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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Mortgage Rates Still Firming A Bit

October 14, 2016 -- Interest rates continue to edge higher this week, nudged there by fair economic data and a firming expectation that the Federal Reserve will actually pull the trigger on a December hike in short-term interest rates. The date of the meeting where this is expected to happen is now just two months away, but given the likely change's proximity to the holiday season, it's probably not a bad idea for markets to at least start to prepare.

The chance of a December move seemed to be enhanced with the release of the minutes of the FOMC's September meeting on Wednesday. Described as a "close call" on whether to raise the federal funds rate, the Fed decided not to make any changes to policy. According to the minutes, "Members generally agreed that the case for an increase in the policy rate had strengthened. But, with some slack likely remaining in the labor market and inflation continuing to run below the Committee's objective, a majority of members judged that the Committee should, for the time being, await further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation."

Since that statement, the labor market did put in another solid month of growth, adding 156,000 more jobs in September and drawing sidelined folks back into the labor pool. If wage growth continues to edge higher, or if price pressures continue to show a bit of firming in inflation trends, a December move will become a done deal. Currently, the available information points to continued improvement, too, as weekly claims for initial unemployment assistance continue to hold at very low levels. In the week ending October 8, just 246,000 new applications were processed around the country, the same figure as the week ending October 1; both figures were the lowest in about 43 years, In fact, initial claims have now been below 300,000 for some 84 consecutive weeks, the longest such string since 1970, according to a review of the data by Moody's.

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The Fed has mentioned in a number of its statements and meeting minutes that "Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports." However, those drags on costs have waned, and continue to; after plummeting into the mid 30-dollar range in January, oil has been holding around the $50 per barrel mark (more or less) for a while now, and the majority of the plummet in oil prices continues to fade in the rearview mirror with each passing month.

As well, the trends for prices of imported goods continues to edge higher over time, and even though import costs rose only by a scant 0.1 percent in September, this was a rebound from August. Also, and while fully acknowledging that import costs last month were still some 1.1 percent below last year at this time, the trend here has been one of lessening declines over time. As recently as six months ago, prices of imported goods were falling at a 6.1% annual rate and the decline has been steadily shrinking since then. If it persists, the pattern suggests that year over year increases in import costs will be seen before long and will begin to contribute to broader price pressures as a whole.

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A similar pattern for export costs is in place, as well. In September, a 0.3 percent rise in costs was tallied, rebounding from a monthly 0.8% decline in August. Although the price level remains 1.5 percent below that seen at the same time last year, the drag of declining prices on inflation continues to fade, as it too was greater than a 6 percent decline as recently as March of this year.

The Producer Price Index likely captured some of these import price increases last month. In September, the measure of price pressures upstream of the consumer rose by 0.3 percent, a bounce higher after no change was seen in August. Core PPI (a measure that removes unpredictable or volatile components such as food and energy inputs) also climbed by 0.3 percent. Although still at a low level, there is a bit of a firming trend to be seen here, too -- "headline" PPI is rising at a 0.7 percent clip, and core, by 0.9 percent. Although not a worrisome level yet, the 0.7 percent change in the headline figure was the biggest jump since December 2014, and of course contrasts against much smaller year-over-year gains (or even outright declines) seen here at times this year.

Consumer spending picked up in September. Retail sales had been a little lackluster in July (+ 0.1 percent) and eased by 0.2 percent in August, but the 0.6 percent rise in the most recently observed month suggests that this was more of a pause in spending rather than the beginning of a retrenchment. Sales were still perky even when the effects of pricey auto purchases and volatile gasoline costs were eliminated; this left a 0.3 percent gain, and this so-called "core' measure of retail sales now holds a solid (if unspectacular) 3.4 percent annual growth rate (the headline figure is a little less at an annual rise of 2.7 percent).

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Holdings of goods have generally been leaning out this year as various players along the supply chain have looked to better align their stockpiles with sales. Overall holdings of unsold goods rose by 0.2 percent in August, but the increase was largely due to a bump in holding by retailers as they rightly anticipated a jump in sales as detailed above. Inventory levels at retailers increased by 0.6 percent; lesser gains were seen at manufacturers, where goods on hand rose by 0.2 percent. Wholesalers trimmed inventories for a second straight month, with unsold goods declining by about 0.2 percent. Collectively, the ratio of goods on hand relative to sales across all three stations in the supply chain was 1.39 months for a third consecutive month, a figure rather tighter than those seen earlier in 2016. In turn, this perhaps suggesting that more orders my be in the offing in the months ahead, providing some additional economic oomph as we go.

The relationship between consumer moods and a willingness to spend money is tenuous at best, but to the degree that it does exist, the path ahead seems unclear. The initial October reading of Consumer Sentiment from the University of Michigan showed some lost ground, as the headline figure shed 3.3 points to land at 87.9 for the period. However, the reason for the overall darker assessment came solely from expectations for the future; this submeasure dipped by 6.1 points to a relatively dismal 76.6 mark, the lowest in two years. Meanwhile, feelings about the current climate powered ahead by 1.3 points to 105.5, an improvement compared to September but a figure that would still be the second lowest of 2016 to date. Could the dim outlook be partially (or wholly) due to the contentious election season and a lack of desirable candidates from both major parties? It certainly stands to reason that this is the case.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Oct 07 Sep 09 Oct 09
6-Mo. TCM 0.47% 0.49% 0.07%
1-Yr. TCM 0.65% 0.57% 0.27%
3-Yr. TCM 0.97% 0.89% 0.92%
5-Yr. TCM 1.24% 1.17% 1.37%
FHFA NMCR 3.58% 3.62% 4.02%
FHLB 11th District COF 0.703% 0.693% 0.643%
Freddie Mac 30-yr FRM 3.47% 3.50% 3.82%

Interest rates have generally been on a firming path since the turn of the month, also known as the start of the new quarter. To some extent, this bump was due to the unwinding of more defensive positions taken at the end of the last quarter to safeguard any gains, but now two weeks into the period, that's arguably less the case. More likely, it's now positioning to try to get in front of changing market conditions, including somewhat firmer oil prices, a brightening outlook for the German economy and some growing concerns about a messy Brexit process. As we noted last week, though, the rise in underlying interest rates isn't fully translating into a commensurate rise in mortgage rates, and it's worth remembering that this was also the case at times this year when Treasury rates plummeted, but fixed mortgage rates only edged lower.

This isn't to say that fixed mortgage rates are immune from selloffs in bonds, only that unlike times in the past, the relationship isn't a lockstep one at this point. Will fixed mortgage rates continue to firm in the days ahead? Yes, a little. We offered last week that Freddie Mac's 30-year FRM would rise by perhaps 8-10 basis points, perhaps hitting all of 3.5 percent... and it didn't even make it that far with a rise of just five basis points.

While waiting to see how the week plays out for mortgages, we'll be reviewing fresh looks at industrial output, looking at housing starts and homebuilder moods, checking out the consumer price index and seeing how existing home sales are holding up, among other things. The uptrend for rates will again be in place next week, but it will still be a mild one, probably adding another 5 basis points or so (perhaps less) to Freddie's 3.47 percent figure from last week.

For a longer-range outlook for mortgage rates and the economy, one which will run through late November, have a look at our new Two-Month Forecast.


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