Wednesday’s Economic Update, Rates and the Fed … The Energy Information Administration reported crude oil inventories in the U.S. increased by 9.6 million barrels to a new record of 458.5 million barrels in the week ended March 13. Analysts had expected an increase of just 4.4 million barrels. The amount of oil production in the U.S. also increased to a rate of 9.42 million barrels a day, the sixth consecutive week of rising production. This news led to a 2.6% decline in West Texas Intermediate crude oil sending prices to a low of $42.34 per barrel while triggering selling pressure in the stock market and modest buying in bonds ahead of the Fed’s monetary policy decision.
However, once the Fed policy statement was released at 2:00 p.m. ET the Dow Jones Industrials shot higher from over 128 points down to 173 points higher, a 300 point swing. Mortgage bonds also reacted by shooting skyward with the FNMA 30-year 3% moving 50 basis points higher while the 10-year Treasury yield moved 8 basis points lower. The reason for these large price swings? The Fed, as largely anticipated, dropped the key word “patient” from its policy statement, giving itself greater flexibility for the timing of its first interest rate hike in nine years.
Investors and traders focused on a couple of key statements including the following. “This change in the forward guidance does not indicate that the committee has decided on the timing of the initial increase.” The Fed’s statement also read “The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective.” Although the word “patient” was removed from the statement, the FOMC recognized that the economy has “moderated somewhat.” As a result, the 2015 GDP forecast was reduced to 2.3% from 2.7%. The cautious commentary on the economy contained within the policy statement offset the impact of dropping the call for “patience,” and this was the catalyst for the financial markets to rocket higher. With the U.S. dollar surging higher, crude oil prices continuing to plummet, and recent economic data showing signs of deflation rather than inflation, it seems unlikely the Fed would have the justification to raise rates anytime soon.
In mortgage news, the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 13, 2015 showed applications fell 3.9% from one week earlier. The Refinance Index retreated 5% from the prior week while the Purchase Index fell 2% from one week earlier. The refinance share of mortgage activity fell to 59% of total applications, the lowest level since October 2014, from 60 percent the prior week. The adjustable-rate mortgage share of activity dropped to 5.5% of total applications.
Stocks are much lower and Mortgage Bonds are higher so far this morning. News that China has tightened credit is having a “butterfly effect” and negatively affecting Stock markets around the world. In addition, Fed Vice Chair Fischer said that we have gotten to use to 0 rates and when they do up, they will go up for some time. These remarks did not affect the Bond Market, but Stocks are selling off.
And speaking of the Fed, it is being heavily debated on when the Fed should remove their “considerable time” language from their statement. Many are speculating it may be removed at the Fed Meeting next Wednesday… We will find out next week. It’s another quiet news day, but we did get the National Federation of Independent Business (NFIB) reported that optimism among small business owners increased 2 points in December from 96.1 to 98. This was much higher than expectations and the best in almost 8 years. Of the 10 components surveyed, four improved, three remained stable, and three declined. But the component “Expect the economy to improve” was up a whopping 16 points and “Expectations for real sales volumes” was up 5 points.
Mortgage Bonds have moved higher after testing support bouncing off of support on both Friday and Monday, and are now trading just above overhead resistance at 104.29. The 10-year Treasury Note Yield has most lower after testing its 25-day Moving Average and is now back down below support at 2.22%. Our patience certainly has paid off.
Stocks are mixed and Mortgage Bonds are trading slightly lower so far this morning. The ADP released their Employment report for November, showing that there were 208k jobs created. This was lower than expectations of 225k, but still a decent number. This did mark the 8th month in a row of 200k+ job creations. Additionally, last month’s figure of 230k was revised higher to 233k. We will see how Friday’s more important BLS Jobs Report fares. But given that the two reports have correlated pretty well over the last few months (as seen below), with the BLS usually coming in higher, we could expect a report on Friday over 200k. More on that in our Jobs Report Strategy tomorrow.
Earlier this morning, the Mortgage Bankers Association reported that Mortgage Applications decreased by 7.3%. This was led by Refinances, which were down 13%. Refinances accounted for 60% of total applications. Purchases, on the other hand, were up by 3% and are now down only 4% on a year over year basis. This is one of the narrowest margins we have seen in a while. Interest rates decreased from 4.15% to 4.08% to the lowest level since May 2013, with 0.28 points paid.
Later this afternoon at 2:00pm ET the Fed’s Beige Book will be released.
Mortgage Bonds are trading in the middle of a range between support at the 25-day Moving Average and overhead resistance at 104.29. The 10-year Treasury Note Yield has moved higher after breaking 2.22% and is now just below the 25-day Moving Average. This level should act as overhead resistance and keep a lid on yields. Meaning – rates should hold steady and could improve.
Stocks are trading near unchanged levels and Mortgage Bonds are a bit higher so far this morning. It’s another quiet news day, but Initial Jobless Claims for the week ending 11/8 were reported at 290k. This was a bit higher than expectations of 288k, and represented an increase of 12k from last week’s number, which was unrevised at 278k. Claims did move a bit higher last week, but this is still a decent number.
