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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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"Modest to Moderate" Mortgage Rates

July 14, 2017 -- The domestic economy keeps plugging along, the global economy is showing some signs of life and the Federal Reserve was even joined this week by another central bank lifting short term interest rates for the first time in years. Conversely, a soft patch for inflation and soothing words about the future for monetary policy by Fed chair Janet Yellen seems to have trimmed recent upward momentum for interest rates, even if they did end this week a touch higher.

Last Friday's employment report detailing another 222,000 new hires in June certainly shows that the economy has considerable strength and upside yet; job growth has been above 200,000 in four of six months this year, making March's one-month stall look more like an aberration with each passing month. However, wage growth continues to be lukewarm, as the 0.2 percent rise in June is still below recent stronger levels, and holding at an increase of just 2.5 percent over the last year. The unemployment rate did move up by a tenth of a percentage point to 4.4 percent and remains a little below a level the Fed considers "full employment", although it's by no means clear exactly how much slack remains, given demographic trends and other considerations.

Although the economy is said to have rebounded in the second quarter when compared to the first, it's hard to derive any sense of this when you run through the Fed's own "Beige Book", formally known as a survey of regional economic conditions. The latest report covers the six-week period leading up to June 30; for this go-round, 7 of 12 districts judged economic activity to be modest, 4 reported moderate growth, and one just "slight" growth for the period. This was essential the same tenor of that covered the April-May period and the one for the period ending in mid-February, so if there is any kind of acceleration happening it's slight, if not imperceptible.

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Now that mortgage rates have moved up off of recent bottoms, but also remain rather below 2017 tops, it's certainly the case that we are in a period of modest-to-moderate mortgage rates, too.

Economic growth will have a hard time speeding up if consumers aren't spending. Overall retail sales in June declined by 0.2 percent, a second month of lower spending. As this series is measured in aggregate dollars spent, lower cost items can pull down the headline figure; for example, a 1.6 percent lower total spend at gasoline stations during the month certainly did so. That said, even eliminating gas sales and pricey automobile components didn't help much, with the remaining "core" retail sales measure declining buy 0.1 percent for June, and that after coming in flat in May. With just a couple of weeks to go before we get the actual initial Gross Domestic Product report, the Federal Reserve Bank of Atlanta's GDPNow tracker covering the second quarter continues to lose traction and now suggests a GDP run rate of just 2.4 percent for the period and continuing in a sawtoothed downtrend.

With retail sales soft, it's unsurprising to see increases in inventories at wholesaling firms. The 0.4 percent increase in stockpiles of goods in May was a little larger buildup than analysts expected, with holdings of durable goods increasing by 0.6 percent while non-durables held steady. The buildup was largely the result of a 0.5 percent decline in sales for the month, and that weakness was good enough to moved the ratio of goods on hand relative to sales up a tick to 1.29 months, the highest level since December and probably good enough to temper the placement of new orders at manufacturers to a degree.

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Consumer borrowing trends picked up a little in May. The May report covering consumer credit usage revealed an $18.4 billion expansion in the amount of revolving and installment debt taken on by consumer during the month. Revolving credit (mostly credit cards) usage bounced up to $7.4 billion during the month, a monthly increase of $6.2 billion and good enough for the biggest splurge since November. However, the overall trend in this recovery and expansion suggest that spending spree will be short-lived. Installment lending, though, had been a stalwart of the nearly nine-year-old economic expansion, but has tired of late, contributing just $11.0 billion to the total this month. Largely comprised of auto and education borrowing, installment lending may be slowing due to cyclical factors, what with an encouraging job market beckoning would-be students, and millions and millions of new or fairly new cars and trucks having been put on the road in recent years.

This week, The Bank of Canada joined the Federal Reserve in acknowledging that economic conditions have improved to a point where emergency-level monetary policy is no longer warranted, raising its key policy rate by a quarter percentage point, the first such more in more than seven years, and signaled that more hikes were likely to come as time progressed. That's much the same as the situation here in the U.S., but what's not specifically clear is the element of time. Before Congress this week, Fed chair Yellen did note that rates would "not have to rise all the further to get to a neutral policy stance" and that the most likely course of Fed action would be one where "additional gradual rate hikes are likely to be appropriate over the next few years."

