short-term interest rates and economic growth. Used properly, they can provide guidance, but they’re not oracles.
Looking to buy, refinance or just learn more about your home finance options? Call me today!
Your Weekly Technical Review Begins here:
The major stock market indexes saw a sharp increase in volatility during the week enduring the worst trading day of the year on Monday. The markets then spent the rest of the week trying to recover most of their losses with the Dow Jones Industrial Average only losing 0.8%, the Nasdaq Composite losing just 0.6%, and the S&P 500 only down 0.5%.
Last Monday’s sell-off was triggered by China’s devaluation of its currency the yuan, allowing it to weaken beyond seven yuan per dollar to counteract President Trump’s latest China tariff announcement. Also weighing on stocks were plunging U.S. Treasury yields resulting in a further flattening of the yield curve along with an announcement by China they were suspending U.S. agricultural purchases. China’s currency devaluation was the greatest in 10 years prompting the U.S. to label China as a currency manipulator.
The flattening yield curve narrowed the spread between the 2-year (1.63%) and 10-year (1.74%) treasury yields instilling a degree of fear among some investors. The 2-year / 10-year yield spread narrowed to its lowest difference since 2007, and when this spread “inverts” with the 2-year yield greater than the 10-year yield it is widely viewed as an indicator for a pending economic recession.
However, interest rates are currently either zero or negative in many countries. There are 21 countries with central banks having zero interest rates and the European Central Bank, Japan, Sweden, Denmark, Switzerland and several private German banks currently have negative interest rates. Negative rates are about the only tool many central banks have left to use to stimulate their economies, so it is likely this low interest rate environment will persist globally. Low or negative interest rates will likely lead to an increase or expansion in asset values of real estate and equities.
The week’s economic calendar was light. Labor market indicators remained strong with June job openings exceeding expectations while weekly jobless claims were less than forecast. Friday, the Labor Department reported core producer prices, which exclude food and energy prices, had dropped 0.1% July, marking the first decline since 2017. This decline in wholesale inflation helps to support the view the Federal Reserve will continue to cut short-term interest rates. Indeed, the Fed funds futures market is currently pricing in an 88% probability for at least two more quarter-point rate cuts by the end of this year.
In housing last Tuesday, CoreLogic released its Home Price Index (HPI) and HPI Forecast for June 2019 showing home prices rose both year-over-year and month-over-month. From June 2018, home prices increased nationally by 3.4%.
On a month-over-month basis, prices in June increased by 0.4%. Single-family home prices are at an all-time high and continue to increase on an annual basis with CoreLogic forecasting an annual price growth increase of 5.2% from June 2019 to June 2020. On a month-over-month basis, CoreLogic is forecasting home prices to increase by 0.5% from June 2019 to July 2019. CoreLogic’s chief economist, Dr. Frank Nothaft, had this to say about home prices “Tepid home sales have caused home prices to rise at the slowest pace for the first half of a year since 2011. Price growth continues to be faster for lower-priced homes, as first-time buyers and investors are both actively seeking entry-level homes. With incomes up and current mortgage rates about 0.8 percentage points below what they were one year ago, home sales should have a better sales pace in the second half of 2019 than a year earlier, leading to a quickening in price growth over the next year.”
Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications increased 5.3% from the prior week. The MBA reported their overall seasonally adjusted Market Composite Index (application volume) rose 5.3% for the week ended August 2, 2019. The seasonally adjusted Purchase Index declined 2% from a week prior while the Refinance Index increased 12.0%. Overall, the refinance portion of mortgage activity increased to 53.9% from 50.5% of total applications from the prior week. The adjustable-rate mortgage share of activity was unchanged at 4.7% of total applications. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased to 4.01% from 4.08% with points increasing to 0.37 from 0.34 for 80 percent loan-to-value ratio (LTV) loans.
