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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Data Help Tether Mortgage Rates

May 11, 2018 -- When the year turned, optimism that the change to tax law would spark faster economic growth was widespread, and investors began to think that a cycle of stronger growth would lead to faster inflation, and in turn, more rapid increases in short-term rates by the Federal Reserve. This concern seemed even more valid when the January employment report revealed wages growing faster than they had been, and interest rates moved measurably higher. Since that time, investors seem to be waiting for the next report that suggests the awaited acceleration in growth has begun, or that inflation has leapt. They continue to wait, as so far, evidence of either has been hard to come by. However, the steady drip of firming inflation has put at least a little solid ground under interest rates, but only enough to continue a "move up, then plateau" pattern that has largely been in place since last September.

From available observations, we haven't seen the anticipated acceleration in economic growth; even discounting seasonal-adjustment issues, there was nothing especially robust about the 2.3% GDP rate posted for the first quarter of the year, and in fact, this was a deceleration from the three quarters which preceded it. Outside of a blockbuster February report, new job creation has been relatively muted, and more importantly for rates, annual wage growth returned to a more familiar and trend-like level after the January surprise. Inflation continues to march higher, but at a pace that hardly seems threatening or that would require a more forceful response by the Fed -- and the central bank remains evenly split as to whether interest rates should be lifted three times this year or four.

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Even factors that should be pressuring long-term rates higher seem muted; the Fed's balance-sheet reduction should be seeing more mortgage-related debt for investors to absorb, but higher mortgage rates has meant a slowing in refinances and only level activity at best for purchases, so there has been a diminishment in issuance of new MBS. As such, not only are investors not being overwhelmed by new supply, there are actually fewer new securities available to buy now than before the Fed moved into runoff mode. Arguably, there is plenty (or at least a suitable amount) of demand amid more limited supply even with the Fed out of the game. As well, the Treasury is issuing rather more new bills, notes and bonds this year than it has in years, and it was expected that stronger growth here and abroad would see investors less interested in snapping up this new debt, leading to excess supply, and in turn, higher yields. So far, that's not much been the case, and there seems to be a great level of appetite at the present yields, which are among the highest in years.

These factors and others have made interest rates rather more sticky than might otherwise be expected, but no one should expect perpetual sluggishness in the pace or regularity of increases. To the degree that seasonal adjustments were the cause, GDP growth in the second quarter (now approaching the halfway mark) can be expected show more strength (an early reckoning suggests a present 4% rate); core inflation has finally returned to the Fed's desired level of 2% and greater monetary-policy effort may yet be needed to keep it there, and the supply of new debt available may not continue to be met with an adequate level of demand. Factors that can move interest rates higher remain strong, and those that provide tempering or even temporary diminishment seem tenuous. Even a subtle shift in the near or long-term expectations for Fed policy (a majority move to four rate hikes for 2018, more increases in '19 or '20 or even a move up in the expected top rate for this cycle) would be sufficient to see mortgage and other long-term interest rates move to the next plateau.

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In the interim, there was little in any of the newly-released data to provide much concern for investors this week, and several reports measuring inflation at various places in the economy were mostly softer than expected. For example, the latest review of Producer Prices for April sported an increase of just 0.1 percent, the smallest increase of the last four months and about one-third forecasts, and overall PPI on an annual basis eased from a flat 3% gain in March to just 2.7% in April. "Core" PPI rose by 0.3 percent, the same as in March, and has been running at a moderate rate of 2.1 percent for the last four months.

Downstream of producers, the monthly Consumer Price Index did move 0.2 percent higher in April after a surprise decline in March, but the general trend for prices remained in place. Core CPI, a measure that excludes volatile food and energy costs actually decelerated to a 0.1 percent rise, the smallest increase noted here since last November. With only modest changes in April, both headline and core CPI held steady, posting 2.4 percent and 2.1 percent annual rates, the same as seen in March. To be fair, though, and relative to last year, inflation is still on a modest upward trajectory even with the leveling of the last two months.

