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Market
Comment
Mortgage bond prices finished the week lower, which put significant upward pressure on rates. Rates were higher Monday and Tuesday, recovered slightly mid-week, and finished Friday on a negative note. The Fed raised rates 25 basis points as expected. Oil prices continued higher with additional supply route disruptions in the Middle East driving the increases. The data was generally overshadowed by global events. ADP employment was 16.25K vs 12K the prior week. NAHB housing was 32 vs 34. Retail sales rose 1.2% vs 0.8%. Housing starts were 1.275M vs 1.31M. Weekly jobless claims were 196K vs 208K. The Philadelphia Fed business conditions index was 52.9 vs 73.6 the prior month. Industrial production was unchanged vs up 0.3%. Capacity use was 76.3% vs 76.4%. Leading economic indicators fell 0.1% vs the expected 0.1% increase. Mortgage interest rates finished the week worse by approximately 3/8 of a discount point.
LOOKING
AHEAD
|
Economic
Indicator |
Release
Date &
Time |
Consensus
Estimate |
Analysis
|
| Weekly ADP Employment |
Tuesday, Sept. 22,
8:30 am, et
|
15K
|
Important. An indication of employment. Weakness may bring lower rates.
|
| Treasury Auctions Begin |
Tuesday, Sept. 22,
1:15 pm, et
|
None
|
Important. 2Y Notes on Tuesday, 5Y Notes on Wednesday, and 7Y Notes on Thursday.
|
| New Home Sales |
Thursday, Sept. 24,
10:00 am, et
|
610K
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Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
|
| Weekly Jobless Claims |
Thursday, Sept. 24,
8:30 am, et
|
202K
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Important. An indication of employment. Higher claims may result in lower rates.
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| Durable Goods Orders |
Friday, Sept. 25,
8:30 am, et
|
Down 0.5%
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Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
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| U of Michigan Consumer Sentiment |
Friday, Sept. 25,
10:00 am, et
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47.8
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Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
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Mortgage Rates Higher
It is very important to remember that US Treasuries and mortgage-backed securities MBSs, the bonds that dictate mortgage interest rates, are different. A U.S. Treasury is backed by the US Federal Government while MBSs essentially are backed by property and borrowers. While both are debt instruments, they possess very different risk characteristics. A look back to the 2008 financial crisis shows how defaults on mortgages can snowball into chaos. Investors demand higher rates to lend money for mortgages because of this additional risk and others such as prepayment. This risk is why we recently saw the 10Y Treasury hit 5% while mortgages pushed up towards the 7% range. It is true that MBSs and US Treasuries generally trade in the same direction. However, this isn’t a certainty, and they often diverge significantly in terms of magnitude of change.
The recent financial volatility in stocks and bonds is a strong reminder that stocks do not always go up, and mortgage rates do not always push lower. Floating in these uncertain times is very risky. The Fed hinted they could raise rates again before the end of the year and the uncertainty in the Middle East conflict continues. Oil and gas prices in the short term remain elevated. The longer-term outlook is very murky. Sustained price pressures will not bode well for mortgage rates. A cautious approach to float/lock decisions is prudent in this environment.
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