For the week, the FNMA 3.5% coupon bond finished 12.5 basis points lower to close at $102.578 while the 10-year Treasury yield decreased 11.04 basis points to end at 1.745%. The Dow Jones Industrial Average fell 197.57 points to close at 26,287.44. The NASDAQ Composite Index dropped 44.93 points to close at 7,959.14. The S&P 500 Index lost 13.40 points to close at 2,918.65. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 12.69%, the NASDAQ Composite Index has gained 19.95%, and the S&P 500 Index has advanced 16.43%.
This past week, the national average 30-year mortgage declined to 3.64% from 3.70%; the 15-year mortgage rate decreased to 3.32% from 3.38%; the 5/1 ARM mortgage rate fell to 3.45% from 3.60%; and the FHA 30-year rate remained unchanged at 3.25%. Jumbo 30-year rates decreased to 3.71% from 3.80%.
Economic Calendar – for the Week of August 12, 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|
|Aug 12||14:00||Treasury Budget||Jul||-$100.0B||-$76.9B|
|Aug 13||08:30||Consumer Price Index (CPI)||Jul||0.3%||0.1%|
|Aug 13||08:30||Core CPI||Jul||0.2%||0.3%|
|Aug 14||07:00||MBA Mortgage Applications Index||08/10||NA||5.3%|
|Aug 14||08:30||Import Prices||Jul||NA||-0.9%|
|Aug 14||08:30||Export Prices||Jul||NA||-0.7%|
|Aug 14||08:30||Import Prices excluding oil||Jul||NA||-0.3%|
|Aug 14||08:30||Export Prices excluding agriculture||Jul||NA||-1.1%|
|Aug 14||10:30||EIA Crude Oil Inventories||08/10||NA||+2.4M|
|Aug 15||08:30||Initial Jobless Claims||08/10||215,000||209,000|
|Aug 15||08:30||Continuing Jobless Claims||08/03||NA||1,684K|
|Aug 15||08:30||Retail Sales||Jul||0.3%||0.4%|
|Aug 15||08:30||Retail Sales excluding automobiles & light trucks||Jul||0.3%||0.4%|
|Aug 15||08:30||New York Empire State Manufacturing Index||Aug||1.1||4.3|
|Aug 15||08:30||Philadelphia Fed Manufacturing Index||Aug||10.0||21.8|
|Aug 15||08:30||Preliminary Productivity||Qtr. 2||1.3%||3.4%|
|Aug 15||08:30||Preliminary Unit Labor Costs||Qtr. 2||1.6%||-1.6%|
|Aug 15||09:15||Industrial Production||Jul||0.1%||0.0%|
|Aug 15||09:15||Capacity Utilization||Jul||77.8%||77.9%|
|Aug 15||10:00||Business Inventories||Jun||0.1%||0.3%|
|Aug 15||16:00||Net Long-Term TIC Flows||Jun||NA||$3.5B|
|Aug 16||08:30||Housing Starts||Jul||1,245K||1,253K|
|Aug 16||08:30||Building Permits||Jul||1,260K||1,220K|
|Aug 16||10:00||Prelim. Univ. of Michigan Consumer Sentiment Index||Aug||97.7||98.4|
Mortgage Rate Forecast with Chart – FNMA 30-Year 4.0% Coupon Bond
The FNMA 30-year 3.5% coupon bond ($102.578; -12.50 bp) traded within a narrower 48.4 basis point range between a weekly intraday low of $102.50 on Thursday and Friday and a weekly intraday high of 102.984 on Monday before closing the week at $102.578 on Friday.
Mortgage bonds traded lower on a sell signal generated last Tuesday from a slow stochastic crossover while “overbought.” The bond managed to pop above the horizontal consolidation zone highlighted in the chart below as a yellow rectangle last Monday. However, it trended back into this zone during the remainder of the week and appears headed for a test of dual support located at $102.453 and the 38.2% Fibonacci level at $102.346. We could see a bounce higher off of these support levels this coming week resulting in stable mortgage rates, but a breach of support could result in slightly worse rates.