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Mortgage Market in Review – July 21, 2014

Market Comment

Mortgage bond prices finished the week negative, which put upward pressure on rates. A strong showing in stocks the beginning of the week put some pressure on bonds. The DOW experienced strong gains Monday morning and continued the trend into Thursday morning before reversing course. Producer prices rose 0.4% in June and the core, which excludes the volatile food and energy costs, rose 0.2%. Expectations were for both components to rise 0.2%. Weekly jobless claims came in at 302k versus the expected 311k. This was not rate friendly. Housing starts printed at 893k on an annualized basis. Traders expected starts to print at 1020k. It seems like housing can’t get any momentum. Mortgage interest rates rose by about 1/4 of a discount point for the trading week.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
Consumer Price Index Tuesday, July 22,
8:30 am, et
Up 0.3%,
Core up 0.2%
Important.  A measure of inflation at the consumer level.  Weaker figures may lead to lower rates.
Existing Home Sales Tuesday, July 22,
10:00 am, et
4.91m Low importance.  An indication of mortgage credit demand.  Significant weakness may lead to lower rates.
Weekly Jobless Claims Thursday, July 24,
8:30 am, et
303k Important.  An indication of employment.   Higher claims may result in lower rates.
New Home Sales Thursday, July 24,
10:00 am, et
556k Important.  An indication of economic strength and credit demand.  Weakness may lead to lower rates.
Durable Goods Orders Friday, July 25,
8:30 am, et
Up 0.2% Important.  An indication of the demand for “big ticket” items.  Weakness may lead to lower rates.

Globalization

Economic globalization is the increasing interdependence of national economies through trade, finances, and technology.  While economists debate the pros and cons of globalization, the fact remains that globalization is not new and continues to expand.

As a driving force in the global economy, the US often benefits when foreign economies struggle.  Investors often move funds to safe havens in what is called a “flight to quality” in uncertain times.  US debt instruments saw an influx of foreign investment over the past few years amid concerns of nations defaulting on their debt and various banking institutions struggling.  Bond prices rose, which caused mortgage interest rates to fall.  From a short-term perspective it was great for U.S. homebuyers and those refinancing if they took advantage of the drop in rates.  However, what goes up often comes down and we have witnessed some reversal of the flight to quality buying of US debt from time to time as the euro zone showed some signs of stability. Nobody can say with certainty how it will all play out.  Stability isn’t growth and bailout money can’t last forever.  As a result, we should expect continued mortgage interest rate volatility.

Fortunately the Fed’s effort to buy mortgage bonds and keep rates low has had success.  The Fed continues to state the goal of maintaining the low interest rate environment.  However, Yellen warned, “If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.”

Now is a great time to take advantage of rates at these levels.  It is very possible we could see increased mortgage interest rate volatility if the Fed moves before most anticipate.

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