Mortgage Market in Review – March 20, 2017

Market Comment

Mortgage bond prices finished the week higher which pushed rates lower amid volatile trading. Rates started the week sharply higher in response to inflation and rate hike fears. The producer price index and core both were higher than expected. Inflation readings on the consumer side were tame as expected. The Fed raised rates Wednesday however mortgage rates improved after the meeting. Traders were worried about a hawkish statement and rapid rate increases sooner rather than later. The Fed tempered that sentiment for the short term and indicated future hikes will be data dependent. Weekly jobless claims were 241K versus the expected 242K. The Philadelphia Fed business conditions index was higher than expected @ 32.8. Mortgage interest rates finished the week better by approximately 1/4 of discount point despite some significant up and down trading.

LOOKING AHEAD

Economic
Indicator

Release
Date &
Time

Consensus
Estimate


Analysis

FHFA House Price Index

Wednesday, March 22,
10:00 am, et

Up 0.6% Moderately Important. A measure of single family house prices. Weakness may lead to lower rates.
Existing Home Sales

Wednesday, March 22,
10:00 am, et

5.7M

Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Weekly Jobless Claims

Thursday, March 23,
8:30 am, et

242K

Important. An indication of employment. Higher claims may result in lower rates.
New Home Sales

Thursday, March 23,
10:00 am, et

560K

Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
Durable Goods Orders

Friday, March 24,
8:30 am, et

Up 1.6%

Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.

Fed Rate Hike

The Fed raised rates 25 basis points Wednesday March 15, 2017. More rate hikes are on the horizon. Just a few weeks ago the consensus predicted a total of 3 hikes this year and there wasn’t much of a chance of a hike in March. Now estimates are all over the place. Some point to three more hikes this year. Sentiment can change very quickly as we often see in the financial markets.

Yellen said she doesn’t think the Fed is too late on inflation. The March Fed statement noted, “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Inflation hawks like Richmond Fed President Lacker already believe the Fed needs to be more aggressive with rate hikes. Some centrists even see the possibility of faster rate hikes.

Core PCE Prices were up 1.7% the beginning of the year. This is the Fed’s preferred inflation indicator. Inflation in the Eurozone was 2% in January. This was the highest level in several years and a little higher than the European Central Bank’s target. The March producer price index showed a 0.3% increase versus the expected 0.1% increase. The core, which excludes volatile food and energy, rose 0.3% versus the expected 0.2% increase. What does that mean? Recent inflation readings continue to escalate. However, higher than expected inflation readings haven’t crossed over to the consumer side yet. The consumer price index recently rose 0.1% while core prices rose 0.2% which were both as expected. Inflation, real or perceived, is the enemy of fixed income investments. Inflation causes mortgage backed security prices to fall and mortgage interest rates to rise. Mortgage interest rates could rise throughout the year. Now is a great time to take advantage of low rates.

Copyright 2017. All Rights Reserved. Mortgage Market Information Services, Inc. www.ratelink.com The information contained herein is believed to be accurate, however no representation or warranties are written or implied.

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