As the U.S. is a nation that is a net importer, changes in the cost of imported goods can contribute to (or detract from) overall inflation over time. In general, import prices stopped routinely declining back in 2016 and have moved more or less steadily higher since then. In April, the aggregate cost of imported goods coming into the U.S. rose by 0.3 percent, rebounding after a March decline of 0.2%. Overall, costs as measured here are running some 3.3% higher this year than last, but the trend has been largely flat for the past six months now. Goods destined for other shores contained rather a bit more inflation, with export prices rising by 0.6 percent for the month; unlike imports, though, the annualized increase has moved steadily higher for months, and is now reckoned at a 3.8 percent annual clip.

Overall, price pressures are evident, but don't seem to be accelerating much and remain reasonably muted at the moment.

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One of the expectations of the passing of tax reform was that more money in the pockets of consumers would lead to stronger spending and faster economic growth. So far, not so much. Even with a March rebound, retail sales have been lackluster for months, and the latest report covering consumer credit balances suggests that consumers may be using this new cash (or at least that which isn't being eaten up by now-rising gasoline prices) to pay down revolving debt. To be sure, new consumer borrowing did rise in March, rising by a total of $11.7 billion dollars; however, all of the increase came from the installment side of the ledger, a form of debt most commonly used for auto loans, education and other such items. Balances on revolving credit actually diminished for a second straight month, with some $2.6 billion retired during the period. It may be that consumers do have more cash in pocket, and are using that cash to cover convenience purchases that used to be "put on plastic", but declining balances suggest that either more dollars are being sent to pay down balances, or that personal debt-consolidation installment loans are adding to the "installment" side tally even as they subtracts from the "revolving" side. Given high (and likely rising) rates on credit cards, this may be a partial explanation for changes seen here of late.

You would think that firmer credit costs and diminishing borrowing would see banks and others loosening credit standards to try to reach wider audiences. According to the latest survey of Senior Loan Officers, that's not the case as of yet. For the most part, regardless of whether consumer or mortgage borrowing, sizable majorities of lenders polled noted little if any change in their underwriting standards, even as demand for mortgages, installment loans and home equity lines of credit all tended to the softer side. The survey covered the three months ended in April, so perhaps loan demand will show a pick up after what was a protracted winter of 2018 in many parts of the U.S. If not, odds favor some loosening of standards at the margins to help support loan growth.

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The buildup of stockpiles of goods at the nation's wholesalers cooled in April, rising by 0.3 percent, the smallest gain since an outright drawdown happened last October. Holdings of durable goods powered ahead by 0.8 percent for the month, but nondurables contracted by 0.4 percent. As overall sales matched the overall increase in holdings, the inventory-to-sales ratio remained at 1.26 months of goods on hand, a third month at that ratio, and one that suggests perhaps a more tempered level of ordering is to be expected in the months ahead.

Repeating the same song over again, initial claims for unemployment benefits posted a 211,000 figure in the week ending May 5, the same as seen in the week ending 04/28. Tight labor markets make business less likely to shed workers as finding new ones can be a difficult and expensive proposition these days.

The preliminary May review of Consumer Sentiment from the University of Michigan saw no change in the headline figure, which remained at a value of 98.8 for the interim period. That did mask a mix in the components, though, as the assessment of current conditions declined a bit, slipping by 1.6 points, while the index covering expectations for the future nudged ahead by 1.1 points.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 May 04Apr 06May 05
6-Mo. TCM2.03%1.92%1.00%
1-Yr. TCM2.24%2.07%1.10%
3-Yr. TCM2.63%2.41%1.49%
5-Yr. TCM2.79%2.60%1.86%
10-Yr. TCM2.96%2.78%2.33%
FHFA NMCR4.49%4.28%4.27%
FHLB 11th District COF0.814%0.816%0.591%
Freddie Mac 30-yr FRM4.55%4.42%4.03%

Although there was a bit of a run up in yields this week, it mostly faded by the end of the week, leaving the influential 10-year Treasury yield about where it started the period, given a basis point or two. With this as a backdrop, mortgage rates have a chance to put in another mostly unchanged week when Freddie Mac reports next Thursday. Of course, we have a bit of new data which could influence rates higher before then, including the retail sales report for April, homebuilder sentiment and housing starts and others for the market to digest. As we seem to have only recently moved to the newest plateau for mortgage rates, there's good reason to think that we may have a fairly stable period for the next couple of weeks, after which the next Fed meeting begins to approach and distort things again.

With this in mind, we think that we'll see not more than perhaps a basis point or two change in the average conforming 30-year fixed-rate mortgage reported by Freddie Mac next week.

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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