Later today at 1pm ET there will be a 30-yr bond auction. After yesterday’s weak 10-Yr note auction, we will watch this closely as this can always move the markets.
Mortgage Bonds are in a wide range between overhead resistance at 103.35 and support at the 50-day Moving Average. We have to be careful because Bonds could whipsaw one way or another. Stocks have started to move sideways after a parabolic move higher. But the Stock market has been incredibly resilient. We have to keep a close eye on the next move for Stocks as it will likely dictate the direction in Mortgage Bonds.
Stocks are lower and Mortgage Bonds are higher after the highly anticipated BLS Jobs Report showed 214k jobs created for October. This number was a bit lower than expectations of 235k, but consistent with what we have been averaging, and a solid report overall. The previous two month’s numbers were revised higher by a combined 31k, with an upward revision of 8k for September bringing that number from 248k to 256k, and an upward revision of 23k for August, bringing that number from 180k to 203k. Not that it matters now, but we believed August’s figure would come in over 200k. It’s amazing that the number was actually reported around 140k, and after 2 months of revisions, finally is over 200k. It just goes to show you how susceptible these numbers are to revision and how inaccurate they can be when first reported.
The labor force participation rate improved slightly from 62.7% to 62.8%. Hours worked edged up by 0.1 hours to 34.6 hours and hourly earnings increased by 3 cents to $24.57, up 2% on the year. The U6, which measures total unemployment, dropped from 11.8% to 11.5%. This is quite an improvement from last year’s 13.2%. The Unemployment Rate edged lower from 5.9% to 5.8% to the lowest level in almost 6.5 years.
Stocks are higher and Mortgage Bonds are lower so far this morning. Initial Jobless Claims for the week ending 11/1 were reported at 278k. This was better than expectations of 283k, and represented a drop of 10,000 from last week’s number, which was revised slightly higher from 287k to 288k. This was the second lowest number of the recovery, bringing the 4 week moving average of Claims down to its lowest level in 14 years at 279k. Overall, Claims continue to show strength in the Jobs market.
Productivity was also reported, up 2% for the 3rd quarter. This was a good number, and helps to keep already low inflation tame. The Fed would actually like to see a move up in inflation, towards their 2% target.
Technicals will take a backseat to tomorrows Bureau of Labor Statistics Jobs Report, but they are not favorable for Mortgage Bonds. After closing near all-time highs yesterday, the S&P 500 looks like it is going to make a run higher today. Mortgage Bonds have been pushed lower off of the 25-day Moving Average and are now in the middle of a range between overhead resistance at the aforementioned 25-day and support at the 50-day Moving Average. The 10-year Treasury Note Yield has moved higher off of its 25-day MA and appears headed towards the 2.41% level.
Jobs Report Strategy
Last month’s numbers: 248,000 new jobs, 5.9% Unemployment Rate
Market expectations: 240,000 new jobs, 5.9% Unemployment Rate
We are going to advise locking ahead of tomorrow’s Jobs Report. Yesterday, we saw a strong ADP number at 230k. And over the last several months, there has been less of a disparity between the ADP and BLS reports, averaging 20k or so. If this were to hold true, we should see a strong number tomorrow. Additionally, the Initial Jobless Claims figure used in the sample week for the Jobs figures came in at 283k, which would support a Jobs number well over 200k. A good Jobs number tomorrow will help the Stock market improve and cause a sell off in Bonds. The estimates are somewhat high, but in order for the Bond market to improve we would have to see a big miss, and all of our signals are pointing towards a decent number. For this reasons, we think the risks favor locking ahead of the Jobs Report.
Stocks are pointed higher and Mortgage Bonds are lower so far this morning. The Mortgage Bankers Association reported that Mortgage Applications increased by a whopping 11.6% for the week ending 10/17. With the decline in rates last week, it should be no surprise that this move higher was led by Refinances, which surged 23% to the best level in almost a year. Refinance activity increased from 59 to 65% of total applications. Interest rates dropped 10bp from 4.20 to 4.10%, to the lowest level since May 2013. Purchases unfortunately did drop 5% and are down 9% from this time last year. But the numbers on Purchases do not adjust for the Columbus Day Holiday, which was the likely reason it dropped. ARMs increased to 9.4% of total applications, the highest level since June 2008.
The Mortgage Bankers Association also released some expectations for next year at their conference in Vegas this morning. They expect Purchases to increase by 15% and Refinances to decline by 3%. MBA Chief Economist, Mike Fratantoni, believes that stronger growth, job gains, and declining unemployment will help fuel purchases in 2015.
