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MarketTrends 04/05/2019: A Little Rate Snapback Due?

A Little Rate Snapback Due?

April 5, 2019 -- A measurable decline in mortgage rates to close March held on this week, but it appears that underlying pressures are kicking mortgage rates back up at least a bit. In the current climate, the fact of the matter is, if the economic news isn't universally dire it will be difficult for interest rates to stay at present levels, let alone decline.

Although Freddie Mac noted that 30-year FRMs did edge higher this week, the increase fell short of our expectations. Given that the yields on the influential 10-year Treasury rebounded pretty smartly off last week's lows (as did secondary market quotes for fixed-rate mortgages), a larger bump in rates should have been seen. However it may be, at least for a short while, that lenders are absorbing some of this increase in order to take advantage of a sudden surge in refinance activity. From one perspective, it's perhaps better to make more loans at a smaller margin than to make fewer at larger, but this sort of phenomena generally doesn't last for long.

The economic news isn't 100% positive, and the drag of the Brexit saga, slower growth in China and elsewhere plus Germany's manufacturing struggles all highlight the challenges for the U.S. economy to continue to perform at a solid rate, but yet, it continues to do so.

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Take for example the February stall in hiring. After a blowout January, the initial report said that just 20,000 new jobs were created. A month later, that's been revised only mildly higher, to 33,000 new jobs, but the March employment report was strong enough as to soothe fears of an impending recession. For the month, 196,000 new hires took place; this wasn't the strongest figure we've seen recently, but is more than a solid showing. In addition to the resurgence in job creation, the nation's official rate of employment remained at 3.8%, just a tick above 50-year lows. Average hourly earnings moved up by 0.1%, but wages increased at about a 3.2% annual rate, above inflation and strong enough to help power future consumer spending and growth. After a few months at or near expansion highs, the labor force participation rate did ease back by 0.2% to a flat 63% for the month, so the labor force has been shrinking a bit after a robust expansion at the end of 2018.

Also on the labor front, initial claims for new unemployment benefits have been trending lower in recent weeks. The 202,000 new claims flied around the country in the week ending March 30 were the lowest figure so far for this cycle and good enough to return to about 50-year lows. More people working and fewer folks losing their jobs tend to make it very hard for a recession to take hold, and there scant indication that a sea change is coming soon.

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The two major components of the economy both seem to be doing well, according to the twin surveys covering manufacturing and non-manufacturing activity from the Institute for Supply Management. The ISM report tracking manufacturing firmed up in March, with this gauge adding 1.1 points to rise to a solid 55.3 for the month. A sub-measures covering new orders rose (+1.9 points, to 57.4), as did one tracking employment (+5.3 points, to 57.5), so it looks as though at least some of the drag from last fall and earlier this year is fading somewhat. From an inflation perspective, a measure of prices paid moved higher, climbing again over the breakeven level of 50, so somewhat more companies are seeing somewhat higher prices.

The larger segment of the U.S. economy is in service-related business, and the ISM report covering non-manufacturing activity also pointed to solid (if moderating) growth. This barometer had bounced higher in February, but those gains proved temporary, as the yardstick here eased by 3.6 points to slide to a still-solid 56.1 for March. The measure of new orders settled back by 6.2 points, but that still left this component at a robust 59, while the portion covering employment edged 0.7 points higher to 55.9 for the month. The "prices paid" component here also reflected firming costs, and with oil prices moving upward it's a fair bet that more broad (if mild) inflation pressure may show in the coming months.

Still likely revealing some drag from the difficult financial markets of the fourth quarter, the effects of the January partial government shutdown and a delay in processing of tax refunds, retail sales in February failed to hit the mark, declining by 0.2%. That said, January's weak showing was revised higher, with a half percentage-point kicker increasing spending to 0.7% for the month. Overall, the report wasn't great, but it didn't suggest any imminent retrenchment on the part of the consumer, either. "Core" retail sales outside of autos and gasoline were soft, though, as after a 1.7% gain in January, they shrank by 0.6% in February. With broad economic activity seeming to be picking up a little of late, we think that odds favor an improvement in retail sales will be seen when the March report rolls out later this month.

Although retail sales for February were soft, sales of new cars and trucks rebounded in March. AutoData reported that sales of new vehicles rose by 0.9 million to an annualized 17.5 million pace during the month, the best showing of 2019 so far. As we are late in what has been a protracted fleet replacement cycle, sales are likely to settle back into the mid-to-high 16 million range, or about the average for the first quarter of 2019 (16.8 million annualized units). Still, it does appear that like many other data series that a pause in activity has or is passing.

