Monday Market Update – 11/18/2019

This post is a week late and I am posting it to my webpage in ghostlike fashion to keep some continuity for my blog. Truth is that with the holiday looming, there really hasn’t been a tremendous amount of “news” in the market. Brexit is looming but not settled. The tariff-war with China is on again, off again with little, to no resolution. Geopolitics has a few hot spots (Hong Kong, Bolivia, Ecuador and maybe France’s yellow-jacket protests) but none of them are really moving the needle economically, as of today. It’s sort of a, “meh” for things that impact the mortgage market.

Product of the Week

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Your Weekly Technical Review Starts Here:

The major stock market indices ended the week at all-time closing highs, propped up on optimism of a US and China trade deal. Mortgage Bonds also ended the week higher, recovering much of the downturn in the previous week.

Fed Chair Powell spoke on Wednesday and said, “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.” This translates to keeping the Fed Funds Rate where it is, unless the economy takes a big downturn.

There were several economic reports released this week, with the highlight being the Cass Freight Index and inflation data. The October Cass Freight shipments index is an extremely telling and important report, but it is little followed by those in the media and mainly by those “in the know”.

Their methodology eloquently describes what they’re measuring: “As we try to navigate the ebb and flow of the economy, we don’t pretend to have any ‘secret sauce’ or incredibly complex models that have exhaustively analyzed every data point available. Instead, we place our trust in the simple notion that the movement of tangible goods is the heartbeat of the economy, and that tracking the volume and velocity of those goods has proven to be one of the most reliable methods of predicting change because of the adequate amount of forewarning that exists.”

The October Cass Freight shipments index was down year over year for the 11th straight month, decreasing nearly 4%. Cass Freight repeated what they have said for the past 5 months – That the shipments index has gone from warning of a potential slowdown to signaling an economic contraction. Cass Freight thinks we can see a negative GDP print as soon as Q4. We think there is a good chance of a recession in 2020.

On the inflation front – The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that headline inflation increased from 1.7% to 1.8% year over year.

The Core rate, which strips out food and energy prices, decreased slightly from 2.4% to 2.3%. In context the 2.4% reading was an 11-year high. The Fed focuses on the PCE (Personal Consumption Expenditures) report, which we received last week and is running much lower. Headline and Core PCE were 1.3% and 1.7% respectively.

Within the report, rents rose by 0.1% for the month and are increasing at a rate of 3.7% on a yearly basis, which is slightly lower than the 3.8% last month. Medical care costs were up 1% for the month and are up 4.3% year over year.

The Producer Price Index, which measures inflation on the wholesale level, increased 0.4% month over month in October, which was higher than expectations of a 0.3% gain. But on a year over year basis, headline PPI fell sharply from 1.4% to 1.1%. The Core reading, which strips out the volatile food and energy prices, was up 0.3% month over month, also slightly higher than the 0.2% gain expected. But once again, the year over year figure decreased significantly from 2.0% to 1.6%.

The Mortgage Bankers Association reported their Mortgage Application data for last week, as they do every Wednesday. Overall, Mortgage Application volume rose by 10% to the highest level in over a month. Applications to purchase a home were up 5.1% for the week and are up 15% from this time last year…a big jump from the 7% year over year gain last week. Refinances were up 13% and are up 188% year over year. The Refinance share of mortgage activity increased from 59.5% to 61.9%. ARM’s made up 4.9% of all applications while 13.1% of loans were FHA.

The average 30-year mortgage increased from 3.98% to 4.03% week over week, bringing rates 112 bp or about 1 1/8% lower than this time last year.

Economic Calendar – for the Week of November 18th, 2019

Date Time ET Event /Report /Statistic For Market Expects Prior
Nov 18 10:00 NAHB Housing Market Index Nov 71 71
Nov 19 08:30 Housing Starts Oct 1.320M 1.256M
Nov 19 Nov 13 08:30 Housing Permits Oct 1.380M 1.380M
Nov 20 Nov 13 08:30 Mortgage Applications Oct N/A N/A
Nov 13 02:00 FOMC Minutes 10/30 N/A N/A
Nov 14 08:30 Initial Jobless Claims Oct 219K 225K
Nov 14 08:30 Philly Fed Nov 7.5 5.6
Nov 14 10:00 Existing Home Sales Oct 5.38M 5.48M

Mortgage Rate Forecast with Chart – UMBS 30-Year 3.0% Coupon Bond

Mortgage Bonds made some nice gains this week, recovering much of the losses from the previous week. Volatility is likely to remain in vogue, with the markets reacting sharply to every comment on the US and China trade relations. Bonds have made some strong technical advances, breaking above their 25, 100, and 50-day Moving Averages. Bonds will likely contend with the 101.46 ceiling, which is a falling trend line and will be an important level to watch. If Bonds can break above 101.46, there is room for Bonds to move higher and rates to move lower. If Bonds stall at this level, at least there are three floors of support beneath present levels.

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