Data Less Dire, Rates To Move Higher

November 8, 2019 -- Mortgage and other interest rates have spent most of 2019 on a downward trend, not only here in the U.S., but also in other developed economies where some rates have been in negative territory for a while, sometimes by design and sometimes not. All of this downward pressure on rates has been predicated on the emergence of increasingly bleak economic news and prospects for more trouble ahead; seeing darkening economic skies, central banks around the world have taken steps to spur economic growth. In general, this has helped to allay investor fears that recessions were or are looming in various economies, improving the chances that widespread outright declines in economic activity won't occur.

Of late, optimism has improved further on prospects that a "phase one" trade deal between the U.S. and China will be happen soon, but disputes remain unsettled and the agreement isn't yet in place. This week, word came that a rollback of tariffs on some Chinese-made goods would be included in the deal, but the White House doesn't seem to be on board with such an action as a component of at least this portion of any deal. It's not yet clear if a rollback is necessary to get the deal in place or that investor enthusiasm about any deal has yet waned, but the optimism will surely wane of movement again comes to a standstill. Still, the discussions are ongoing and that's a reason for optimism, if nothing else.

The impasse on trade between the largest and second largest global economies of course has had wide-ranging and pervasive effects, but also direct ones, too, including the damping of economic activity here and there. The current U.S. trade deficit shows a bit of this; in September, the gap between the value of imports and those of exports narrowed by $2.5 billion to $52.5 billion for the month, but not necessarily in a good way. During the month, exports declined by $1.8 billion while imports slid by $4.5 billion, so trade flows were diminished on both sides. Depending on your perspective of energy exports, it may be a good thing or a not-so-good one that for the first time in this Bureau of Economic Analysis series (dating to 1978) the United States was a net exporter of oil, thanks to advanced location and extraction techniques, including fracking.

Curious as to what the Federal Reserve is doing, and what it means to mortgage markets and rates? After each Fed meeting, read HSH.com on the latest move by the Federal Reserve. We break down the meeting-closing statement, analyze monetary policy changes and interpret the effects on mortgages and more.

Although the economic news hasn't been all that great, it has been collectively fair and continues to be. Worries that a manufacturing-led slowdown might be spreading to the non-manufacturing sector were soothed a bit this week, as the Institute for Supply Management report covering service business activity showed an improvement in October. The ISM barometer rose by 2.1 points for the month, rising to a moderate 54.7, and was powered by both a pickup in new orders for services (+1.9 points to 55.6) and in employment (+3.3 points to 53.7 for the month. If the largest component of the economy isn't faltering and hiring remains solid any softness in manufacturing is less likely to be able to spread.

Last week, we saw that the ISM report covering manufacturing edged higher to a less-negative stance; that improvement is of course welcome, but headwinds for the sector remain. Overall factory orders in September declined by 0.6%, a second consecutive decline. Orders for durable goods slumped the most, falling by 1.2%, while those for non-durable goods edged 0.1% higher for the month. "Core" factory orders (a measure of business-related spending) shrank by 0.6% for the period and fast on the heels of a 0.8% decline in August, so caution in business investing seems to be the order of the day, at least for the moment.

Downstream of manufacturers, the nation's wholesaling firms are keeping a lid on their accumulation of goods. In fact, holdings by wholesalers shrank by 0.4% in September, with durable goods stockpiles declining by 0.1% and non-durables by 0.9%. With sales for the month flat, the ratio of goods on hand relative to sales remained at 1.36 months for a fifth consecutive month, so it seems unlikely that a spate of new orders will be flowing to factories anytime soon.

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In general, it's said that the consumer is holding up well despite the overall slower economic climate. Rising wages and solid labor markets continue to power consumer spending, in turn helping the economy grow at a modest-to-moderate pace. With cash flowing, consumers added to credit balances at a slower pace in September, adding only $9.5 billion in new loan balances. As is commonly the case, borrowing on installment (auto loans, education loans, etc) expanded the most, rising by $10.6 billion for the month. That said, balances on revolving credit (mostly credit cards) actually shrank by $1.1 billion, and that after declining by $2.2 billion in August. This year, there have been several budget-busting spending sprees on plastic followed by retrenchment, and in the last seven months alone we've seen three large increases and four smaller paydowns, so the recent decline isn't out of the ordinary. However, the installment component was a pattern-breaker, as new borrowing here was about half that seen in August and the smallest amount since May.

A slide in sales of new autos is likely at least partly responsible for the lesser gain in installment borrowing, as sales of new vehicles in September slipped to a 16.6 million (annual) rate according to AutoData, the slowest pace in six months. As for the revolving credit portion, odds favor a new expansion in borrowing before long, as the holiday shopping season seems to have already begun, if you can believe the displays in some stores and some advertising on television. The retailer's "Black Friday" comes late this year, leaving a shortened "traditional" shopping season, so many outlets are starting early.

