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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Mortgage Rates Still Mostly Level

July 13, 2018 -- For weeks and weeks now, about 12 in all, mortgage rates have held in a very narrow range, wobbling about. Of late, concerns about the economic impact of trade "wars" have helped them to steady in a holding pattern. Of course, that the Fed continues to espouse a gradualist approach to monetary policy even with signs of firming inflation is also helping to keep investors calm.

At some point, it is likely that markets will notice that shorter-term instruments are paying nearly as much as are longer-term ones and may shift their focus a bit to one of less duration. Should this occur, shorter rates would level or perhaps decline a bit and long rates rise, but so far the reverse has mostly been true, with shorter rates rising due to Fed policy while strong appetites for the highest returns in many years for longer-term instruments are anchoring yields for longer-term Treasuries and mortgage rates.

After a volatile beginning to the year, interest rates have mostly settled, albeit at higher levels. It doesn't much feel like there is a lot of pressure for them to push higher at the moment, but this may change as news of stronger growth and rising inflation continue to come.

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It may be that we will continue to hold fairly level until we get to the next Fed meeting, where a new policy holding a press conference even at meetings that don't feature updated economic projections from members will begin. More pressers mean more chances to glean even subtle changes in the Fed's thinking or outlook, and this could inject a little volatility at times, moreso if the Fed decides to make a policy move. The next meeting comes July 31-Aug 1, and while there's little likelihood that a policy change will occur (it would surprise markets in a bad way), we may get some refinement of the Fed's thinking as it pertains to the impact of trade and tariff impositions on prospects for future growth and inflation.

Inflation continues to tick higher, at least according to two popular measures. The Producer Price Index, a measure of cost changes upstream of the consumer posted a 0.3 percent gain in June, a touch hotter than forecasts. Overall, the PPI now sports an increase in costs over the last year of 3.3 percent and continues in a rising pattern. As recently as five months ago, "headline" PPI was running at a mild 2.6% but continues to warm. That's also the case for "core" PPI, a measure that excludes the most volatile or transient influences on prices. Core PPI rose 0.3% for the month; in fact, it was the sixth consecutive 0.3 percent rise, accelerating the rate of increase from an annualized 2.1% in April to 2.7% for June.

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Certainly, not all increases in input costs are passed directly to the consumer, but at least some are, and there are anecdotal reports that this is increasingly becoming the case. The overall Consumer Price Index managed only a 0.1 percent rise in June, less than was expected, but the small bump was enough to push the annual headline rate of inflation to 2.8 percent, a six-year high. Core CPI, which excludes things like food and energy costs (which are prone to swings from month to month) rose by 0.2 percent and is running an annual rate of 2.2 percent in June, the same as in May. The core trend is upward, but with a flatter trajectory at the moment.

Although the Fed does not use CPI as its preferred inflation gauge, their core Personal Consumption Expenditures measure is of course influenced by the same overall factors that drive CPI, and so an upward trend here will likely see an upward trend there, if perhaps at different speeds. Core PCE is currently at a flat 2%, the Fed's intended level, but seems likely to firm up above that level in the coming months.

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   Resources:Housing & Salary StudyARM Index DataHome Value Estimator

How fast or slow final prices rise depends in some ways on what happens to costs as a result of the trade "wars" getting underway at the moment. As a nation that is a net importer of goods, higher tariffs mean higher input costs for certain commodities and directly higher costs for certain (and perhaps a widening number of) goods sold directly to consumers. So far, any impact hasn't yet been seen; June's measure of the aggregate costs of goods hitting these shores actually declined by 0.4 percent, the second decline in the last four months. However, May's figure was revised upward from an increase of 0.6% to one of 0.9%, so this month's dip may be revised away in time. Over the last 12 months, import prices are some 4.3 percent higher, settling a little after a May spike to 4.5% but measurably higher than just a few months ago. Conversely, we exported a bit of inflation last month, as export costs were 0.3 percent higher, driving the annual rate to 5.3 percent -- almost double where it was as recently as last October.

