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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Inflation Smolders But Rates Rise

September 14, 2018 -- We've all been watching and waiting for the return of inflation, the kind that forces the Federal Reserve and other central banks around the globe to lift rates nearly in unison in hopes of controlling price pressures. This has been the situation for years, and at the moment the U.S. has core inflation at the Fed's preferred 2% level. With solid economic growth in place here, the Fed has been on a campaign of raising rates to hopefully get monetary policy back to a more "normal" level before the next economic downturn hits, and there is a virtual certainty that rate hikes later this month and in December are coming.

In some other advanced economies, that's not quite the case just yet, and central banks continue to run QE-style policies and hold interest rates at extraordinarily low levels. For example, the European Central Bank confirmed this week that it will look to terminate it's bond-buying program at the end of this year, but pledged to keep it's policy rate at a negative level at least through next summer. To be fair, the construction of the ECB program targeted private (rather then government) bonds and they were likely to run out of things to buy before long, anyway. Despite strengthening growth and inflation, the Bank of England held their key policy rate steady at a meeting this week amid concerns about the messy Brexit process and rates their remain stimulative. The Bank of Japan made a modest change to their interest-rate targeting program, allowing interest rates to rise just a bit, but banks there continue to complain that the years-long policy continues to hamper their ability to profitably lend money. The BOJ meets next week to consider policy.

The Fed of course meets again in two weeks' time. When they do, futures markets place a 97% likelihood that they will lift the Federal Funds rate (and already, these forecasters put a 77% chance on another lift come December). Presently, given the strength and momentum in the economy, both moved do seem likely. But what if inflation, having only recently made it to desired levels, shows signs of faltering, or even simply leveling? Would programmatic QE-style stimulus canceling and projected rate increases be put on hold or even reversed? It is a question worth considering in the context of inflation reports that were released this week.

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Inflation-trackers come in various forms. The Fed's preferred measure of one of Core Personal Consumption Expenditures, which has percolated at a 1.9% or 2% annualized rate over the last four months, but monthly increases which are incorporated in the tally have begun to cool a bit; June and July showed increases of just 0.1%. Other popular measures include the upstream-of-the-consumer Producer Price Index, and for August, the "headline" PPI actually declined by 0.1%, the first negative reading since March 2017, and this came on the heels of no change in July. Core PPI (a measure that excludes the most volatile components such as food and energy costs) flatlined to no change for the month, the lowest reading in over a years' time. In looking at the last twelve month period, headline PPI has cooled from 3.3% in June to a current 2.8%; core PPI has backed off as well, easing from a 2.8% rate last month to a present 2.6%.

The Consumer Price Index is also a commonly-used reference for prices; it too has seen a bit of pattern shift of late. In August, the headline consumer price index came in with a 0.2 percent rise for the month, mirroring a July increase. Core CPI, however, showed with a rate half as much again, with just a 0.1 percent rise for the month. As with PPI, this change took the top off of a string of increases; headline CPI was up to an annual rate of 2.9% in July, but has settled back to 2.7% for August, while core CPI slipped from 2.3% to 2.2%. Taken with the PPI, it may be that the Fed's expected run-up in inflation which returned us to these levels is running its course, leaving perhaps a flatter and softer pattern in its wake.

This would more likely be the case if inbound costs that serve to fuel or enhance these increases were waning... and they may be, at least to a degree. As the U.S. is a nation of net imports, price pressures for items coming here would tend to push inflation measures higher; however, in the last couple of months, despite all manner of trade and tariff concerns, price pressures have faded. For August, aggregate import prices declined by 0.6%; expectations were for a lesser decline. As well, this was the second consecutive month where inbound costs declined (July was a 0.1% fall) and the trend has been decidedly a softer one after a May spike. The downdraft for August chopped the annualized rate of price increases down measurably, from 4.9% in July to just 3.7% in August.

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We're not exporting much by way of inflation, either. Albeit with a smaller slide, export prices declined for a second month, easing by 0.1% after a 0.5% drop in July. Export inflation too has cooled, and now stands at an annual rate of just 3.6%, down from a much warmer 5.3% annual rate as recently as June.

If we are at the beginning of a flattening trend for inflation, and we may be, additional rate increase by the Fed won't be warranted, or at least not in any kind of regular, structured fashion. Moves in the federal funds rate and other changes in monetary policy can take six or more months to work their way through the economy, and higher rates will generally tend to further temper inflation. It may be that we are seeing the effects of the last couple in increases in short-term rates, and even if inflation does continue an uptrend for a bit longer yet, these expected forthcoming increases in rates will likely see it soon retreat. From the Fed's Beige Book this week: "Prices are rising at a modest to moderate clip in most districts, but some reports indicate deceleration."