Consumer borrowing seems sufficient to help in that regard. In February, new consumer credit balances expanded by $15.2 billion dollars, powered as usual by installment credit, which rose by $12.2B, but also nudged upward by $3 billion being added to revolving accounts. Borrowing is by no means skyrocketing, but is expanding at a pretty solid rate, indicating that consumers remain confident that tomorrow's paycheck will cover today's outlays.

Spending for new construction projects rose by 1% in February. Although outlays were uneven among the segments, spending on residential projects rose by 0.7%, a third consecutive increase. Given that the four previous months to the current run (Aug-Nov) all sported declines in residential construction, the resumption here is an encouraging sign. Spending on commercial and industrial projects did continue in an erratic pattern, one of increases one month followed by decreases the next, and posted a decline in February of 0.5 percent. Public works projects have been getting a boost of late, with February's 3.6% increase in spending coming fast on the heels of a 5.7% rise in January. "Your tax dollars at work" as the road-construction signs often say.

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A little bit of inventory cloggage in the supply chain may slow things a bit, but as the latest report covers January, it's hard to know where things stand. Overall inventory levels at the three stations of supply all rose in January, with overall stockpiles rising by 0.85% for the month. Manufacturer holdings expanded by 0.53%, wholesalers added 1.18% more goods to their shelves and retailers put 0.84% more products on their shelves. With these increases, the overall ratio of goods-on-hand relative to sales rose to 1.39 months. While that may not sound like much, it is actually the highest figure since August 2017, and may presage a bit of slowing in ordering until some inventories are worked off. Of course, if final sales firm in the months ahead, any slowing would tend to be nominal.

New orders for durable goods slumped a bit in February, declining by 1.6 percent. As is often the case, high-dollar transportation orders distorted the top-line figure, and modest gain was seen when they are excluded from the tally. Spending outside that for the military and aircraft (often referred to as "core" durable orders) are a proxy for overall spending by businesses, and after a nice pop in January, a 0.1% decline in outlays was seen in February. The report was a little soft, but actually not as soft as analysts expected.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Mar 29Mar 01Mar 30
6-Mo. TCM2.46%2.52%1.94%
1-Yr. TCM2.41%2.55%2.09%
3-Yr. TCM2.18%2.49%2.41%
5-Yr. TCM2.20%2.50%2.59%
10-Yr. TCM2.41%2.70%2.79%
FHFA NMCR4.46%4.60%4.12%
FHLB 11th District COF1.125%1.056%0.753%
Freddie Mac 30-yr FRM4.06%4.41%4.40%
Historical ARM Index Data

So this is where we find ourselves in the first week of April, in a place where the economic news isn't all that bad, and in fact, pretty good. Yes, there are headwinds and yes, there are global troubles that could certainly trip us up, but the U.S. economy is showing remarkable resilience, and there is every reason to believe that the current expansion will become the longest on record later this year. Interest rates are still at historically very mild levels, regardless of the bleating of the White House that they should be lower, and mortgage rates are far closer to historic lows than they were just a few months ago. With the Fed making soothing sounds about policy, and the drag from a sluggish global economy amid few concerns about inflation keeping market-based interest rates anchored we should be in a pretty neutral interest-rate environment for a fair period of time.

That said, if the data isn't dire or increasingly dire it will be hard to see rates decline or even hold at rock-bottom levels. To the degree that the data is warmer, firmer or better (insert your choice of adjective here) interest rates and mortgage rates will tend to rise a bit. At the moment, we'd need an abundance of such positive data just to retrace some of the 2019 decline for mortgage rates, and while we still think that it will generally come, it will take a while to accumulate.

This week's solid slate of data is just one plank, but one that is good enough to push rates off of recent bottoms. By our reckoning, we should have seen a bigger bump this week, but it didn't show, making it more likely that a more outsized rise may come next week. Based on where the underlying pressure was at the end of the week, we think we'll see a 7-8 basis point increase in the average conforming 30-year FRM that Freddie Mac will report next Thursday morning. It wouldn't even surprise us at all if it was a little to the upside of that. Still, spring homebuyers are being greeted by favorable conditions. Those of more modest means looking for state-backed mortgage supports should check out our 2019 update covering Homebuyer Assistance Programs.

For an outlook for mortgage rates that carries to the middle of the spring homebuying season, 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".

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