Another Quiet Week in Mortgage Markets
For the third straight week, mortgage rates remained confined in a narrow range. After rising steadily for the first half of the year, mortgage rates peaked at the end of June. What followed in July and much of August was a correction which quickly erased about half of the year’s increase, punctuated by a sharp fall after last month’s weaker than expected inflation data. Since August 18, however, mortgage rates have been stuck in what might be described as a Labor Day lull, with very little movement. There have been few surprises from the economic data or the Fed during this period, providing investors with little reason to adjust their views. While inflation indicators remain elevated above optimal targets of 1% - 2% annually, investors are generally comfortable now that the Fed has contained the threat of higher future levels with its numerous rate hikes. The prevailing sentiment could quickly change, though, if the inflation data on next week’s agenda contains any surprises.
The only major economic report this week was consistent with the consensus forecasts. Second Quarter Productivity growth was revised higher as expected. Productivity gains are a key factor in the long term health of our economy, so this data was well received by investors. The one small surprise was that unit labor costs grew at a strong 5% annual rate. While this was good news for workers, wage inflation is a major consideration for the Fed. Overall, the offsetting effects of higher productivity growth and rising labor costs were roughly neutral for mortgage markets.
For the week, average 30-year fixed rates decreased by 0.01%, as measured by the Fannie Mae Required Net Yield. In the housing sector, the July Pending Home Sales index fell 7% from June, and it was 16% lower than one year ago. This index is based on contracts which were signed but were not yet closed, so it is a leading indicator of future home sales. The chief economist of the NAR predicted that the pace of existing-home sales will continue to ease, but is then “likely to flatten in the months ahead.”
Also Notable:
• Home prices rose 1% in the second quarter, and were 10% higher than one
year ago, according to OFHEO
• The July Pending Home Sales index fell 7% from June, and it was 16% lower
than one year ago
• Fed Chief Bernanke suggested that higher incomes would be likely to offset
slower home price appreciation for consumer spending
• Compromise legislation was proposed which would establish a new regulator for
oversight of Fannie Mae and Freddie Mac
Week Ahead
A full slate of economic data is on tap for next week. Friday will be the big day, with the Consumer Price Index (CPI) coming out. Almost without exception, higher inflation leads to higher interest rates, and CPI is the most widely watched inflation indicator. Industrial Production, a broad measure of business related economic activity, will also be released on Friday, along with Consumer Sentiment and the Empire State regional manufacturing index.
The schedule is lighter earlier in the week. Retail Sales on Thursday will be the most significant economic data prior to Friday. Consumers account for about 70% of economic activity, and this report is a major indicator of spending by consumers. The Trade Balance will come out on Tuesday, but this information about the quantity of imports and exports has not been a market mover recently. Finally, there will be a 10-yr Treasury auction on Tuesday, and investors will be closely watching the level of buying by foreigners.
