Bond and stock prices recorded modest gains for the week when investors realized the week’s economic data was not that supportive for a 25 basis point rate hike at Federal Reserve’s September FOMC meeting despite several Fed officials suggesting such a rate hike could take place.
To start the week, the Commerce Department reported Personal Income rose 0.4% in July following a 0.3% increase in June. Subtracting personal current taxes from Personal Income to calculate disposable personal income showed an increase in disposable personal income of 0.4%. After adjusting for price changes, Real Spending grew 0.3% in July following a rise of 0.4% in June. Both Personal Income and Spending matched their consensus forecast. With Disposable Income increasing 0.1% more than Real Spending, the personal savings rate edged higher to 5.7% in July from 5.5% in June.
Also, the Federal Reserve’s favorite measure of inflation, Core PCE prices, increased by 0.1% in July to match the consensus forecast and June’s increase of 0.1%. The annual rate of growth in Core PCE prices, which exclude food and energy prices, held steady at 1.6% for the fifth straight month. Inflation is not advancing toward the Fed’s stated target of 2.0% at least as measured by Core PCE prices and the stock and bond markets both responded with a relief rally.
The week’s most anticipated economic data arrived Friday in the form of the monthly Employment Situation Summary totaling payroll gains for August. Investors appeared to be relieved that employers only added 151,000 Nonfarm Payroll jobs in August, missing the consensus forecast of 180,000 by 29,000 jobs. Furthermore, June’s Nonfarm Payrolls number was revised lower by 21,000 while July’s number was revised higher by 20,000 for a combined two-month revision of 1,000 lower. The miss in payroll gains will likely prevent the Federal Reserve from raising rates at their September and November FOMC meetings.
In housing, the National Association of Realtors (NAR) reported their Pending Home Sales Index rose more than expected in July with a reading of +1.3% to 111.3, the second highest reading in over a decade. Analysts had forecast an increase of just 0.7%. June Pending Sales were downwardly revised to a decline of 0.8% from an initial reading of +0.2%. Year-over-year, the Pending Home Sales Index is 1.4% higher than it was in July 2015. NAR chief economist Larry Yun remarked there would be even greater Pending Home Sales activity right now if there were more affordable listings on the market.
As for mortgages, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending August 26th showing the overall seasonally adjusted Market Composite Index increased 2.8%. The seasonally adjusted Purchase Index rose 1.0% from the prior week, while the Refinance Index increased 4.0%. Overall, the refinance portion of mortgage activity increased to 63.5% of total applications from 62.4%. The adjustable-rate mortgage share
of activity fell to 4.5% from 4.6% of total applications the prior week. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance remained unchanged at 3.67% with points paid decreasing to 0.33 from 0.34. For the week, the FNMA 3.0% coupon bond gained 10.9 basis points to end at $103.63 while the 10-year Treasury yield decreased 2.04 basis points to end at 1.6075%. Stocks ended the week higher with the Dow Jones Industrial Average adding 96.56 points to end at 18,491.96. The NASDAQ Composite Index advanced 30.98 points to close at 5,249.90, and the S&P 500 Index gained 10.94 points to close at 2,179.98. Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 5.77%, the NASDAQ Composite Index has added 4.62%, and the S&P 500 Index has advanced 6.24%. This past week, the national average 30-year mortgage rate decreased to 3.42% from 3.43% while the 15-year mortgage rate decreased to 2.76% from 2.77%. The 5/1 ARM mortgage rate fell to 2.85% from 2.86%. FHA 30-year rates held steady at 3.25% as did Jumbo 30-year rates at 3.53%.
Mortgage Rate Forecast with Chart
For the week, the FNMA 30-year 3.0% coupon bond ($103.63, +10.9 basis points) traded within a slightly wider 50 basis point range between a weekly intraday high of $104.00 on Friday and a weekly intraday low of $103.50 on Monday and Thursday before closing the week at $103.63. The two largest intraday market moves by the bond took place on Monday with the release of the July Personal Income and Spending report and Friday with the August Employment Situation Summary. In both instances, bond prices shot higher immediately following the economic news. However, bond prices held on Monday but retreated on Friday when the stock market gained traction after traders realized there was less risk of a rate hike at September’s Federal Reserve FOMC meeting due to soft employment data. Friday’s trading action resulted in an initial move well above the 50 and 25-day moving average (MA) resistance levels located at $103.69 and $103.71 respectively. This move then failed as the bond’s price fell back below these levels creating a weak candlestick and a negative stochastic crossover sell signal suggesting a possible further decline. The 38.2% Fibonacci retracement level at $103.15 continues as the nearest support level. If the stock market continues higher this week and pressures the bond market lower, we could see a slight deterioration in mortgage rates.
Chart: FNMA 30-Year 3.0% Coupon Bond
Economic Calendar – for the Week of September 5, 2016
The economic calendar shrinks this coming week with only a few reports of any significance. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
As always, your loan guy,
Viral (Vic) Joshi
P.S. If you want to get more timely market updates, I have a weekly newsletter that goes out via e-mail. E-mail me, viral@vicjoshi. com, so that I can put you on the mailing list.
Loan Consultant/Branch Manager
C2 Financial Corporation