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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Second Shutdown Averted, Trade Deal Optimism Move Markets

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February 15, 2019 -- The effects of a late-2018 stock market swoon, impending (then actual) partial government shutdown and saber-rattling over trade are starting to show in the economic data, giving investors concerns about the strength of the U.S. economy. In turn, this is helping to keep downward pressure on interest rates, as is a general lack of current inflation and a Federal Reserve which seemed to move from "hawkish" to "dovish" in the space of just a few weeks.

The initial shutdown was over a couple of weeks ago, and a new one was averted today with the signing of a budget deal between the administration and Congress. Perhaps adding to investor optimism was word that progress is being made on a new trade agreement with China, which has been a source of global concern.

Although there are some challenges and headwinds about, economic fundamentals still seem solid, including job growth and rising incomes and major stock indexes have recovered sizable portions of the fourth quarter correction. The Brexit process remains a mess, and several major advanced economies are performing sluggishly, if at all, but if the U.S. is growing that has proven in the recent past to be enough to help lift them, as least to a degree.

Mortgage and other interest rates of course have been damped by a difficult patch, but it does make us wonder if the market seesaw has moved a little too far to one side. After all, up until recently, the sentiment seemed that to be that "The Fed will continue raising rates until the economy breaks" to a current "Next likely Fed move will be none or perhaps even a cut in rates."

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The truth is more likely to be in the center of those positions somewhere. As we've seen many times, investors all seem to follow one another to one end of the seesaw -- first at a trickle, then often in a rush -- before a few brave souls start to take positions at the other end again, only to be followed by the herd at some point.

Certainly, while it has signaled a pause for a time, the Fed hasn't ruled out future rate increases, but may only be waiting for the full effects of both previous rate increases and new economic uncertainties to become more clear before it chooses to act again. To be sure, the Fed does not know where the "neutral" rate for the federal funds actually lies, and should optimism, economic growth and core inflation show signs of firming from the recent soft patch they certainly will again consider kicking short-term rates higher.

Given current conditions, this doesn't feel like it will happen anytime soon, but then again, the Fed turned investor sentiment with its messaging in just a few weeks' time after the December rate hike. We'll learn much at the March FOMC meeting, when it is expected that a balance-sheet management plan will come to light, a new summary of economic projections are due and we'll get a new look at current Fed thinking.

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Until then, there's plenty of data to consider. One item that set the market on its ear this week was a 1.2% decline in retail sales for December, a considerable fall and a reading that was so far below expectations that it called into question the veracity of the data. However, the Commerce Department noted that "Processing and data quality were monitored throughout and response rates were at or above normal levels for this release", but we wonder if there will be a larger revision than usual next month. Falling gasoline prices were a considerable influence in the top-line figure, but weakness was broad-based; only auto- and building-related spending posted gains.

To the extent that the abrupt halt in spending was a result of poorly-performing stock markets (roughest month for equities in 90 years) or concerns about effects of the then-impending government shutdown, well, those issues have passed (if not reversed) and it would stand to reason to expect that some rebound took place in January. That said, the IRS closure may have affected the timing of at least some tax refunds, which are also said to be smaller this year overall due to the changes in tax brackets and withholding rates over the course of 2018.

Industrial Production stumbled a bit to start the year, declining by 0.6% in January. It was the first decline posted here in eight months. Manufacturing output cooled during the month, sliding 0.9% for the period, but some support was seen in a 0.1% increase in output from mining concerns and a 0.4% rise in utility output during the period. The dip in production trimmed the top off a gentle increase in total capacity utilization, as the percentage of industrial production floors in use dropped by 0.6% to land at 78.2%. This figure remains a couple of percentage points below historic norms, and still rather well below bottleneck levels that can add inflationary pressure.

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While price pressures remain mostly muted, thanks largely to the 2018 slump in oil prices, if might be wrongheaded to think they've gone away forever. Major consumer goods producers are quietly (or not so quietly) raising prices or are planning to, with these decisions influenced by rising input and transportation costs and also in response to incomes continuing to rise. For the moment, core inflation trends remain mostly flat while 'headline' figures fall. This was the case in January both the Producer and Consumer Price Indexes; PPI (a measure of costs upstream of the consumer) declined by 0.1% for the month, pulled down by sliding energy costs. However, "core" PPI, a measure excluding these and other erratic costs actually rose by 0.3% for the period. For the last 12-month period, headline PPI is now rising at just a 2% clip (and retreating quickly from last summer's near-term highs), while "core" PPI is running at a 2.4% clip and settling only slowly.

