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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Global Softness Dragging Down Rates

March 15, 2019 -- A spate of economic softness that began last year in developed economies has persisted for a spell, trimming the top off of growth in the United States. For our own part, the month-long partial shutdown of the federal government also created its own economic interruption, adding in an additional degree of certainty at a time when financial markets were already shuddering.

Recent data suggests that those effects yet linger, but may be beginning to shift in favor of improvement, at least here. Overseas, the European Central Bank has pledged more monetary stimulus over a longer period of time, and China has now announced fiscal stimulus in the form of tax cuts and such to help re-fire its fading growth. To the effect that these initiatives succeed, growth with eventually start to strengthen, and with that, firmer interest rates would become more likely.

It looks as though the "deal or no deal" Brexit process will not be settled come month end, given that the U.K. Parliament agreed to a postponement of the divorce until an agreement can be reached. That said, the 27 other member nations of the trading and currency bloc would need to agree to an extension, and Prime Minister May still has some time for a last-ditch effort to gather enough votes for her plan. Suffice it to say that the saga continues, keeping a level of uncertainty in financial markets at all times.

In uncertain times, such as now, investors often show some favor to the safety and soundness of bonds, eschewing stocks, whose fortunes are tied to the ability of firms to reap profits in this softer economic climate. However, a quick scan across the globe reveals that many sovereign bonds have puny yields; 10-year bonds in Japan have negative returns, 10-year German bunds are returning less than 10 basis points. By contrast, U.S. Treasuries have relatively huge yields at about 2.6%, a level above even recession-set and fiscally-challenged Italy's comparable offerings.

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Given this, it's not hard to see why money continues to pour in to U.S.-backed bonds, pushing yields down and anchoring them to a real degree. Couple this with inflation that can't seem to find much by way of traction and you've got conditions for interest rates that may hang around for a while, at least until an accumulation of improving economic data (or the start of a uptrend in prices) begins to support higher interest rates. It may be a while yet before such conditions begin to show.

But what does the Federal Reserve think of all this, and how do members of the Federal Reserve Board feel about the prospects for growth and inflation later this year? We'll know more of that pretty shortly, as the Fed meets again next week to set monetary policy and expectations. No change to short-term interest rates will come at this meeting, but we would expect to see a working outline for terminating the runoff of the Fed's balance sheet. By their own inference, the central bank has prepared markets for outright reductions in holdings to come to a close by the end of the year, but will also likely feature a process for recycling inbound money from MBS into Treasuries. The statement that closes the two-day affair will likely again allude that global headwinds and crosscurrents plus soft inflation allows for patience for a while yet.

But how long will patience last? We'll also get a new assessment from members about where they think that monetary policy will be in the near, mid and longer-run as updates to the Summary of Economic Projections are also due out. These "dot plots" have been a topic of discussion inside the Fed about their effectiveness in property conveying the message about expected monetary policy and there is some reason to think that these may be discontinued at some point. To be sure, they are helpful in coalescing the collective thoughts of members but are subject to regular revision, and really amount to little more than speculation ("If the economy performs this way and inflation performs that way then I'd expect that the federal funds target would be [number or range]."

Our own take on this is that "if the economy shows more signs of firming between now and June and core prices don't weaken much that there will be growing odds of at least one rate hike before 2019 comes to a close."

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For now, though, the mixed economic messages continue, albeit with an improving tenor. After a dismal December showing, retail sales bounced back in January, but just a bit. An 0.2% rise in overall sales was the headline figure, but this was muted to a great degree by low gasoline prices and a drop-off in auto sales. Leaving them out, so-called "core" retail sales had a fine rebound, rising 1.2% for the month and nearly erasing a 1.6% decline in core retail sales from the month prior.

Orders for durable goods moved 0.4% higher in January, following up on a 1.3% rise for December. In fact, there has been a three-month string of rising orders, and the measure of durable goods orders that is a proxy for broad-based business spending (no defense spending, no aircraft) rose a solid 0.8% for the month, its first positive value since October and the strongest one since last July.

Spending for construction projects rose a stout 1.3% in January, the biggest gain since last April. That said, the components that make up the headline figure were erratic; outlays for residential projects declined by 0.3%, a sixth straight contraction; spending for commercial and industrial buildings rose 0.8% and has been more positive than not over the same time period. Driving the headline up was a 4.9% increase in spending on public-works projects, a sector that had been contracting over the last two months. Highway and street spending led the way, so there must have been a lot of potholes to be repaired during the month. It would be better if spending on residential projects was picking up, but housing conditions remain sluggish. We did learn last week that housing starts turned up in January, so perhaps more funds will flow in this direction as we move into the spring homebuying season.

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The winter is often a slow time for sales of homes, and the report covering sales of new homes did soften rather a bit. In January, an annualized 607,000 new homes were sold across the country, a 6.9% decline from an upwardly revised December sales figure. In fact, December's sales were moved up by 31,000 to 652,000 and November's initial figure saw an additional 29,000 added to the tally (now 628,000) so perhaps January's meager figure will also be revised higher as time wends forward. Still, sales for the month were soft enough as to see there still be 6.6 months of available supplies (some 341,000 actual units built and ready to go). Of course, some of the recent softer pace of sales might be related to still-increasing price of new homes, which rose 2.6% in January after a 4.6% increase in December. By contrast, part of the revival in sales from October to November (+13.8%) may have been due to heavy discounting, as prices in November were down by almost 10% during the month compared to October, luring buyers.

