4/2/2018 | Casey Fleming | This could be a very interesting week for interest rates in general, and mortgage rates in particular. As you recall if you are a regular reader, interest rates are driven in the long run by inflation, but in the shorter term they often react to stock market volatility. The week could be a highly volatile one in the stock market, so it could be an interesting one for interest rates.
Interest rates and mortgage rates
One thing to keep in mind is that “interest rates” and “mortgage rates” are not the same thing, and although over time they tend to track each other closely, they do not always track exactly. Stock market volatility tends to drive some institutional money into bonds, such as U.S. Treasury bonds and mortgage-backed securities, driving down those interest rates.
However, mortgage lenders have to be very concerned about volatility because it takes a while to process and close a loan, so there is a lag between the time a loan is priced and when it is ultimately sold off to Fannie Mae, Freddie Mac, or a Wall Street hedge fund. Higher volatility means greater risk, so when volatility drives bond yields down, retail mortgage rates take some time to follow. In fact, sometimes they actually go up for a while, rather than down.
Performance over the last week
Looking at the chart above you can easily see the principle in action. The 10-year U.S. Treasury Bond (red line) was fairly stable from about mid-February through the beginning of last week, but you can see that for the last two weeks or so we’ve seen a downward trend. The Fannie Mae 60-day yield (blue line) is starting to follow in the last week or so. But the Freddie Mac Mortgage Market Weekly Survey (green line) shows very little downward movement – lenders are waiting to see if the trend holds before following. My guess is when the Freddie Mac index is updated this coming Thursday we’ll see a very slight dip in the green line.
Because of this we would expect to see lender margins (the spread between their wholesale cost and the rate they offer borrowers) rise, which it has as you can see in the chart below.
Lenders need to keep their pipelines full, however, so competition will always eventually drive margins back down to wherever the current equilibrium is. So what should we expect this week? If stock market volatility continues, and especially if stocks fall, we should see bond yields continue to drop and by the end of the week some improvement in mortgage rates.
Economic Calendar for week of April 2nd
Monday, April 2nd brings us the ISM Manufacturing Index, a measurement of manufacturing activity. It is expected to be down slightly from previous months, and by itself is not expected to be a major market-mover. Construction Spending, on the other hand, could be an early indication as to whether the 2017 construction boom is still going strong. A reading outside of expectations could move markets.
Tuesday brings Light Vehicle Sales for March – a measure of new car and light truck sales. A survey of economists suggests that March sales will be slightly lower than February. Anything but a large surprise is not likely to move markets.
Wednesday brings the ADP Employment report for March, a measure of new (private industry only) hires for the month. New hires have held pretty steady in recent months, but a survey of economists suggests it will be down a little this month. A strong surprise could be a market-mover, but it is only the second-most important announcement of the day.
At 2:00 PM (Eastern) the FOMC will release the minutes from their last meeting. While they have already announced their major decisions from the meeting and held a news conference, the minutes often contain details about the individual thinking of the board members. Since this was the first meeting chaired by Jerome Powell, this release will be closely watched. Investors will look for stability and consistency. Minutes that hint at significant changes in Fed thinking or policy moving forward could roil the markets, potentially sending both stocks and bonds down.
Wednesday day also brings Factory Orders for February, which are expected to go positive after a negative month in January. Anything other than a huge surprise on the upside is not likely to push stocks higher, but a surprise to the downside could bring stocks down and push bonds up.
Thursday brings Weekly Jobless Claims which have been running on the low side, and are expected to slide up just a little. This might surprise on the downside, which could push stocks up. The Trade Deficit for February also arrives Thursday morning. Given all the talk of trade wars lately, this will be more closely watched than usual. Since it’s a reading for February, however, it’s old data and should not be too significant.
Friday brings the Employment Report for March, a BLS report on new job growth, unemployment and wages. New job growth is expected to be neutral at 167,000 new jobs created, and the unemployment rate is expected to slip very slightly to 4.0%. These estimates are likely to match expectations pretty closely and so are unlikely to move markets. Wages, however, are more difficult to forecast. Will the Tax Act bonuses still be factored in? Will wages actually have risen, beyond the one-time bonuses? The wage report will be very closely watched and may move the market.
I’m finishing this article up on Monday morning (a bit late) and the stock market is off considerably this morning, bonds have rallied a little and mortgage-backed securities are off a little. While long-term interest rate trends are always driven by inflation, in the short-term they can be tossed around by more temporal factors, such as global politics.
When this happens, we might see interest rates improve but will rarely see mortgage rates improve (significantly, anyway) in the short term. Lenders are loathe to improve pricing in highly volatile markets, and this week looked from the beginning like it could be a bit of a roller-coaster, and is turning into a wild, E-ticket ride.
Margins have already been rising leading up to this week, so if bond yields drop you could see a little improvement in mortgage rates, but it is most likely lenders will not improve pricing much until the market stabilizes.
This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. 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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