4/2/2017 | Casey Fleming
Last week I wrote that due to a thin week of economic reports there was not much likely to happen the week of March 27th to drive mortgage rates one way or another. I also noted that this coming week (April 3rd) there were more economic reports on tap, and some that could be market-movers, so the lower mortgage rates at the beginning of the week might disappear.
However, I also noted that recent volatility in the market meant that lenders were letting margins rise higher, and that eventually the margins would have to come back down, resulting in lower mortgage rates. Let’s see what happened.
Let’s start with a modification of the yield comparison chart to show only the last month of activity, so it’s easier to see short-term trends. It’s easy to see the run-up in Treasury Bond yields and the Fannie Mae 60-day yield (essentially the wholesale cost of mortgage money) leading up to the Fed meeting on the 14th. After the meeting and the as-expected outcome, investors relaxed and yields (interest rates) dropped back down to the lower end of a “new normal” range.
HSH Associates, one of the better trackers of mortgage rates, commented at the end of the week “Mortgage rates dipped a little further this week, settling close to the bottom of a range that had held throughout 2017 so far. However, we’re probably pretty near the bottom of the between-Fed-meetings valley for rates, now that we’re two weeks past the last central bank get-together.”
That seems consistent with the fact that in the chart above you can see wholesale rates flatlined all week.
Will lenders lower margins to offer lower mortgage rates?
Let’s go back to the margin question. Lenders are risk-averse, so they tend to raise their margins sharply when they are nervous about wholesale rates increasing, but lower their margins only slowly as the market settles down. Thus, mortgage rates tend to jump up, and settle down.
Looking at the chart above tracking the margin (interest rate spread), notice that in the first half of March the retail margin jumped up quite a bit, and even stayed high for a while after the Fed meeting, when wholesale rates were dropping. Now the stable market is catching up to them, and competition is driving margins down. If you think of the “normal” range for the margin to be between 0.400% and 0.500%, (last summer was higher because the volume of business was so high) then you can see that we are still solidly in the middle of the normal range for the margin.
As a result, we saw lower mortgage rates across the board on Friday.
What drove the lower mortgage rates?
It’s the economy, Silly. OK, it’s inflation.
Looking at the few economic reports from last week, Tuesday’s big news was the Consumer confidence index, which came in at the highest level in years, and far higher than expectations. This sparked a rally in the stock market because confident consumers buy things, and that boosts the economy. As you can also see in the top chart, it sparked a small bump in Treasury yields and the Fannie Mae 60-day yield, because an over-heating economy is potentially inflationary.
However, on the same day wholesale inventories came in continuing to expand, and at twice the level expected. This means manufacturers are making more widgets than consumers are buying, despite consumers’ confidence. If this trend holds, manufacturers might slow down production. Remember this for later.
Wednesday brought pending home sales, and again the numbers were better than expected. Home buyers are back again this spring, and back in force.
Thursday brought 2016 4th quarter GDP revision, which came in very slightly higher than expected, but still at the bottom of the ideal range of 2 – 3%. Initial Jobless claims came in much higher than expected, however, indicating that maybe factories are, after all, slowing down production.
Friday showed continuing gains in personal income (although it doesn’t say who’s making the money!) but a decline in personal spending. Is it that the average person is making and saving more, or is it that the average person isn’t the one making the money? Only time will tell, but… the core inflation report showed that core inflation remained very tame.
So, in the week of March 27th through 31st we learned that consumers were becoming much more confident, manufacturers’ inventories aren’t selling as well as they’d like, existing homes are selling like hot cakes, the country’s economy is growing steadily but slowly, more folks were laid off last week than expected, personal incomes were up but folks weren’t spending the money, and core inflation is comfortably within an acceptable range. And that was a slow week.
This week is a full week of reports. Remember, we are on inflation watch here.
Monday’s reports aren’t likely to move markets that lower mortgage rates.
Tuesday brings Factory Orders, which with rising inventories might be important. A particularly low reading could spur a selloff in stocks and a rally in bonds (driving mortgage rates lower) and a particularly high reading could do the opposite.
Wednesday brings the big kahuna of the week – the FOMC minutes from the Fed meeting of 3/14. This could shed some additional light on the meeting as it shows what the individual governors are thinking. Lenders will watch this closely, and in expectation (or fear) of an unfavorable interpretation of the minutes, retail mortgage rates may rise on Tuesday (the day before). If the minutes show a high level of concern about inflation, mortgage rates will continue to rise on Wednesday.
Wednesday also brings the ADP employment report, showing how many new jobs were created during the previous month. Given the larger-than-expected rise in unemployment claims last week, this will be closely watched. A high number of new jobs would likely trigger a rally in stocks and a rise in mortgage rates, while a low number would do the opposite.
Thursday always brings Initial Unemployment Claims. The markets will be looking for the trend after last week’s unexpectedly high number.
Friday brings a slew of reports, the most important probably being the average hourly earnings. Higher earnings means folks have more money to consume goods and services, but that means higher costs for employers and higher prices, and thus is inflationary. A survey of economists estimates a rise in hourly earnings of 0.30% for the month. A reading at that level would keep the market stable.
For the week of 4/3, then, Wednesday is the big day. Barring unusual moves in the stock market, mortgage rates are likely to rise Tuesday and then either rise more or settle down depending on Wednesday’s reports.
Mortgage rates should follow stocks this week
All of these reports will reverberate through the stock market as well as the bond market, so mortgage rates are very likely to follow stocks this week.
The profit margin for lenders is back to the middle of the current normal range, so retail rates should follow the bond market pretty closely if the reports are all close to their expected ranges.
In other words, look for stability this week, with a chance of wild swings mid-week. A move toward lower mortgage rates is likely to be small, but a move to higher mortgage rates could be significant. Stay tuned.
This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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