The Consumer Price Index told a similar tale. Headline CPI was unchanged for a second month, with the 0% change for the two periods helping to create just a 1.5% rise in prices over the last year. However, "core" CPI (no energy, no food costs) continued to chug along, posting a 0.2% increase for January, a value seen in 7 of the last 8 months -- and leading to a nearly-steady annual core PPI of 2.1% over the last 12-month period. The Fed closely follows a measure of core inflation (core Personal Consumption Expenditures, or PCE) but movements there generally will track core CPI. By this reckoning, core inflation remains firm, not retreating.

At least some input prices are being dragged down by falling costs of imported goods. A strong U.S. dollar tends to put downward pressure on such costs, which posted a 0.5% decline in January, a larger decline than expected, and import prices have now been retreating for three consecutive months. Over the last year, prices of imported goods are now actually falling at a 1.7% rate; this is in strong contrast to them rising by as much as an annual 4.8% as recently as last July. Goods heading off of these shores are also seeing lower prices; there was a 0.6% decline in export costs for January, and export prices are also in a three-month skid. As with imports, prices tracked here are now declining on an annual basis (-0.2%), a remarkable reversal from an annual rise of 4.3% just last summer.

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If the present trend is an indication, hiring in February will fall rather short of January's 304,000 new hires. Initial claims for unemployment assistance have been relatively elevated of late, bumping up measurably in the end of January and only settling back a little in the last two weeks. In the week ending February 9, 239,000 new applications for benefits have been filed, and even leaving out the "shutdown spike" of a three weeks ago, the last two back-to-back readings were the highest such pair in several months.

We learned a couple of weeks ago from the ISM reports that there was a bit of rebound in manufacturing in January. Perhaps being revealed with a lag, the latest report from the Federal Reserve Bank of New York covering manufacturing in the Empire State sported a bounce higher, with the indicator rising 4.9 points to a relatively modest 8.8 for February. A measure covering new orders edged higher (+4 points to 7.5) while one tracking employment (-3.3 points to 4.1) eased further. Respondents generally reported muted price pressures, which have been mostly on the decline for months.

Also rebounding a bit in at least early February were consumer moods. Battered by weak stocks and shutdowns, consumer sentiment had been beaten down by January, when a sharp decline in moods occurred. In early February, though, the preliminary report from the University of Michigan saw improvement, rising by 4.3 points to 95.5, something closer to trend. Assessments of present conditions improved modestly, sporting a 1.2-point increase, but those for the future brightened markedly with a 6.3-point gain lifting the value back up from January doldrums. With the second potential shutdown now averted and investor optimism rising, it's a fair bet that sentiment will improve a little over the course of the rest of the month, perhaps enough to erase the January drop completely. While the Fed remains concerned about the future for inflation, consumers don't seem to be; the report noted "...importantly, consumers' long term inflation expectations fell to the lowest level recorded in the past half century." The Fed pays attention to long-range expectations for prices in its forecasts for price pressures over the long haul as these can become self-fulfilling, influencing consumer spending behavior over time.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Feb 08Jan 11Feb 09
6-Mo. TCM2.49%2.52%1.71%
1-Yr. TCM2.56%2.59%1.89%
3-Yr. TCM2.48%2.53%2.29%
5-Yr. TCM2.49%2.55%2.54%
10-Yr. TCM2.68%2.72%2.82%
FHFA NMCR4.83%4.86%4.05%
FHLB 11th District COF1.056%1.060%0.746%
Freddie Mac 30-yr FRM4.41%4.45%4.38%
Historical ARM Index Data

Lower mortgage rates aren't yet much supporting the housing market, but they are helping to keep at least some refinance activity alive. We'll need low rates in place -- and more inventory to buy, moreso from the existing side than from new construction -- to get a solid spring homebuying season underway. That should start arriving in the next few weeks and will spread from the south to the north along with the arrival of robins and other snowbirds.

We'll get a fresh update on what's happening in housing next week with data releases covering homebuilder sentiment, housing starts/future building permits and existing home sales. Given that we're these reports cover the depths of winter there's little reason to expect any huge increases, especially as existing home sales reported in January will likely better reflect conditions in late November and December -- when financial markets were roiling, mortgage rates were at 7-year highs and holidays were kicking in. This combination argues for more softness than not. Other than this, a pretty light calendar of other data is on tap. As the recent trend of slightly softer interest rates was countered a bit by Friday's stock rally, we'll expect to see no change in the average 30-year FRM offered rate reported by Freddie Mac come next Thursday morning.

For an outlook for mortgage rates that carries though the depths of winter, 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".


Still underwater in your mortgage despite rising home prices? Want to know when that will come to an end? Check out our KnowEquity Underwater Mortgage Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.

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