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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Pattern Shift To Lift Rates

September 15, 2017 -- Although it's never been a certainty, you can almost always tell when financial markets move out of the lull of summer and into the quickened pace of fall. Often, this change comes in the first full week of business in September -- the week after the Labor Day holiday. Hold-steady hedges and positions set to cover the period where investor ranks are thinned by holiday start to unwind; incoming information from the end of vacation season gets expressed into new positions and outlooks for the months to come. In some years, this has meant a downturn for rates, the results of a slowing economy and flagging inflation; some years, and possibly this one, it means the start of an upturn in interest rates.

At the moment, we are seeing some safe-harbor investment positions unwinding, the result of the passing of hurricane Irma, which came fast on the heels of Harvey. This is to be expected, as these storms were close enough together as to leave investors little time to assess damage from Harvey while preparing for Irma. Rates had moved lower into Harvey, lower still into Irma, but now are moving reasonably back upward, at least to places seen before the storms.

Will they move beyond these ranges and boundaries as the fall progresses? Much depends of course on the economy and how the Federal Reserve is manipulating policy to address it. The U.S. central bank policy-setters meets again next week, and there is about a zero chance of a move in the federal funds rate. However, the Fed is expected to announce exactly when it will start the runoff of its holdings, gradually trimming them back by limiting the amount of reinvestment as time moves forward. It's not clear if they will announce an imminent start or a future start date, but some action in this regard is expected.

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Beyond this, the outlook for interest rates is a bit murkier. However, there are some clues that the Fed's expectations for a transient lull in inflation is bearing out, as inklings of firming price pressures are starting to creep in around the edges. At present, futures markets place about a 52 percent chance of the Fed raising the funds rate come December, but there is a lot of data to be seen between now and then that will color this thinking. As well, and at least for the moment, the current run rate for GDP in the third quarter seems to have cooled from the 3 percent in the second quarter to about 2.2 percent; with just a few weeks to go, and the full economic effects of Harvey and Irma yet to be realized, we may be heading into the last quarter of the year on a softer economic note that would otherwise have been the case absent the storms. Even with inflation that is perhaps moving again upward, will slower growth stay the Fed's hand until the picture is again clearer? It's hard to know, and with a potential change to Fed leadership come next February, it may be that a change will occur regardless, just to get it in place before the next Fed Chair (even the same one!) takes over.

As far as inflation goes, we did see a little end-of-summer bump in prices. Some are storm-related, of course, and so should fade over time, but how low that will take is unclear. The Producer Price Index, a measure of costs upstream of the consumer rose by 0.2 percent, in August, the biggest bump since April and more than a reversal of July 0.1 percent decline. As well, so-called "core" PPI (a measure that removes the most volatile components in hopes of tracking a truer rate) also rose by 0.2 percent, a value also the strongest since spring. On an annual basis, headline PPI is running at a 2.4 percent clip; core at a 2 percent clip. Neither of these is above recent boundaries, but do represent an upturn in the pattern.

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This is much the same with the Consumer Price Index. Months of soft (if not negative) readings gave way to a 0.4 percent pop in August, driven there by a spike in gasoline costs related to Harvey. This was the largest kicker in costs since the beginning of the year. The "core" CPI, a measure that leaves out food and energy costs due to their high rate of variability from month to month also popped higher, rising by 0.2 percent, good enough to be the largest rise since February. To be fair, prices do remain well contained, but perhaps just a little less so, as headline CPI is now running at a 1.9 percent rate (up from 1.6 percent as recently as June) and core CPI at a 1.7 percent rate, no longer receding, but holding steady in a fourth-straight-month plateau.

The Fed prefers a different measure -- core personal consumption expenditures -- but if costs are rising in these thermometers, they surely will also be rising in that one as well.

Retail sales in August were down by 0.2 percent, seemingly closing a summer of weakness, what with two of the last three months posting declines. Lower auto sales helped pull the headline number down, but even when these and sales at gasoline stations are extracted from the total the number was only a lesser (0.1 percent) decline. The Census Bureau noted that Harvey didn't have much effect on the number of responses to their poll, but the results were lackluster at best. With the bump in Harvey-related gasoline prices acting as a bit of a brake on the economy (perhaps 0.1 to 0.2 percent in GDP), overall economic growth may slow a bit, even as retail sales may perk up in Florida, Texas and other affected areas in the months ahead.

