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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Tricky Messaging For The Fed

June 14, 2019 -- Wildly swinging markets, softer economic growth, stubbornly low inflation, political badgering, trade-war effects, market pressures and more all confront the Federal Reserve as it holds it's next policy-setting meeting in just a few days' time.

Investors and the President are both agitating for a cut in rates, and certainly, the Fed could find cover for making such a move with inflation below desired targets. However, as the central bank probably wants to re-assert that it is an independent body, largely free of external market or political pressure, it's a bit of a delicate time for the Fed. Just six months after having a policy outlook that suggested higher rates and "autopilot" for balance-sheet management, the Fed has pivoted to a policy of patience and ending runoff of its holdings.

To pivot again to a rate cut after the June meeting might send the wrong impression to both the President and the markets that the Fed can be badgered or goaded into cutting rates. That would likely only engender more of the same kinds of behaviors from both sides, a rather unpleasant outcome. To be sure, with inflation failing to meet official targets, the Fed does have at least some cover if they should want to cut rates, but there isn't much in the available data to suggest that the economy is faltering badly enough as to need assistance right now. Growth is slowing from any number of causes, and that inflation remains below target is thought to be a "transitory" phenomenon, and it's not clear that slightly lower short-term interest rates can help on either front.

If the Fed doesn't intend to change policy on Wednesday - and we don't think they will -- then what to say in the statement which closes the meeting to keep the markets on an even keel? How to best convey what it arguably growing concern about domestic and global economic conditions without creating an expectation for a near-term return to more emergency-level policies? Will the official message reinforce or contradict to a degree the sum of the Summary of Economic Projections? Getting this messaging right is probably even more important now than in December when rates were last increased, when the statement and the commentary at the subsequent press conference was flubbed and roiled markets. It took the release of the minutes of the meeting three weeks later and lots of chatter to clarify the Fed's intentions.

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The proper messaging is also crucial right now for other reasons. Perhaps most important, the economy is doing OK; at about the halfway mark (for economic reports for the quarter, if not the calendar) the current run rate for GDP has moved higher, and is now reckoned at 2.1%. Of course, this is moderation; the economy isn't growing as strongly as at times last year. Importantly, it's not collapsing and cutting rates or misstating concern about growth and such might lead markets to think that worsening times are ahead, when it may be that we're simply in a softer patch due to ever-changing trade and tariff issues and some hangover from last year's tax-cut fiscal kicker. If the outlook isn't especially dark, or the well-known headwinds haven't much intensified, it's important to make sure that this news is broadcast far and wide. If, after a surge, it appears as though growth is reverting to the mean for this expansion (something around 2% GDP or thereabouts) but is expected to continue for the foreseeable future, then this expectation needs to be made known.

As well, inflation below desired levels in the Fed's eyes may not be optimal, but that's not the same as disinflation or deflation, and there's really nothing special about 2% inflation or even 1.5% inflation. Various efforts across the globe -- including negative interest policy rates and open-ended (and still on-going) forms of QE have failed to lift inflation to target anywhere, so perhaps it's not an issue of the price of money or something that can be solved with lower rates very effectively, at least in the current global economic construct.

For our part, we're glad to not to have to write the meeting-closing missive. If we did, we'd probably look to impart some concern about unpredictable trade and tariff effects but look to express confidence that growth is settling for knowable reasons to sustainable or trend-like levels and that inflation falling shy of targets isn't desired but not a grave concern that required an immediate response. We'd also take pains to note that should conditions for either growth or inflation become less favorable or persistent that a policy response could be warranted. We might also add: 'Now go away for the summer and leave us be!"

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As we mentioned above, the vast majority of signals suggest the economy is doing OK. Yes, we know that job growth was a measly 75K in May, and that April and March's figures were revised down. However, the unemployment rate remains at about a 50-year low and wage growth is still running over 3% and so outstripping inflation, so "real" incomes are growing. The labor force participation rate remained stable at 62.8% and continues to hang around levels often seen in the latter stages of this 10-year expansion. As well, worker productivity is running strong, at least in the first quarter of this year, with a 3.4% increase helping to drive down per-unit labor costs by 1.6% for the period, allowing employers to pay higher wages to employees on the books even if they aren't able to add workers. As well, the Fed's recent Beige Book talked more about labor shortages than of workers looking for employment, and weekly unemployment claims figures remain very low (just 218K and 222K in the weeks ending June 1 and 8, respectively).

Retail sales pushed higher again in May, rising 0.5%, and building on a 0.3% lift in April. Spending stalls in December and again in February spooked the market, but three increases in spending in a row show that consumers remain willing to spend and don't seem concerned much by trade saber-rattling or stumbling stock markets. Even "core" retail sales pushed 0.5% higher, so spending outside of autos and gasoline remain fair. With oil prices again sliding, lower gasoline costs may trim the top-line retail sales number for June when it comes, but this change may also free up money for spending on other goods and services and keep core sales on a firm path.

