“This dust will not settle in our time. And when it does some great roaring machine will come and whirl it all sky-high again.”
-Samuel Beckett, All That Fall
Last Thursday Freddie Mac’s Primary Mortgage Market Survey was published. It showed the average 30-year rate on a fixed-rate mortgage to be 3.56% with 0.6 points, up a hair from the week prior. As per usual, we note that the survey responses are collected early in the week, and the Survey is pretty much a backward-looking measure. Normally rates don’t change much following the publishing of the survey, unless something seismic happens. And something seismic happened on Thursday night/Friday morning when the United Kingdom voted to leave the EU.
The impact on the markets was swift and severe, with global equities selling off, and most commodity prices (excepting gold, because, you know, shiny metal!) falling immediately. The yield on 10-year Treasuries closed Thursday around 1.74%, and sometime after midnight had fallen to 1.45%, one of the biggest one day shifts I can recall in recent history. Treasuries sold off a bit Friday afternoon, but have since rallied again. Right now 10-year yields are at 1.48% but things are volatile. Movement in mortgage backed securities has been roughly analogous to movement in Treasuries.
We’ll have more on the Brexit below and the possible ramifications below, but for the time being it is safe the say that the markets are rattled, and it prompted a massive flight to safety that ultimately was to the benefit of mortgage rates. I’m not sure that anyone or anything else ultimately benefits from this.
Click here to get today’s latest mortgage rates.
Today’s economic data:
This is a data-heavy week, but I suspect that none of will really matter. It’s all going to be about the fallout from the Brexit. Today we get manufacturing data from the Dallas Fed and international export data. Pretty much a non-factor at the moment. The E.U. Summit this week is the main event this week.
The week that was:
Maryland Senator Clay Davis has a catch phrase that nicely sums up the market action we saw last week that continues this morning, but this is a family blog. There was some data last week (notably, the May Durable Goods report significantly disappointed), but none of it really matters/ed in the run-up to and aftermath of the Brexit vote. So much so that it probably doesn’t make much sense to burn any more words discussing the non-Brexit portions of last week.
Don’t wait for rates to rise. Start your mortgage process now.
Bregrets, we have a few*:
Nothing bad ever occurred when nationalist sentiment spread across Europe, right?
In case you were unaware, the U.K. voted to leave the E.U. on Thursday night. This means that the U.K. has two years to negotiate an exit from the E.U. To say that this injected a massive dose of uncertainty into global financial markets would be an understatement. This is unprecedented, and anybody who tells you what will happen is probably making an educated guess at the very best. As the voting became clear, U.S. Treasuries rallied sharply. Global equities plunged. The Euro, the Pound, the Yen, and the are all sharply down against the dollar. Oil, which is traded in dollars, is off as well. This all continues this morning.
It’s worth noting that this is an advisory referendum, and not binding. Maybe the parliament could tell the populace to pound sand down a rathole, but I don’t think that will happen. My guess is that British politicians would like to keep their jobs. There are some rumors that there may be another referendum, but that seems like a slippery slope to me. Point is, there is a small but non-zero chance that this referendum will not stick. As Kent Brockman once said: “democracy simply doesn’t work.”
In terms of U.S. monetary policy, if the UK had remained in Europe, I think it would have been a pretty good bet that the Fed hiked rates in either July or September (despite the poor Durable Goods data, and this assumes the next employment report isn’t a dud). Those chances evaporated between Thursday and Friday. Right now, the Fed Fund futures don’t price in a probable hike until December of 2016 or February of 2017.
Is any of this price action sustainable? Who knows? The Dow closed down about 600 points on Friday, and is down another 200 plus points this morning. Bank stocks in particular are getting hammered. Anyway, here are some things to keep an eye on in the wake of the Brexit:
- This could be the first domino in the meltdown of the E.U. Already, Scotland (which overwhelmingly voted to stay in E.U. is saying they should hold another referendum to break from the U.K. Sinn Fein is calling for a vote for a united Ireland (Northern Ireland voted to stay in the E.U., and shares a border with the Republic of Ireland, an E.U. country. There are calls for votes in Italy, France, Holland, and Denmark. You see where this could go. This just emboldens all the nationalists who don’t like Brussels.
- David Cameron is stepping down, and a new Tory will be put in place in October. Someone actually needs to negotiate the exit from the E.U., and it’s not clear who that will be. Cameron will not invoke Article 50 of the Lisbon Treaty (the mechanism through which a country leaves the E.U.) – so we’re going to have months of uncertainty ahead. An aside: David Cameron is likely to be listed with Neville Chamberlain on the big list of worst British PMs. It was Cameron who authorized this vote in the first place. Wade Boggs and Barney will debate it in a bar.
- The U.K.’s economy will suffer (the pound is already down more than 10% since Thursday night). I read that France and others want to make an exit painful in order to deter others. Who knows what happens to the pro-leave politicians in the wake of whatever happens. Right now they seem to have absolutely no plan whatsoever. It seems clear that they did not ever actually anticipate winning.
- That all the markets so badly missed predictions about the outcome of this vote is concerning for November’s election. I still think the digitally-challenged one will get stomped, but I feel less confident than I did a couple days ago. It seems like a lot of the same motivations that fueled the “leave” voters are fueling the trump voters.
- As I mentioned above, I can’t see the Fed hiking any time soon. We’ll see what Yellen says this week. I don’t think “remain calm, all is well,” is going to cut it.
Where all this goes is anyone’s guess. The only thing that is certain is uncertainty.
*I cannot take credit for this line – I read it on a message board, but cannot subsequently find it to credit the likely anonymous person who wrote it in the first place. But I liked it enough to borrow it.
What’s the takeaway for rates this week?:
Rates were close to three year lows before the referendum, and are now lower. I don’t know how much lower yields can go. Ten-year yields are a few basis points above all-time lows. Ponder that for a moment. For the longest time I’ve been saying that I thought it was more probable than not that rates would rise. I certainly didn’t see something like this happening. The market reaction seems to indicate that few did.
I don’t think it is worth belaboring the point – now is a great time to get a new mortgage. This week will be volatile, so it is anyone’s guess how long rates will sit at current levels. Strike while the iron is hot.
Don’t wait for rates to rise. Start your mortgage process now.
Notable events this week:
Monday:
- International Trade in Goods
- Dallas Fed Manufacturing Survey
Tuesday:
- GDP
- S&P/Case-Shiller Home Price Index
- Consumer Confidence
Wednesday:
- Personal Income and Outlays
- Janet Yellen speaks
- Pending Home Sales Index
- EIA Petroleum Status Report
Thursday:
- Weekly Initial Jobless Claims
- Chicago PMI
Friday:
- PMI Manufacturing Index
- ISM Manufacturing Index
- Construction Spending
from Total Mortgage Underwritings Blog http://ift.tt/28YzjaG
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