Managing monetary policy and especially messaging are about to become very tricky. Moving from "accommodative" to "neutral" to even mildly "restrictive" and what this means to investors and others is all going to be front and center between now and this time next year, and not just here in the United States.

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Retail sales failed to impress in August, rising a scant 0.1% for the month. The number was a little stronger at 0.2% when pricey autos and erratic gasoline costs were excluded, but things here have been rather uneven this year, ranging from an outright decline of 0.1% in January to a hot surge of 1.2% in May, and everything in between. Overall, sales are still solid when weighed against last year, but with a strong economy and firming income growth one might expect to see more routine and steady increases.

Of course, it may be that the erratic retail sales are being influenced by what's happening in the stock market (i.e. quarterly dividend spending, etc.) or perhaps by a save-then-spend cycle which seemed to form during the last recession and early recovery. Certainly, all indications are the consumers remains reluctant to borrow, with consumer credit trends only reliably supported by expansions in borrowing for big-ticket items like autos and education. Revolving balances (aka borrowing on credit cards) has been quite soft, and in fact rose by just $1.3 billion in July, barely filling in a $1.2 billion reduction in outstandings in June. Installment lending climbed by $15.4 billion, its strongest increase since last November, but has been in a waxing and waning pattern for a while now, so follow-through September doesn't seem likely.

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Industrial Production advanced a bit in August, rising by 0.4 percent. For a change, contributions to the total came from all components, as manufacturing output rose by 0.2%, mining production expanded 0.7% and utility output pushed 1.2 percent ahead. With the gains, the percentage of production floors in active use rose to 78.1%, just a whisker below expansion highs, if still well below levels that create inflation-enhancing bottlenecks.

Inventory levels at the nation's wholesalers expanded by the largest amount since February, posting a 0.6% gain. Aggregate stockpiles of durable goods rose by 0.8% while those for non-durables increased by 0.3%. Rising holdings can indicate a replenishment of goods depleted by sales or by an anticipated increase in future sales; it may be the former in this case, as current sales were unchanged in July after a 0.2% decline in June. These came right after a couple of very strong months, so it is more likely that this build is one of recovery rather than anticipatory. Even so, there may be some space for inventory builds to continue for a bit, as the ratios of goods on hand relative to sales fairly low. This should spur more orders to factories and help support the production side of the economy a bit more.

Should the trend continue, we may soon see initial claims for unemployment benefits dip below the 200,000 mark, a level last seen back in October 1969. For the week ending September 8, just 204,000 new applications were processed around the country, and although erratic at times, this trend of general diminishment is approaching 10 years from a peak of 665,000 in March 2009, a remarkable run.

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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
 Sep 07Aug 10Sep 08
6-Mo. TCM2.30%2.24%1.15%
1-Yr. TCM2.50%2.44%1.23%
3-Yr. TCM2.74%2.74%1.40%
5-Yr. TCM2.78%2.80%1.65%
10-Yr. TCM2.91%2.94%2.07%
FHFA NMCR4.60%4.59%4.00%
FHLB 11th District COF1.018%0.934%0.657%
Freddie Mac 30-yr FRM4.54%4.53%3.78%
Historical ARM Index Data

Despite any number of troubles that could easily be focused on, things are pretty good all around, or at least that's the perception one gets from consumers polled as a part of the Consumer Sentiment index from the University of Michigan. After an August downturn, sentiment turned strongly upward in the initial September reading, rising by 4.6 points to 100.8, the second highest level in about 14 years. The present situation component posted a 5.8-point rise to 116.1, which was a 14-year high, while the measure of expectations for the future brightened by 4 points to 91.1, a new high for this cycle, and if it sticks, would also be the highest since 2004.

Upward pressure on mortgage rates continued this week, gentle but insistent. We do have two weeks to go before the Fed meeting kicks in at the end of the month, and a general pattern has been for rates to firm as we approach a meeting and then relax after the change to short-term rates has come and new assessments future economic, inflation and monetary policy outlooks are provided by members. For a while, this has been pretty predictable, but we may not see much if any retreat in rates when this meeting concludes. For that, we'll need to wait. In the meanwhile, a somewhat lighter slate of new economic data is out next week, but there remains some unrealized upward momentum for mortgage rates we expect to see between now and next Friday.

From our perspective, you should expect another 3-4 basis point increase in the average 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday morning, as we close in again on 2018 highs.

For an outlook for mortgage rates that will carries nearly until Halloween, check out our latest Two-Month Forecast.

You might also take a minute to have a have a look at our 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. It's hard to think that we'll be looking to 2019 in just a few short months.

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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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