After moving up for seven consecutive weeks, mortgage rates have dropped due to the recent, modest decline of U.S. Treasury yields. As the economy recovers, it should experience a strong rebound in the labor market. Combined, these positive signals will continue to bolster purchase demand. The drop in rates creates yet another opportunity for those who have not refinanced to take a look at the possibility.
Week of April 5, 2021 in Review
Hot wholesale inflation numbers and hot home appreciation figures highlighted a fairly quiet week of economic reports.
The Producer Price Index (PPI), which measures wholesale inflation, more than doubled its expected increase, rising 1% from February to March. On an annual basis, PPI surged from an already elevated 2.8% to 4.2%. Core PPI, which strips out volatile food and energy prices, increased as well.
Also of note regarding inflation, the Institute of Supply Management (ISM) Services Index (which gives us a read on the overall health of the non-manufacturing sector) rose from 55 to 64 in March. This was well above estimates and the highest on record. Within the report, the ISM explained how production capacity constraints, material shortages, weather, and challenges in logistics and human resources continue to cause supply chain disruption. This is likely a recipe for continued price pressures, which can lead to higher inflation.
Rising inflation can have a big impact on Mortgage Bonds, and the home loan rates tied to them. Read on to learn more – and what the Fed thinks about inflation forecasts this year.
Inflation wasn’t the only thing that was reported hot last week: Home prices continue to appreciate. CoreLogic’s Home Price Index report showed that home prices increased 1.2% during February. Prices also rose 10.4% compared to February of last year, which is up from the 10% annual gain in January.
And unfortunately, Initial Jobless Claims were also on the rise in the latest week. The number of people filing for unemployment for the first time increased by 16,000, as Initial Jobless Claims reached 744,000. Factoring in continuing and pandemic-related claims, 18.2 million people are still receiving benefits throughout all programs, compared to 3.4 million people who were receiving benefits through all programs in the comparable week last year.
Wholesale Inflation Comes in Hot
The Producer Price Index (PPI), which measures wholesale inflation, rose by 1% in March, which was more than double expectations. On a year over year basis, headline PPI increased from an already elevated 2.8% to 4.2%.
Core PPI, which strips out volatile food and energy prices, was up 0.7% for the month, again much higher than the 0.2% increase that was expected. Year over year, Core PPI increased from 2.5% to 3.1%.
Part of the reason for the increase in wholesale inflation, which may continue this spring, is that readings for the more current months are replacing the readings from 2020 when much of the economy was shutdown.
Why does rising inflation matter?
Inflation is the arch enemy of fixed investments like Mortgage Bonds because it reduces their value. Home loan rates are inversely tied to Mortgage Bonds. Rising inflation can cause Bonds to worsen or move lower, which means home loan rates can rise.
The Fed has stated that they will be tolerant of inflation but has also reiterated that they believe rising inflation will be transitory. Though many factors influence the markets, it’s always important to keep an eye on inflation headlines since they can have such an impact on Mortgage Bonds and home loan rates.
No Winter Cool Down for Home Appreciation
CoreLogic released their Home Price Index report for February, showing that home prices increased 1.2% during the month. Prices also rose 10.4% on a year over year basis, which is up from the 10% annual gain in January.
Within the report, the hottest markets were Phoenix (+16.2%), San Diego (+12.3%) and Denver (+10.0%).
CoreLogic forecasts that home prices will rise 0.6% in March. However, they have been forecasting minimal gains each month and yet the gains have been higher and closer to 1%. For example, they had previously forecasted we would see a 0.5% rise in February, versus the 1.2% gain that was reported.
CoreLogic predicts home prices will appreciate 3.2% in the year going forward, which is lower than the 3.3% forecast in their previous report and still lower than most forecasts out there. Remember that not that long ago they were expecting a negative 6.6%.
Initial Jobless Claims Moving in Wrong Direction
The number of people filing for unemployment for the first time increased by 16,000 in the latest week, as Initial Jobless Claims reached 744,000. This is the second week in a row that Initial Claims moved the wrong way. California (+145K), Texas (+79K) and New York (+67K) reported the largest number of claims.
Continuing Claims, which measure people who continue to receive benefits, declined by 16,000 to 3.73 million.
Pandemic Unemployment Assistance Claims (which give benefits to people would not usually qualify) increased by 200,000, while Pandemic Emergency Claims (which extend benefits after regular benefits expire) decreased by 120,000.
As a result, 18.2 million people are still receiving benefits throughout all programs, which is pretty stable compared to the previous week – and still significantly higher than the 3.4 million people who were receiving benefits through all programs in the comparable week last year. The bottom line is that we are still not seeing any significant improvement in jobless claims, unfortunately.
What to Look for This Week
Two auctions are ahead this week, with the 10-Year Note auction Monday and 30-Year Bond auction set for Tuesday, which will be important to monitor. Plus, key reports across a wide spectrum of the economy could move the markets this week.
On Tuesday, more inflation news will be reported with March’s Consumer Price Index, which can certainly impact the markets especially if inflation comes in hot. We’ll also get a read on how small businesses were feeling in March with the National Federation of Independent Business Small Business Optimism Index.
Thursday brings a plethora of news, including weekly Jobless Claims, March Retail Sales, regional manufacturing data for April from the Empire State Index and Philadelphia Fed Index, and April’s National Association of Home Builders Housing Market Index, which will give us a real-time read on builder confidence.
More housing news end the week on Friday, when Housing Starts and Building Permits for March are reported.
Technical Picture
Mortgage Bonds are trading in a wide range between support at the 25-day Moving Average and overhead resistance at the 50-day Moving Average. Although Bonds ended last week with a lot of room to the upside, there is also lot of risk this week with the auctions and Consumer Price Index, so I’ll be keeping a close eye on things.