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   Mortgage data:Today's Mortgage RatesHistorical Mortgage RatesReverse Mortgage Rates
   Calculators:Home Equity CalculatorTri-Refinance CalculatorPMI Cost Calculator
   Resources:Housing & Salary StudyARM Index DataHome Value Estimator

Although there are lagged effects, market-engineered lower mortgage rates are kicking refinancing activity higher, and debt consolidation, equity cash-out or just lower monthly payments can also provide a lift to future retail sales and investment. With last week's drop for 30-year FRM rates, the Mortgage Bankers Association noted a 26.8% rise in applications, with a 46.5% increase in refi apps and a 10% bump in those for purchase-money mortgages as homebuyers look to grab the lowest rates since September 2017 while they last.

Despite earlier rounds of tariff increases and threats of more, the nation's imbalance of trade doesn't seem to have been affected very much. In April, the differential between the value of goods coming to the U.S. and those leaving was $50.8 billion, a figure closer to the bottom of the range for the last year but not much more than that. Pressures on imports and retaliation for exports seem only to be putting a damper on trade, as exports declined by $4.6 billion and imports by $5.7 billion for the month. Meanwhile, prices of both imported goods and those for exports are seeing falling prices (these are tallied before duties are added). Import prices declined in May by 0.3% and are now retreating at a 1.5% annual pace, while export costs slide 0.2% for the month and are falling at an -0.7% annual clip. After tariffs are added, final prices to consumers on both ends of the transaction will of course be higher, but falling base costs seem likely to limit even that effect, at least for now.

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Elsewhere in the price measurement stream there's not much to report, either. The Producer Price Index rose by just 0.1% in May, down a bit from April's 0.2% increase but still sporting a 1.9% annual rate of increase, if one that is settling. Core PPI, a measure exclusive of highly-volatile inputs was unchanged for the month and is holding a 1.6% annual rate of increase at the moment and is also in a diminishing pattern. Downstream of producers, the Consumer Price Index rose by 0.1% for May, an increase also softer than was April's. The annual rate for CPI is now 1.8% and is in the middle of a half-point range it has held for the past six months. Core CPI rose just 0.1% for the month, too, but is holding pretty steady at a 2% annual clip. The Fed prefers a different price measure, but that core PCE measure should generally track movements in the core CPI, if at a slightly lower percentage level.

Industrial Production flared 0.4% higher in May, a better-than-expected showing. Manufacturing output rose by 0.2%, reversing an April decline; mining activity expanded by 0.1% (rather less than in April, but still a gain) and utility output pushed 2.1% higher for the month, recovering a good portion of April's slide. With the bump in output, the percentage of production capacity in active use rose back to 78.1% but still remains well below levels that might promote inflation.

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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
 Jun 07May 10Jun 08
6-Mo. TCM2.24%2.46%2.13%
1-Yr. TCM2.05%2.37%2.31%
3-Yr. TCM1.82%2.24%2.63%
5-Yr. TCM1.86%2.27%2.78%
10-Yr. TCM2.10%2.47%2.94%
FHFA NMCR4.15%4.36%4.49%
FHLB 11th District COF1.095%0.958%0.814%
Freddie Mac 30-yr FRM3.82%4.07%4.62%
Historical ARM Index Data

Although the effects may yet show, consumers seem unperturbed by noisy financial markets or the trade and tariff mess. The University of Michigan's initial June review of Consumer Sentiment was solid enough, with the 97.9 value a 2.1-point fall from May's final level. Current conditions were rated more favorably, with the near-term barometer rising 2.5 points to 112.5 for the month, but expectations for the future darkened a bit, with a 4.9-point falling leaving the outlook measure at 88.6 for the month so far. Both figures are near recent averages, so there's not much concern being expressed here. One item that did stand out, though was the collective outlook for long-term inflation; an expectation of price increases of just 2.2% over the next 5-year window was the lowest figure in the 40 years the question has been posed. In its thinking, the Fed does give some weight to inflation expectations, and this could factor in their thinking if they should decide to lower rates at some point. That said, the Fed has taken pains (including explicit inflation targeting of 2%) so it may just be that consumers are slowly starting to believe them... but falling gasoline costs may just as well be the reason.

The Fed has an unenviable job at most times, but seemingly moreso at the moment. Come Wednesday, someone's going to be disappointed regardless of the outcome, but how the well the Fed reveals it's thinking and expectations will determine whether there is market damage or not. Pressures, hopes and expectations be damned, the economy at this point doesn't seem to need a cut in interest rates and an at-the-ready posture may be all that is warranted.

As far as mortgage rates go, the strong downdraft for underlying rates seems to have paused, and where rates end up next week will largely depend not on new data but on what the Fed signals to the market. We think there's a good chance that the Fed's expression of confidence about the economy will chase away some of the rate-cut expectations (at least one of perhaps three that are already being priced in for the remainder of the year) and that the 30-year FRM reported by Freddie Mac will edge a few basis points higher when they report next Thursday morning.

For an outlook for mortgage rates that carries just past America's 243rd birthday, check out our latest Two-Month Forecast.

You might also see our 2019 Outlook, where we provide observations and speculations for ten topics that are in and around the housing and mortgage markets. We're now just a few weeks away from a mid-year review of our prognostications.

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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