Mortgage rates rose early last week, only to fall back a bit late Friday. Last week’s Primary Mortgage Market Survey showed the average rate on a 30-year fixed-rate mortgage was 3.48% with 0.5 points, up slightly from the prior week’s measurement of 3.45% with 0.5 points. Due to the way the survey is conducted – most of the survey responses are collected early in the week – it reflects conditions from the early part in the week and can be dated by the time it is issued. This was the case last week, when bonds rallied at the end of the week. Yields on 10-year Treasuries were around 1.55-1.60% early last week, and are presently around 1.50%. Mortgage backed securities rallied along with Treasuries, and rates fell.
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Today’s economic data:
There’s a few pieces of data today, nothing all that significant:
- The PMI Manufacturing Index for July beat expectations, coming in at 52.9 compared with expectations of 51.3.
- The ISM Manufacturing Index for July came in at 52.6 compared to expectations of 53.2. This is down from June’s reading of 53.2. Within the report, employment was down, but new orders were strong, which should lead to future gains in employment and may indicate that this sector is beginning to turn around.
- Construction spending was down in June, falling by 0.6% compared to the expectation of 0.6% growth. Construction spending is up 0.3% year-over-year, a number which has been steadily declining.
More mixed economic data. As has been noted here and probably a million other places, external factors (global developments and swings in equity prices) have been driving U.S. markets to a far greater degree than the domestic data has.
The week that was:
There were two events last week that are worth revisiting: the Fed had their July meeting and released a statement, and the advance estimate of second quarter GDP came out.
The Fed did not hike rates, which was the expectation. The Fed statement was more dovish than anticipated. The phrase “near-term risks to the economic outlook have diminished,” garnered a lot of attention. Additionally, the Fed noted that job growth rebounded, that inflation remains below the 2% target, but will rise to 2% over the medium-term. Looking forward, the Fed left themselves leeway to hike rates again this year. Based on the statement, I would have expected bonds to sell-off. In fact, the opposite happened. Bonds rallied, and implied probability of a rate hike in the coming months fell according to Fed Fund futures prices:
- September implied probability of a hike: 12%
- November implied probability of a hike: 12%
- December implied probability of a hike: 37.2%
- February implied probability of a hike: 37.2%
Notably, NY Fed President William Dudley, who is a voting FOMC member this year, spoke in Indonesia last night, and said:
“Market expectations, to my eye, derived from federal funds futures prices, which price in no more than one 25 basis-point rate hike through the end of 2017, … appear to be too complacent.”
He tempered his statement by noting that there are lingering risks to the U.S. economy, and that the risks of tightening too soon are probably less than the risk of tightening too late. So once again, we are getting mixed messages from the Fed.
Jumping to the advance reading for second quarter GDP: it was anticipated that we would see a headline reading of 2.6% growth. The actual number came in at a paltry 1.2%. The first quarter reading was revised down to 0.8%. There are some bright spots in the report – consumer spending was up, and the sharp decline at inventories could point to growth in the coming quarters. Even so, weak first half growth should tamp down expectations of a possible rate hike later in the year.
Looking ahead:
The big event of the week is the July employment report, which comes out on Friday morning. After disappointing in May, employment bounced back in a big way in June with a print of +287k jobs. The expectation for July is that we will see a print of +185k, and a +0.3% increase in average hourly earnings. If we see a better-than-anticipated report, rates may rise, and vice-versa. However, in light of the weak GDP numbers, I think we’ll have to see a *really* strong number in order to see an increased market expectations of a rate hike this year, and then the corresponding increase in rates.
Long story short, I don’t think we are likely to see much movement in rates this week. Same old, same old.
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Notable events this week:
Monday:
- PMI Manufacturing Index
- ISM Manufacturing Index
Tuesday:
- Personal Income and Outlays
Wednesday:
- ADP Employment Report
- ISM Non-Manufacturing Index
Thursday:
- Weekly Initial Jobless Claims
- Factory Orders
Friday:
- Nonfarm Payrolls
- International Trade
from Total Mortgage Underwritings Blog http://ift.tt/2ap5mhy
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