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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Central Banks, Trade Wars, Mortgage Rates

June 15, 2018 -- In a well-signaled and widely expected move, the Federal Reserve decided this week to raise the federal funds rate by another quarter of a percentage point, the seventh increase in a now-accelerating cycle that began a little more than two and a half years ago. The target for the funds rate is now 1.75 to 2 percent, the highest such level in nearly 10 years. Mortgage rates were largely unmoved.

Characterizing the economy as "strong" and with inflation at or perhaps above the Fed's "symmetrical" target, the central bank also has now penciled in two more interest rate increases this year, most likely in September and December. However, in a change in what has been a very predictable strategy, Fed Chairman Jay Powell will now hold a news conference after each meeting, rather than only after quarterly meetings where new economic projections from members became available, and often where changes to policy were announced. Presumably, the Fed wants to re-take the ability to make a policy change at any meeting and no longer wants markets to think that once per quarter is the only cadence for making such moves. This may serve to make markets a little more on edge as formerly benign Fed meetings become "live", especially if economic conditions seem to suggest a move may be warranted. However, but we'll need to wait to gauge how investors behave in this new climate.

The Fed also made a material change to its statement, removing what has been known as "forward guidance". For a number of years "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run" has been included in the post-meeting statement but has now been omitted. The Fed's own forward-looking projections suggest that the longer-run level of the federal funds rate is expected to be perhaps 2.9 percent or so, but their near-term projections for 2019 and 2020 suggest that the key policy rate will be above this level by then. Since it won't be all that long -- perhaps by this time next year or sooner -- that rates will be at "longer run" levels, something had to give, so out the statement went. See more about the Fed's moves this week.

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The Fed's European counterpart is faced with a different set of challenges, what with growth only burbling along at best and inflation remaining below target levels. Where the Fed's meeting took a more "hawkish" tone, the ECB's posture was considerably more dovish, with ECB Chair Mario Draghi revealing that the ECB's bond-buying spree will continue until the end of 2018, albeit at a pace cut in half (to $15B Euros per month) for the final stanza of this year. At the same time, the ECB intimated that its key policy rate would not be increased until perhaps June of 2019; at -0.40%, it remains highly stimulative. That rates and yields will remain low across the pond for a while longer yet amid modest economic conditions saw investors plow some funds back into U.S. Treasuries, keeping yields here from rising very much. Given relatively high yields in the U.S. compared to other mature economies, this is something that can be expected to persist, at least until growth and inflation begin to strengthen elsewhere.

One major central bank pulling one way and at least two still pulling the other (Japan's Central Bank QE and low-rate policies remain unchanged amid muted and perhaps declining inflation) can be expected to contribute to a flat-ish trend for interest rates, at least for now.

Certainly, there are now plenty of signals that inflation is on the rise; this week we got a look at the latest Producer Price Index, Consumer Price Index and Import and Export prices. All are moving steadily higher and provide evidence that the Fed's preferred price measure will follow. The latest measure of costs upstream of consumers (PPI) rose by 0.5 percent in May, rather more than was forecast and a rebound from a soft April. So-called "core" PPI rose a little less, just 0.3%, but that matched April's core PPI bump and that of four of the last five months. Headline PPI is rising at a 3.1% clip, up from 2.7% just a month ago, while core PPI is up by 2.5% over the last 12 months (just 2.1% a month ago). Price inputs seem to be rising more quickly here.

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Not all input prices are directly passed down to consumers, but enough of them are to have moved the Consumer Price Index up by 0.2 percent in May. "Core" CPI, which excludes erratic gasoline and food costs also rose by 0.2%. Whether headline or core, prices as tracked here are marching steadily higher. Over the last year, headline CPI is now running at a 2.7% pace; as recently as last October, it was a flat (and more benign) 2 percent. Core CPI tells much the same tale; presently 2.2% on a year-over-year basis, this measure was holding a 1.7% annual rate just six months ago.

Import prices are affected by items such as the relative strength or weakness of the dollar, rising prices for items sourced beyond our shores and more. However, as the U.S. is a nation of net imports, rising costs for inbound goods and services certainly influence overall price levels. In May, import prices rose by 0.6%, the same as in April, and the last year's cost profile was raised to 4.3%. We're also sending higher prices out with goods leaving the U.S. too; export costs rose 0.6% for the month, and are now some 4.9% above where they were a year ago. The 4.3% increase for imports, 3.1% for headline PPI then 2.7% for headline CPI seems to show the transfer of inflation well enough at the moment, and the momentum suggests that more is likely in the months ahead.