The Consumer Price Index (CPI), which measures inflation on the consumer level, was also reported. Headline and Core CPI, which strips out food and energy prices, were both up 0.1%. On a year over year basis, Headline and Core CPI remained stable at 1.7%. Signs of inflation are still nowhere to be seen. We will receive the Fed’s favorite measure of inflation, the Personal Consumption Expenditures (PCE), on October 31st.
Yesterday, the 10-year Treasury Note Yield concerned us when it broke above 2.21%. And it has moved higher this morning to 2.24%. With the recent quick move up in Stocks, it would not surprise us to see the S&P 500 reverse course, especially with the several resistance levels above. We will see how this unfolds later today.
Stocks are higher and Mortgage Bonds are lower so far this morning. Mel Watt, the head of the Federal Housing Finance Agency (FHFA), said yesterday that the FHFA has been working to refine the Representation and Warranty Framework to provide more repurchase clarity to the country’s banks. Currently, there is quite a bit of ambiguity regarding re-purchases of mortgages, leading to lenders implementing their own overlays. If the FHFA provides us with a more in detail explanation of the Reps and Warranty guidelines, it could make the loan process more seamless. In addition, the FHFA is preparing guidelines for mortgages w/LTVs of 95-97%, permitting down payments as small as 3-5% of the home value. Fannie Mae said they will start buying loans with as little as 3% down. We could see Freddie Mac follow suit. This is good news for housing.
And speaking of housing news, Existing Home Sales were reported. This report measures closed sales for September. Sales were up 2.4% at 5.17 M units. This was stronger than expectations looking for 5.10 M units and the best number of the year. The Median Existing Home Sales price was reported at $209,700, up 5.6% year over year. Additionally, inventory declined a bit to a 5.3 month supply. Distressed sales dropped to 10%, while cash buyers were at 24% and investors were 14%. First time homebuyers remained at 29%. This was a strong housing report following a good Housing Starts report last week. We will get New Home Sales on Friday.
Mortgage Bonds are still trading in the middle of a wide range between support at 103.35 and overhead resistance at 104.64. The S&P 500 opened up above a very important level of resistance at its 200-day Moving Average. If Stocks can gain momentum from here, it may apply pressure to Bonds. The 10-year Treasury Note Yield is currently battling a very important level at 2.21%. If Yields break convincingly above this threshold we could see rates start to move higher.
Stocks are lower and Mortgage Bonds are higher so far this morning. Dragging on Stocks are some weaker than expected earnings, namely from IBM. Ebola fears have begun to ease this morning as nearly all who were quarantined by the city of Dallas, because they had contact with the patient Thomas Duncan, have completed the 21 day incubation period and have been cleared of the disease.
It’s a quiet news day, but the economic data for the week heats up, highlighted by Housing and Inflation data. The week looks something like this:
Tuesday: Existing Home Sales
Wednesday: Mortgage Applications, Consumer Price Index
Thursday: Initial Jobless Claims, FHFA House Price Index
Friday: New Home Sales
The S&P 500 is lower and may be poised to test the lows again from Thursday in the coming week, which would be beneficial for Mortgage Bonds. The 10-year Treasury Note Yield tested very low levels and came up and tested 2.21% and is using this as a ceiling. It is encouraging if it stays beneath there.
It’s not surprising that one of the most sought after areas to live in is one of the nation’s highest in rent. In 2013 Cary, NC won numerous awards ranging from the Forbes list for Best Places for Business and Career while Raleigh, NC also is noted by Forbes as the #1 Best Places for Business and Careers, Best Place in Cost of Doing Business, Best Place for Job Growth and Best Place in Education. With all the great economic value of living in such an area comes the highest rent increase is also in the Raleigh Cary area to be one of the highest in the nation reports Triangle Business Journal.
The apartment rental rate average has increased 2.1 percent from last year. The area now ranks has 13th in the nation for the largest rent increase. Jay Denton, Axiometrics’ senior vice president reports, “Job growth continues to be strong, and new household formation is resulting in increased absorption of the new units, which gave landlords the leeway to increase rents during the third quarter.”
With the increase in rent and low mortgage rates and home prices remaining 13 percent below their 2006 peak nationally, now would be a great time to consider the purchase of a home. Why pay rent for a higher monthly cost when you can own a home and have something to call your own that is an investment of your future?
In an article written by Forbes, Buying a Home is Now 38% Cheaper Than Renting, it is reported that “Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas according to Trulia TRLA -2.01%’s latest Winter Rent vs. Buy report. Rising mortgage rates and home prices have narrowed the gap over the past year, though rates have recently dropped and price gains are slowing. Now, at a 30-year fixed rate of 4.5%, buying is 38% cheaper than renting nationally, versus being 44% cheaper one year ago.”
Since one of the nation’s highest rent increase is in the Raleigh Cary area purchasing a home would be an option to seriously consider. If you want to find out how much house you are approved for then give Phil a call at 919-422-6035 or you can pre-qualify online on his secure website. Have a question? Email Phil. Phil is an award winning mortgage banker who works closely with many realtors and homebuilders to offer you the best service possible.