Mortgage Rates Move Slightly

Rate update as of June 10, 2021

This week’s busy economic calendar brings more news on inflation, along with key housing reports, including the Home Builders Housing Market Index, May Housing Starts and Building Permits, along with weekly Jobless Claims and Fed will also be holding their two-day meeting beginning Tuesday, with their Monetary Policy Statement releasing on Wednesday. We need to stay on our toes here, folks. Rates are on the move up but it is STILL a great time to buy!

The economy is recovering remarkably fast and as pandemic restrictions continue to lift, economic growth will remain strong over the coming months. Despite the stronger economy, the housing market is experiencing a slowdown in purchase application activity due to modestly higher mortgage rates. However, it has yet to translate into a weaker home price trajectory because the shortage of inventory continues to cause pricing to remain elevated.

Week of June 7, 2021 in Review

Consumer inflation was on the rise in May, while small business owners also expressed labor and inflation fears. Plus, two important auctions were in the news.

Consumer inflation rose by 0.6% in May per the Consumer Price Index (CPI) report. On an annual basis, CPI increased from 4.2% to 5%, which was the highest year over year increase in almost 13 years! Core CPI, which strips out volatile food and energy prices, also made headlines, as it was up 0.7% in May while the year over year reading increased from 3.0% to 3.8%. The Core CPI annual reading was the highest annual increase in 29 years!

Rising inflation is crucial to monitor because it can have a big impact on Mortgage Bonds and the home loan rates tied to them. Be sure to read the important explanation below.

Inflation and labor concerns were also on the minds of small business owners last month, per the National Federation of Independent Business Small Business Optimism Index. Businesses expecting higher selling prices rose 4 points to 40%, which is the highest level in 40 years! In addition, a record-high 48% of small business owners reported unfilled job openings in May, up from 44% in April.

We did see a small improvement in Initial Jobless Claims in the latest week, as the number of people filing for unemployment benefits for the first time decreased by 9,000 to 376,000. The number of people continuing to receive regular benefits is at 3.5 million while 15.35 million people are still receiving benefits throughout all programs. We likely won’t see meaningful changes in this data until after September, when the extended benefits expire. Even still, the situation could continue to prove challenging for many families that are relying on schools or childcare to open fully.

Lastly, investors were closely watching the 10-year Treasury and 30-year Bond auctions that were held last week on Wednesday and Thursday, respectively. Find out more about the results below.

Red Hot Consumer Inflation

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.6% in May. The year over year reading increased from 4.2% to 5%, which was the highest year over year increase in almost 13 years!

Core CPI, which strips out food and energy prices, was up 0.7% in May. On a year over year basis, Core CPI increased from 3.0% to 3.8%, which is the highest year over year increase in 29 years!

Within the report, we saw that rents rose 0.1% in May, increasing by 2% on a year over year basis. A rise in rent prices will likely lag but could contribute more to service inflation in the coming months.

Remember that part of the reason for the increase in the annual comparisons is that readings for the more current months are replacing the readings from 2020 when much of the economy was shut down due to the pandemic. For example, the -0.1% reading of Core CPI from May 2020 has now been replaced with a 0.7% reading from May of this year.

Even though this rise in inflation in May was expected, the big question is whether or not some of the factors influencing inflation are going to be transitory. Inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates move higher.

Though many factors influence the markets, keeping an eye on inflation is always important.

Businesses Express Labor and Inflation Fears

Inflation was also on the minds of small business owners last month, per the National Federation of Independent Business Small Business Optimism Index. Businesses expecting higher selling prices rose 4 points to 40%, which is the highest level in 40 years!

Labor was also a big concern, as a record-high 48% of small business owners reported unfilled job openings in May, up from 44% in April. In addition, the quality of labor ranked as businesses’ “single most important problem,” with 57% of respondents saying they had few or no qualified applicants for open jobs, up from 54% in April.

If production costs are rising and businesses can’t find workers to fill positions, they have to pay workers more and raise prices. These reports only point to higher inflation to come.

On a related noted, the Labor Department’s JOLTS report, which tracks the monthly change in job openings, was reported at a record 9.3 million in April, which is an increase of 1 million from March. Only 7% of new job postings were filled.

Initial Jobless Claims Remain Under 400,000

The number of people filing for unemployment benefits for the first time decreased by 9,000 in the latest week, as Initial Jobless Claims totaled 376,000. Though this wasn’t much of an improvement from the previous week, it was a move in the right direction. California (+53K), Illinois (+31K) and Georgia (+21K) reported the largest number of claims.

The number of people continuing to receive regular benefits decreased by 258,000, with   Continuing Claims coming in at 3.5 million. We likely won’t see meaningful changes in this data until after September, when the extended benefits expire. Even still, many people who have children and rely on schools or childcare opening may still face challenges.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) decreased by roughly 83,000 combined.

All in all, 15.35 million people are still receiving benefits throughout all programs, which is down 95,000 from the previous week.

Update on Auctions

Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively, to see if there would be more demand for Treasuries and Bonds at auction.

Demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

The 10-Year Treasury Note Auction was met with above average demand, which helped Mortgage Bonds move higher afterwards. The bid to cover of 2.58 was above the one-year average of 2.40. Direct and indirect bidders took 84.2% of the auction compared to 76.2% in the previous 12.

Thursday’s 30-year Bond Auction was met with average demand. The bid to cover of 2.29 was just below the one-year average of 2.33. Direct and indirect bidders took 82% of the auction compared to 79.5% in the previous 12.

What to Look for This Week

This week’s busy economic calendar brings more news on inflation, along with key housing reports.

On Tuesday, we’ll get an update on wholesale inflation when May’s Producer Price Index is reported. Plus, we’ll see how retailers fared in May with the latest Retail Sales data and how manufacturing in the New York region is doing with June’s Empire State Index.

Housing news also begins on Tuesday with an update on how builders are feeling this month via the National Association of Home Builders Housing Market Index. More housing news follows Wednesday when the data for May’s Housing Starts and Building Permits is reported.

On Thursday, weekly Jobless Claims will be reported as usual along with more regional manufacturing news from the Philadelphia Fed Index.

The Fed will also be holding their two-day meeting beginning Tuesday, with their Monetary Policy Statement releasing on Wednesday. This always has the potential to move the markets, especially if there are comments about inflation or their ongoing asset purchases.

Technical Picture

Mortgage Bonds are testing the 25-day Moving Average, which is now acting as a ceiling of resistance, after breaking beneath it. If they remain below it, the next level of support is at the 50-day Moving Average. The 10-year is sitting in the middle of a wide range between overhead resistance at the 100-day Moving Average and support at the 1.373 Fibonacci Level.