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This is especially true as new tariffs on imported goods kick in, as goods headed here will carry higher prices. Depending on what retaliatory duties are imposed by China, or Canada, or Mexico or any other nation where the Trump administration has announced penalties, we might see diminished exports, slower economic growth, jobs losses or other casualties of these changes to trade policy. Even if trade flows do remain unchanged, higher prices can be expected, regardless.

With wages rising and tax withholdings reduced earlier in 2018, it's been expected that consumers would eventually start spending at a faster pace. We noted a couple of weeks ago that consumer borrowing trends have been soft, and it may be that the influx of new cash is partly the cause of a 0.8% rise in retail sales for May, the strongest increase in outlays since a holiday splurge last November. Even excluding pricey automobiles and the effects of rising gasoline prices left the headline unchanged so there was underlying strength to be seen as well. Consumer spending makes up perhaps 70% or more of the economy and it would seem that we will be in for an outsized GDP figure for the quarter when it comes at the end of July, possibly something above 4%. Hot growth, tight labor markets and rising prices all give the Fed reasons to continue on a path of routinely raising interest rates.

Industrial output wasn't much to get excited about in May, as it declined by 0.1 percent for the month. Manufacturing softened by 0.7%, but rising prices for oil and such saw mining activity ramped up by 1.8% for the month, continuing a four-month string of gains. Utility output gained by 1.1%, with only a February stumble marring a longer string of increases in output. That manufacturing was soft was a little surprising given other available evidence of strength, but the dip may be the result of new tariffs in aluminum, steel and other items, distorting activity. With the easing in output, the percentage of industrial capacity in active used stepped back, falling 0.2% to 77.9% for the month, a level still well short of adding to inflation concerns.

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Perhaps the manufacturing swoon noted above was just a blip. We'll not have a measure of that for a couple of weeks yet, but at least one regional review of activity suggests a higher rather than lower pace. The Federal Reserve Bank of New York's local barometer of manufacturing sported a 4.9 point gain in June, with the headline value rising to 25 for the month, a very solid figure, and one surpassed only three times in the last 10 years. The report noted that orders powered higher and employment rebounded to a five-month high, while input prices remained firm but in about the middle of a the recent trend.

With largely blue economic skies, consumer moods remain very high. The preliminary June reading of Consumer Sentiment from the University of Michigan rose by 1.3 points from the closing May poll, landing at 99.3 for the month so far and just a little off recovery highs. An improving assessment of current conditions pushed the headline figure higher, with the sizable 6.1-point gain pushing this component to 117.9, while hoped for expected conditions in the near future were more muted, slipping 1.7 points to 87.9 for the period so far.

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Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Jun 08May 11Jun 09
6-Mo. TCM2.13%2.05%1.09%
1-Yr. TCM2.31%2.27%1.18%
3-Yr. TCM2.63%2.67%1.46%
5-Yr. TCM2.78%2.82%1.74%
10-Yr. TCM2.94%2.97%2.18%
FHFA NMCR4.51%4.49%4.12%
FHLB 11th District COF0.895%0.814%0.583%
Freddie Mac 30-yr FRM4.54%4.61%3.89%

That interest rates barely moved given the Fed's stronger review of the economy and expectation of more forceful policy moves as growth and inflation seem to moving above long run levels suggests at least two things: One, that markets believe that the Fed is still "ahead of the curve" in terms of fighting inflation, and that growth probably won't run hot for an extended period. If nothing else, it shows a belief in the Fed's present and projected path for policy. It may also suggest that investors believe that inflation won't move all that much higher, or if so, not for very long. Two, it reflects that in our globally-interconnected world, investors and interests outside the U.S. have considerable influence on market-based interest rates and trends, and that the immediate prospects of surging growth and inflation outside the U.S. remain slim. The potential for meager returns elsewhere coupled with relatively high yields available in the U.S. seem to make the option of investing here a pretty compelling one, and this should help to keep interest rates on a relatively even keel for a time.

That time will include next week. The trend for rates this week was a little firmer to start with but tailed at the end after the Fed, ECB and JCB policy announcements. With this as a backdrop, and amid a fairly light calendar of new economic data due, we think the average conforming 30-year FRM as reported by Freddie Mac won't move more than a couple of basis points, probably downward. In the meanwhile, we'll be considering where rates will wander for the rest of the summer as we work on the next Two-Month Forecast for mortgage rates.

For an outlook for mortgage rates that carries into the "Dads and Grads" portion of the year, check out our latest Two-Month Forecast.

You might also take a minute to have a have a look at our broad-brush 2018 Outlook. We look out over the year and provide thoughts and expectations for a wide range of housing and economic topic, and even include a long-range forecast for mortgage rates.


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