Industrial Production managed a 0.1% overall increase in February. Although the gain was weaker then analysts expected, it was nonetheless a rebound from a 0.4% drop in January. As with construction spending above, the components were mixed at best. Manufacturing production declined for a second month in a row, easing by 0.4%; mining output continued a string of gains with a 0.3% increase and utility production rose by 3.7%, probably due to several spates of cold weather during the month. The percentage of industrial production floors in active use slipped a tenth of a percentage point to 78.2% for the month and has been in a gentle downward trend since November.

A backward-looking picture of overall inventory levels across various stages of the economy suggests that future factory activity may come in on the softer side for a while yet. Overall stockpiles of goods rose by 0.6%; manufacturers reduced holdings by 0.02%, a second trimming of stocks on hand, while wholesalers fattened up their shelves with a 1.09% increase in inventory levels. Retailers, too saw stockpiles grow after a November drawdown, with a 0.86% rise in holdings. With retail sales rebounding only a bit, levels of goods on hand relative to final sales rose to 1.38 months of overall inventories on hand, the highest figure since August 2017. As such, it is unlikely that we'll see a surge in new orders anywhere until these relative gluts of inventories are worked through.

That slowness in manufacturing seems to be reflected in the latest local survey from the Federal Reserve Bank of New York. It's Empire State Manufacturing Index was expected to show a small increase, but instead the report for March reversed course, declining 5.1 points to land at a near-breakeven 3.7 for the month. Measures covering new orders fell from 7.5 in February to just 3 in March, so slowing, but a bit of optimism was seen in the employment metric, which moved upward to its highest level in three months. The trend here is still modestly positive overall, but only slightly so. More such local reports will come as the month rolls along, and perhaps the slowing here is a just a regional stumble.

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If we are to see interest rates moving higher, it will take more than just improving economic growth and rising wages. We'll also need to see prices moving to Fed-preferred levels or above, and also promising to hold there reliably. At the moment, that's not quite the case, although the trend may be starting to change.

Prices of imported goods coming into U.S. ports rose in February by 0.6%. While not enough to get very excited about, it was the biggest one-month increase since last May, and with January having posted a 0.1% rise, the first back-to-back increases since September-October of last year. Of course, between those were two significant declines, and prices of imported goods are actually now 1.3% below year-ago levels, although this is less negative than was seen in January. For exports, we pushed goods out to others with prices that were also 0.6% higher during the month; while also not much to write home about, it was the first increase in export prices in four months' time, but even then was only sufficient to make prices 0.3% higher over the past 12 months.

Producer and Consumer prices are both still being affected by the downdraft in energy prices last year, but this too is starting to change (just check gasoline prices of late). For February, the Producer Price Index headline rose by just 0.1%, half of the increase observers expected, and headline PPI is rising at just a 1.8% rate over the past year. Core PPI also rose by 0.1%, but this measure that excludes energy and other volatile inputs is running a 2.2% rate for the pat year.

The tale was much the same for Consumer Prices. The headline CPI rose by 0.2%, its first increase in three months (all 0.0% changes), leaving the headline CPI rising at just a 1.5% annual clip. Core CPI rose by just 0.1%, with the annual reference cooling to a 2.1% yearly rate. The Fed prefers a measure of inflation called the Core Personal Consumption Expenditures (Core PCE), which has bee running a little lower than core CPI (about 1.9% recently), but would tend to follow the same things that influence trends in core CPI. In general, core prices are in a flat-to-slightly cooling stance just yet.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Mar 08Feb 08Mar 09
6-Mo. TCM2.53%2.49%1.88%
1-Yr. TCM2.53%2.56%2.05%
3-Yr. TCM2.48%2.48%2.42%
5-Yr. TCM2.48%2.49%2.65%
10-Yr. TCM2.68%2.68%2.88%
FHFA NMCR4.60%4.83%4.08%
FHLB 11th District COF1.125%1.056%0.753%
Freddie Mac 30-yr FRM4.41%4.37%4.44%
Historical ARM Index Data

One signal that the future may be economically brighter than today is the continued improvement in consumer moods. The preliminary March report covering consumer sentiment from the University of Michigan Survey of Consumers showed a 4 point increase over the final February figure. The top-line number is now at 97.8 and has erased virtually all of the stock-market and shutdown-related slump seen in January. Assessments of current conditions added 2.7 points to hit 111.2 and has recovered about half the early 2019 dip, while those for the future rose 4.8 points to 89.2, a five-month high. Happier consumers are thought to be more likely to open their wallets and pocket books and power the economy, and of course, a stock market that has also recovered from a rough fourth quarter doesn't hurt this line of thinking, either.

The Fed certainly has a lot of shifting sand to ponder when it meets next week. In the current domestic and global economic climate, interest rates will have difficulty getting any kind of reliable upward traction. That said, the Fed has a bit of a difficult job when it comes to the message it releases Wednesday afternoon, as too optimistic an outlook risks confusing the market as to what and where they are seeing brightening skies, while too pessimistic an outlook would also roil markets, who would then start the drumbeat for the Fed to consider cutting interest rates sooner than later. Cautious optimism is about the best message they can convey, and we expect that's what we'll get.

There's not much new data out before the Fed meeting, so markets won't have much by way of additional clues to work with. With a soft fade for interest rates as the week came to a close, odds favor little change to mortgage rates in the coming days, but we might see a couple of basis point decline in the average offered rate for 30-year FRMs that Freddie Mac reports next Thursday morning.

For an outlook for mortgage rates that carries to the midddle of the spring homebuying season, check out our latest Two-Month Forecast.

You might also see our new 2019 Outlook, where we provide observations and speculations for ten topics that are in and around the housing and mortgage markets.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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