Weekend Mortgage Update
Nick Bednarczyk
Leading Loan Advisor ?? Focusing on creative Jumbo and Non Qm Investor lending since 2004 NMLS 365574
Mortgage Rate Update.
HSH MarketTrends
Rates Continue Step Back
January 13, 2017 -- The closer we get to inauguration day, the more it seems that the enthusiasm that faster growth, fiscal stimulus and friendlier tax policies is becoming more tempered by the day. The incoming Trump administration may ultimately be able to realize its goals and fulfill its promises, but none of this is likely to happen with the flip of a switch, and it appears as though investors are adapting to this reality.
As such, and as it often the case, mortgage and other interest rates rose rather too far, too quickly, driven there by markets chasing from one end of the see-saw to the other. Once one end becomes crowded, some bets are then placed on reversal of the trend to varying degrees... and removing money from one end and placing on the other tends to have a leveling effect on rates until the next run to one end (or the other) takes hold, and the process repeats itself.
That the process of getting appointees vetted, policies formulated and put into political motion is and will be a slog is usually a given, and even if beneficial or desired changes can be put in place quickly, it can take rather a bit of time for any beneficial effects to be realized. As such, any effects from changes to fiscal, tax or trade policy isn't likely to be felt anytime soon, so the focus rightfully again is tuned toward the current situation, where the economy continues in fairly steady (but unspectacular) fashion with perhaps a hint more inflation to be seen.
Mortgage and other interest rates have drifted back, most likely into the lower middle portion of a new range. With the last Fed meeting now a month ago -- an event which occurred in the middle of the setting of holiday-influenced investor positions -- markets seem to have repositioned themselves to something closer to reality. It also bears noting that when the Fed raised rates back in 2015, influential yields on 10-year Treasuries were measurably lower four weeks after the fact, with the decline back then of about 15 basis points... very similar to the dip we've seen of late. We've noted at times over the past year that this can often be the case, a kind of "buy the rumor, sell the fact" type of stance that can often be seen in the markets.
For whatever combination of reasons, rates are lower, but arguably still have more bias to the upside than not. This is particularly true if recent wage gains are joined by firming inflation, and from available indications, this does seem to be the case. One such indicator is found in the aggregate value of imported goods; the 0.4 percent rise in costs in December has pushed the annual rate from a scant 0.1 percent last month to a now-considerable 1.8 percent and rising. Six months ago, import costs were still declining at a 4.7 percent annual rate, so the change has been pronounced. This is much the case with export costs, too; a 0.3 percent rise in December moved the annual pace of increase to 1.1 percent, a considerable turnaround from prices falling at a 3.5 percent clip as recently as June. As the U.S. is a nation that is a net importer, this change in trend may raise an eyebrow or two at the Fed.
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That's probably the case with the latest Producer Price Index as well. Headline PPI for December rose by 0.3 percent, down just a touch from November's monthly pace. However, instances of falling prices are starting to fade, as there were only four monthly dips in costs seen here in 2016, half the rate of 2015, and there were no declines in "core" PPI for the year. Headline PPI is now rising at a 1.6 percent annual rate (it was at an unchanged year-over-year level as recently as August) and core PPI has more than doubled since then to a 1.7 percent annual rate. Now, to be sure, the levels of import and PPI price changes are still mellow, if not muted, but the trend here is important, as the Fed will be looking to maneuver policy so as to keep inflation at a 2 percent rate. The Fed's preferred measure of inflation is currently reckoned at a 1.7 percent rate, but if input costs and wages are firming it's a good bet that this measure will start to move higher before long.
Consumers opened their wallets to close 2016, with retail spending rising by 0.6 percent. However, that spending seemed to be on rather targeted purchases and was driven by sales of cars and gasoline. Exclusive of these, so-called "core" retail sales in December were unchanged from November but this figure was propped up to this level by strong non-store (largely internet) sales. On an annualized basis, overall retail sales were some 4.1 percent higher in December than comparable year ago period, the second strongest pace since 2015, but core retail sales managed only a 3.1 percent year-over-year gain, the softest gain since early 2014. From our perspective, this was a rather mixed report at best.