After months of only meager expansion, there was a relative explosion in the amount of new credit that consumers took on in May. The Federal Reserve reported that new borrowing by consumers rose a stout $24.6 billion, the biggest borrowing splurge since a holiday-fueled one last November. The use of revolving credit lines has been especially soft this year (probably the impact of somewhat higher take-home pay from the changes to tax brackets in 2018) but rebounded smartly, with balances rising by $9.8 billion, easily the strongest in six months' time. Installment debt also powered higher; driven by still-strong sales of cars and trucks and other big-ticket purchases like tuition, the $14.8 billion increase in debt loads also moved to a six month high. As taking on debt is a kind of expression of confidence about one's future prospects, the increase seen here might be considered a sign that consumers expect the good economic climate to continue for a while yet.

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Popular measures of consumer moods suggest that confidence is high, but there doesn't seem to be a lot of traction to elevate moods further at the moment. The latest measure comes in the form of Consumer Sentiment from the University of Michigan; their preliminary report for July eased by 1.1 points overall, with the headline figure pulled down by a less-rosy assessment of current conditions. The report noted that trade and inflation concerns tempered moods, with the current conditions index easing 2.6 points to 113.9 for the interim period. Expectations remained fairly constant, though, as the outlook component of the index moved up by 0.1 point to 84.4 for the month.

Inventories at the nation's wholesaling firms expanded by 0.6 percent in May, outstripping expectations, but even then, a spurt in sales thinned stockpiles of unsold goods. The inventory build was the largest in three months, and may reflect some front-loading of inventory before higher costs as a result of new tariffs kicks in. That said, sales posted a very strong 2.5 percent gain for the month, fast on the heels of a solid 1.1 percent one in April, so the measure of goods on hand relative to sales edged down to just 1.24 months, the lowest in several years, and suggests that more orders to factories (whether here or abroad) are likely to come to help replenish depleted holdings. That's a positive for manufacturers, who are already enjoying fair if not robust times.

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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
 Jul 06Jun 08Jul 07
6-Mo. TCM2.13%2.13%1.14%
1-Yr. TCM2.33%2.31%1.23%
3-Yr. TCM2.64%2.63%1.60%
5-Yr. TCM2.73%2.78%1.94%
10-Yr. TCM2.84%2.94%2.36%
FHFA NMCR4.57%4.51%3.97%
FHLB 11th District COF0.885%0.895%0.645%
Freddie Mac 30-yr FRM4.52%4.62%3.96%
Historical ARM Index Data

Although there was a sizable decline in claims for initial unemployment assistance in the week ending July 7, where claims fell from 232,000 to just 214,000 it is likely that the mid-week Independence Day holiday and annual auto-plant retooling created both actual and seasonal-adjustment issues with the numbers. We'll see if the decline holds (perhaps signaling further strengthening in the labor market) in the coming weeks.

The flat environment for interest rates in general and mortgage rates in specific seems to be a durable one. To be sure, rates remain at historically favorable levels (only about 50 basis points above where they were this time last July) and continue to provide support for the housing market, where the level of rates is a lesser concern for most than is the lack of affordable, desirable home that are available to purchase. We'll get a little look at how fast new inventory is being added to the market next week when the report covering housing starts for June comes, and we'll also get a send of how builders feel about their prospects in the current market climate when the NAHB reports on Tuesday.

Other than that, the summer doldrums seem to be kicking in, and there's little reason to expect much by way of change for mortgage rates again last week. Movements in underlying rates that help govern mortgages remain muted, with a near equal chance of a couple basis point rise as one of decline. We've bet on the wrong side of the move over the last couple of weeks, expecting a move one way an getting another, so suffice it to say an insignificant move for the average conforming 30-year fixed rate as reported by Freddie Mac seems on tap for next week.

For an outlook for mortgage rates that carries into the waning days of summer vacation, check out our latest Two-Month Forecast.

You might also take a minute to have a have a look at the mid-year review of our 2018 Outlook. Back in December 2017, we looked out over the year and provided some thoughts and expectations for a wide range of housing and economic topics, and included a long-range forecast for mortgage rates. Now at the mid-year point, we look both backward and forward and review where things are at.


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