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If inflation cannot begin to start to show some regular signs of traction it may be a longer period of low rates than current policy forecasts seem to expect. Although laid at the feet of transient influences, there is little doubt that the recent trend for inflation has been a cooler one, and with influential inputs like energy prices holding at low levels this may persist for a bit. By way of measure, in June the Producer Price Index edged just 0.1 percent higher, trimming the trailing annual rate here to a flat 2 percent, a full half percentage point lower than just two months ago. The so-called "core" measure of PPI also rose by just 0.1 percent, but like the headline figure also faded, easing to a 2.1 percent annual rate for the month.

For the most part, consumer prices followed suit. In June, the overall Consumer Price Index was unchanged from May, with the "core" rate (a measure which excludes food and energy influences) rising by 0.1 percent. However, the annualized 1.6 percent rate (headline) and 1.7 percent rate (core) remain below the Fed's target of 2 percent, and are also in a recent cooling pattern, with June's annualized figure a whopping 1.2 percentage points below February's 2.8 percent number (core CPI has shed about 0.5 percent over the same period). Even the Fed's own preferred inflation tracker (core Personal Consumption Expenditures) is only 1.4 percent in May, the most recently available month and has fallen in each of the last three months from a recent peak of 1.8 percent. In general, no inflation means no upward pressure on long-term interest rates.

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May saw a modest increase in industrial production output, which gained 0.4 percent for the month. Mining interest led the way this time, with output rising by 1.6 percent for the month and contributing to what has so far been a pretty good year for this sector. Manufacturing production added to the uptick, sporting a 0.2 percent rise and taking back about half of April's decline. Utilities product had no impact this month, with production levels the same as they were in April. That said, overall percentage of industrial production floors in active use did edge higher by 0.2 percent to 76.6 percent, a value good enough to be the highest since August of 2015 -- if still some 3.3 percentage points below the typical average rate of the last 45 years.

Weekly unemployment claims tallied 247,000 in the week ending July 8, but holidays, vacations and typical annual automotive retooling cycles make these numbers a little "noisier" than they might otherwise be.

What's clear enough is the consumers are getting the blues about the future even as they are enjoying the present. The preliminary July report covering Consumer Sentiment from the University of Michigan eased by a full 2 points, slipping to 93.1 for the month to date. Oh, things seem okay now; the assessment of current conditions moved up by 0.7 points to 113.2, a value better than a 10-year high, but assessments of days yet to come were rather darker, with a 3.7-point fall leaving the expectations index at 80.2, a value about equivalent to those seen before last fall's election-fueled spate of optimism kicked in.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Jul 07 Jun 09 Jul 08
6-Mo. TCM 1.14% 1.09% 0.36%
1-Yr. TCM 1.23% 1.18% 0.46%
3-Yr. TCM 1.60% 1.46% 0.69%
5-Yr. TCM 1.94% 1.74% 0.95%
FHFA NMCR 3.87% 3.97% 3.75%
FHLB 11th District COF 0.648% 0.645% 0.690%
Freddie Mac 30-yr FRM 3.96% 3.91% 3.48%

A modest-to-moderate economy featuring little inflation, consumers that aren't spending much while feeling less optimistic about tomorrow isn't the stuff of which surges in economic growth are made. However, the Fed remains optimistic about the prospects for growth, and it may be that firming growth elsewhere in the world will provide some outside oomph for the aging U.S. recovery. We've noted before that, provided it's reliable, there's nothing wrong at all about 2 percent growth, and even if inflation does start to reverse course again, there is now at least a little slack that can be absorbed before it would have any measurable influence on mortgage rates.

With Independence day behind us, summer doldrums beckon, and odds are starting to favor that we won't see a Fed move after Labor Day. With that in mind, mortgage rates seem likely to mostly wander, most especially next week, when we think that a couple of basis point decline will be reported by Freddie Mac when next Thursday rolls around, probably enough to get us back under the 4 percent mark for conforming 30-year fixed rates once again.

For a forecast for mortgage rates that will carry you deeper into the summer (at least until early August), have a look at our Two-Month Forecast. We've also just released an mid-year review of our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.

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