Mortgage rates have not changed in any appreciable matter this week, and only rose slightly last week. Although it is now very old data, Freddie Mac’s Primary Mortgage Market Survey from last Thursday had the average rate on a 30-year fixed-rate mortgage at 3.45% with 0.5 points. Rates are only marginally higher now. That said, there is some risk that we could see rates rise today following the Fed meeting this afternoon.
If the Fed statement is more hawkish than the last one, which I think is likely, we could see bonds sell off, causing yields to rise. I think the Fed wants to prepare the markets for a potential hike in September or December. Even if the chance of a hike is remote, it’s better if the markets are prepared for the possibility to avoid market turmoil.
Click here to get today’s latest mortgage rates.
Recent economic data:
The main event of the day is the Fed statement that will be issued at 2pm this afternoon. In the meantime, a rundown of some of today and yesterday’s economic data:
- The S&P/Case-Shiller Home Price Index for May showed that on a seasonally adjusted basis, the 20-city index showed a -0.1% month-over-month decline in prices, which was lower than the expected level of growth. April’s number was revised down from 0.5% growth to 0.2% contraction. This report reflects a three month average with a two month lag, so it’s a backward-looking measure, but it indicates that home prices were weakening.
- On the other hand, new home sales for June came in significantly above expectations. On a seasonally adjusted annual rate, new home sales came in at 592k in June, compared to the consensus expectation of 562k. May’s number was revised from 551k to 572k. Pretty strong numbers overall.
- Consumer confidence was above expectations in July, with a reading of 97.3 versus the expectation of 96.0.
- Durable goods orders took a hit in June. The headline number showed a 4.0% month-over-month decline compared with the expectation of a 1.3% decline. May was revised from a 2.2% decline to a 2.8% decline. Much of the decline is attributable to a dip in aircraft orders. Core capital goods orders (which excludes some of the more volatile portions of the overall number) showed a 0.2% increase from May. Manufacturing continues to limp along.
As we’ve said many times in this space, the markets have become very much disconnected from the day-to-day domestic economic data. External factors (e.g. equity prices, global turmoil) have been the main drivers of bond prices for quite some time now. In theory it is useful to keep an eye on the domestic trends to try to intuit what the Fed may do, but even that has been somewhat of a futile effort of late.
Today’s Fed Meeting:
While there is no expectation that the Fed will hike rates at this meeting, there is the possibility that we could see the groundwork laid for a hike in September or November. The domestic economic data has been reasonably strong, and the market seems to have shook off the brief panic that followed the Brexit. Job growth bounced back in June after a weak May report. Many measures of inflation show inflation at or nearing the Fed’s 2% target. The Atlanta Fed’s GDPNow measure estimates second quarter GDP will be 2.4%. The hawks certainly could make a case that a rate hike is appropriate in the coming meetings, lest we overshoot inflation goals. If we look at the prices of Fed Fund futures, we can see that the implied probability of a hike has increased recently:
- September: 26.7%, up from 20% the day before.
- November: 28.2%, up from 21.6% the day before.
- December: 52.2%, up from 51.5% the day before.
While the increased probability of a rate hike has begun being priced into Fed Fund futures, we have not seen the same thing occurring in bonds. Yields remain very low, with yields on 10-year Treasuries sitting between 1.55-1.60% for about two weeks now.
The doves are likely to make the argument that the danger that a hike will stifle growth is greater than the danger that inflation will get out of control if the Fed waits too long to hike. I tend to agree with this argument, if for no other reason than the hawks have been wrong about inflation for years now. Until we see wages growing in earnest, it is hard to see how we’ll have sustainable inflation.
That said, I think we will see a statement that is mixed, but will be a little more hawkish than the last statement. In turn, I think we will see yields rise at least a little bit this afternoon, and that mortgage rates will rise as well.
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Notable events this week:
Monday:
- Dallas Fed Manufacturing Survey
Tuesday:
- S&P/Case-Shiller Home Price Index
- New Home Sales
- Consumer Confidence
- Richmond Fed Manufacturing Index
Wednesday:
- Durable Goods Orders
- EIA Petroleum Status Report
- FOMC Announcement
Thursday:
- International Trade in Goods
- Weekly Initial Jobless Claims
- KC Fed Manufacturing Index
Friday:
- GDP
- Chicago PMI
- Consumer Sentiment
from Total Mortgage Underwritings Blog http://ift.tt/2auiFRS
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