Credit usage may be a little soft, but the same can't be said for lending standards, at least for mortgages and consumer loans, which remain essentially firm and unchanged. At least that's the message from the Fed's poll of Senior Loan Officers at the nation's largest banks; credit conditions in the fourth quarter saw mostly unchanged underwriting standards for mortgages of all stripes, and slightly tighter conditions for things like auto loans and credit cards. With lower mortgage rates in place an refinancing and homebuying activity solid, banks reported generally stronger demand for mortgages during the survey period, and demand for auto loans and credit cards also firmed a bit.

Worker productivity tailed off in the third quarter of 2019, declining by 0.3%, the first decline since the fourth quarter of 2015. Quarterly productivity figures are subject to considerable revision, but the dip nonetheless ends a string of positive readings. The decline in output per worker per hour meant a corresponding increase in the labor cost for each unit being made, and per-unit labor costs rose from 2.4% in the second quarter to 3.6%, a move which will tend to eat into corporate profits a bit, but also one that may impact wage gains for workers. Of course, the dip in productivity may also be related to the strong spate of hiring during the quarter; as the labor pool shrinks it becomes increasingly difficult to hire experienced hands, and it may take rookies somewhat longer to be able to contribute even as training them can interrupt the output of more productive workers.

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The labor market may be cooling a bit, but nothing worrisome at the moment. The monthly Job Openings and Labor Turnover Survey (JOLTS) report for September found somewhat fewer job openings during the month, but also fewer people quitting their jobs, too, with both new separations and new hirings remaining in pretty good sync. As well, initial claims for unemployment assistance remain at very low levels; in the week ending November 2, just 211,000 new applications were filed at state unemployment offices around the country, a figure trending toward the bottom of a range that has persisted since the end of June.

Like initial unemployment claims, mortgage rates have pogo-sticked in a range that has held since mid-July, and one that is at favorable levels overall for both purchasers and refinancers. One week rates go down, and refi activity kicks higher, only to reverse the process a bit the following week. In the week ending November 1, the Mortgage Bankers Association of America reported that mortgage rates eased back and applications for refinance moved 1.8% higher, but that increase wasn't enough to offset the drag of a 3.6% decline in applications for purchase-money mortgages, so the overall change was a 0.1% decline in mortgage application activity overall. Despite some backing and filling, the general trend in mortgage activity has been very strong this year, much stronger than expected or planned for by lenders, all thanks to a poor economic climate and the considerable decline in interest rates that such a climate engenders.

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Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Nov 01Oct 04Nov 02
6-Mo. TCM1.61%1.74%2.49%
1-Yr. TCM1.57%1.66%2.67%
3-Yr. TCM1.59%1.44%2.92%
5-Yr. TCM1.60%1.43%2.97%
10-Yr. TCM1.78%1.60%3.14%
Federal Cost of Funds2.150%2.200%0.948%
FHLB 11th District COF1.127%1.155%0.687%
Freddie Mac 30-yr FRM3.78%3.57%4.94%
Historical ARM Index Data

Overall consumer moods remained on an even keel to start November. According to the University of Michigan survey of consumers, consumer sentiment edged 0.2 points higher in their initial monthly poll, rising to an overall value of 95.7 to start the period. Current conditions were rated less favorably; the near-term gauge declined by 2.3 points to 110.9 in the interim report, taking back about half of October's gain, while assessments of the future were more favorable, with the forward-looking barometer edging 1.7 points higher to 85.9 for the month to date. If it holds, it would be a four-month high for the expectations component of the index.

So investor optimism is rising, and important economic categories aren't worsening at the moment. It's important to remember that it was both actual economic decline and fear of further decline that prompted the considerable fall in interest rates both here and abroad this year, and while there has been little improvement yet to be seen on the economic front, there has also been little further deterioration (or at least unexpected deterioration). At present, the removal of some of the fear from investors of future economic deterioration, helped by central bank actions, a lessening of trade-saber rattling and more is all it has taken to see interest rates move up off of recent bottoms, not only here but across the globe. Improving optimism can only drive them up so high; eventually, we'll need to see solid economic evidence to justify that optimism, or we'll reverse course again.

For next week, though, it looks like optimism has the upper hand. Mortgage rates are poised to head back up again toward the top of the summer-fall range, and this week's dip in rates is history. Given the stance of yields as the week came to a close and with a thin calendar of new data before Freddie Mac reports next Thursday, odds favor perhaps a 7-9 basis point increase in the average offered rate for a conforming 30-year FRM they will report. Looking forward from there? Well, we'll be working on our next Two-Month Forecast, the last one of 2019.

For an outlook for mortgage rates that carries until the early stages of the holiday season, check out our latest Two-Month Forecast.

See our mid-year review of our 2019 Outlook , where we provide updates to our speculations for ten topics that are in and around 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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