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Industrial Production output was certainly affected by Harvey. However, August's 0.9 percent slump in measured output was broad based, as declines were seen in manufacturing (-0.3 percent), while mining interests saw a 0.8 percent decline in output. Utilities dragged the headline down further, though, as they sported a 5.5 percent decline in for the month. As a result of slowing activity, the percentage of production floors in active use slipped to 76.1 percent, the lowest ratio since March. With a rather lengthy recovery in affected areas yet to come, not to mention Irma's impacts yet to be seen, it may be some time before the sectors measured here show much by way of recovery.

Claims for new unemployment benefits in the week ending September 15 eased a little, falling from 298,000 to 284,000. However, claims will remain elevated and may move higher as Floridians look to return to their places of employment, some of which were severely damaged by Irma. The effects may persist in Florida and Texas for a good while yet; that said, the employment market continues to largely look healthy, with one measure of job availability hitting its highest level ever this week.

Total measured inventory levels in the economy were a bit higher in July, but unevenly so. Manufacturers expanded their holdings by 0.2 percent, a lesser gain than in June; wholesalers beefed up their stockpiles by 0.6 percent, about the same as the month prior, but retailer holdings dipped by 0.1 percent, likely wiping out a portion of two months of increases. Sales gains across the trio were modest, at best and the overall ratio of goods on hand relative to sales remained at 1.38 months. These inventory-to-sales ratios have been fairly consistent month to month from each sector, and there don't appear to be an sizable imbalances forming, so the generally modest pattern here seems likely to continue.

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Manufacturing activity in at least one Federal Reserve district is faring well. The NY Fed's Empire State Manufacturing Index sported a 24.4 value for September, following up nicely on a robust 25.2 in August. The report noted that orders powered higher and employment gains picked up, too. We'll get a companion reading from the Philadelphia Fed's region next week, but manufacturing should be at least holding its own as the economies of our trading partners pick up and exports firm.

The initial September reading of Consumer Sentiment from the University of Michigan edged down a little, slipping 1.5 points to land at a value of 95.3 for the interim. Although consumer assessments of current conditions were more positive, taking back last month's decline and then some, a dimmed outlook for the future held sway over the total index with a decline of 4.3 points. Perhaps reflective of the transient price pressures noted above, expectations for inflation ticked up another tenth of a percentage point after a four-month flat spell.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Sep 08 Aug 11 Sep 09
6-Mo. TCM 1.15% 1.15% 0.49%
1-Yr. TCM 1.23% 1.22% 0.57%
3-Yr. TCM 1.40% 1.49% 0.89%
5-Yr. TCM 1.65% 1.80% 1.17%
FHFA NMCR 3.99% 4.00% 3.69%
FHLB 11th District COF 0.707% 0.657% 0.690%
Freddie Mac 30-yr FRM 3.78% 3.89% 3.46%

While we tend to focus on the U.S. economy and interest rates, what happens here is increasingly dictated by what happens elsewhere. The Wall Street Journal noted on Friday that for the first time in years, three of the world's major central banks are moving policy in the same direction (four, if you count Canada). Pulling back on extraordinary stimulus (or planning to) and raising interest rates are all signs that interest rates here have more potential to rise as we go along, but to what degree remains to be seen. Obviously, how quickly things change in the UK, the Eurozone, here and elsewhere will dictate if interest rates grind or leap higher, but the suggestion is that more upward than downward pressure for interest rates is in the offing in the weeks and months ahead.

The Fed meets to contemplate all these things and more next Tuesday and Wednesday. The statement that closes the meeting will likely allude to transient deflationary factors; not that they exist, but rather they seem to be fading. Also, the uncertain economic effects of the hurricanes will likely warrant a mention. Perhaps more important, we'll get quarterly updates on Fed member's expectations for growth and inflation, and it will be interesting to see if assessments have changed over the last three months. All this, and details on the balance-sheet runoff start, too. A busy week for the Fed and the markets.

Even without all this considered, we are likely to see a bump in mortgage rates next week. A 10+ basis point rise in the 10-year Treasury yield probably doesn't get fully passed through to fixed rate mortgage rates next week, but plan on Freddie Mac reporting a 5 or 6 basis point increase in the average conforming 30-year FRM when they issue their release next Thursday. If Fed member expectations seem to point to a potential December hike, we might add a basis point or two to the bump.

For a forecast for mortgage rates that carries into early Autumn (October, anyway), have a look at our Two-Month Forecast. You might also have a glance at our recent mid-year review of our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.


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