It looks like we're starting to see some changes in consumer credit usage. After being dominated for several years by installment borrowing (the kind of debt used for vehicle and education loans) it looks as though that trend may be moderating. In November, overall consumer debt balances expanded by $24.5 billion, a rebound from a comparably lackluster October gain of just $16.2 billion. However, installment borrowing barely budged, coming in a $13.5 billion in new loans, down just a whisper from October's rate. However, borrowing on revolving accounts (mostly credit cards) jumped by $11 billion for the month, a figure good enough for the third biggest month since January 2000 (two of those took place in 2016). It may be that wage gains and reliable job markets may be starting to embolden consumers to commit tomorrow's wages to cover today's purchases, and if so, somewhat firmer economic growth in the near term might be expected.
Along with leveling stock markets, consumer moods appear to have become a little more tentative of late. After a strong run up in both November and December, the measurement of consumer sentiment as tracked by the University of Michigan held nearly steady in the preliminary January poll. The indices' value of 98.1 was virtually the same as December's final, and was held there by an improved assessment of current conditions amid tempered expectations for the future. Rising wages and steady labor markets should continue to support near-term optimism, but we'll need to see how moods react to any changes in tax and fiscal policy as they become clearer over time.
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Initial filings for unemployment benefits seem to be returning back to trend as we move away from holiday and seasonal distortions. The 247,000 new applications for benefits filed in the week ending January 7 were about right in the middle of recent peaks and valleys, but it may be that we won't get a fully clear picture until the week of the 14th, which is the first full business week of 2017. Still, claims remain very low, which suggests that hiring should continue to remain in solid territory, most probably in the range of where the December job report (+156,000) was at or thereabout.
Stockpiles of goods up and down the supply chain expanded in October, rising by a collective 0.7 percent, a buildup that was a little more than analysts expected. Retailers stocked up the most, adding to their holdings by nearly a full percent (probably in anticipation of the holiday shopping season), but wholesalers did the same, and even manufacturers added to inventories at a 0.2 percent clip for the month. Sales appear to be holding up well despite the build, as ratios of goods on hand relative to sales edged up only slightly to 1.38 months, a fairly steady pace and one which may presage more ordering up and down the chain in the months ahead, failing any sudden dropoff in activity.
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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
Jan 06 Dec 09 Jan 08
6-Mo. TCM 0.63% 0.63% 0.47%
1-Yr. TCM 0.86% 0.84% 0.65%
3-Yr. TCM 1.48% 1.41% 1.26%
5-Yr. TCM 1.92% 1.84% 1.66%
FHFA NMCR 3.62% 3.61% 3.93%
FHLB 11th District COF 0.603% 0.598% 0.649%
Freddie Mac 30-yr FRM 4.12% 4.16% 3.92%
With the economy in pretty good shape, and the Fed having made a recent move, we're back in what is rather a "sweet spot." There is a Fed meeting at the end of this month, but there is a near-zero chance being placed by futures markets on a change to short-term rates at that confab, coming as close as it is to the change in December. In fact, there is presently still only a slight likelihood of a move in March, but that meeting is still a ways off, with a lot of data to review and consider between now and then, not to mention updates to FOMC member's projections for growth, inflation and policy, so we'll not speculate about those prospects at this point.
Although unexpected from our perspective (at least based upon other market signals) mortgage rates trudged backward this week, according to Freddie Mac. We don't think such a surprise is likely to be repeated next week, as we think rates seem poised to pause around these levels. Equities have been having trouble finding much traction of late, and a new auction of debt by the U.S. Treasury found many willing buyers this week, but a Monday federal holiday and a subsequent short week with just a handful of meaningful economic reports is a good recipe for stability.