Bernanke is OK with me
Federal Reserve Chief Ben Bernanke provided some positive guidance to the markets today. Bernanke's comments indicated that the Federal Reserve may take a breather from their 22-month rate hike streak. Bond investors thought this was great news. According to
Reuters, the Benchmark 10-year notes rose in price for a yield of 5.08 percent, from a yield of 5.12 percent just before Bernanke's remarks. Bond prices and bond yields move in opposite directions.
Hopefully, this will help slow the rate of increase on mortgage rates. Bankrate.com's
weekly national survey of large lenders resulted in a 6.64 percent average on the benchmark 30-year fixed rate mortgage, up 7 basis points from the previous week's survey. This is the highest the 30-year fixed rate has been since June 12, 2002.
Here's some further analysis of the Fed Chairman's comments from
Reuters:
Federal Reserve Chairman Ben Bernanke on Thursday said U.S. interest-rate rises will be increasingly driven by economic data and policy-makers could at some point pause in their 22-month credit-tightening campaign to assess the outlook.
"Future policy actions will be increasingly dependent on the evolution of the economic outlook, as reflected in incoming data," Bernanke said in testimony prepared for delivery to the congressional Joint Economic Committee.
He said it seemed "reasonable" to expect U.S. economic growth to moderate toward a more sustainable pace as the year progresses, but the Fed's policy-making committee must still remain vigilant on inflation.
"Even if in the committee's judgment the risks to its objectives are not entirely balanced, at some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook," he said.
Bernanke said any decision to take a break in the Fed's interest-rate rising campaign would not preclude action at subsequent meetings.
Bubble? What Bubble?
Despite rising interest rates, consumers appear confidant that real estate is still worth buying. According to the Commerce Department, New Home sales rose 13.8 percent. The increase was a recovery from the 10.9 percent decline in February.
Builders were able to sell many of these homes by dropping the price. The median price of homes sold in March dropped to $224,200, down 2.2 percent from February prices. As long as builders make money and buyers the product the demand, then all is well in the world. Hopefully, builders can keep selling homes without continuing to drop prices past the point of un-profitability.
As of 3:15 p.m. in Houston, Treasury prices were down in response to the news. Strong durable good orders helped drive down the price. In response to lower Treasury prices, yields on the benchmark 10-year not rose 3
basis points to 5.10 percent from yesterday's 5.07 percent. We can expect mortgage rates to follow.
For additional information on these issues visit
Bloomberg.com.
Existing home sales holding on
The National Association of Realtor's
Existing home sales report came in today, and it was better than expected. It appears that interest rates are not scaring off buyers, and the housing market has not yet tanked as predicted by pessimists. Here's some
analysis from Joel Naroff, Chief Economist for Commerce Bank:
March Exiting Home Sales
KEY DATA: Total Sales: +0.3%; Single-Family: +0.3%; Condos: +0.2%
IN A NUTSHELL: “So far, the cracks in the housing market are not that great, but with inventories skyrocketing, that may not last long.”
WHAT IT MEANS: The housing market has not fallen apart yet. Existing home sales rose a touch in March, the second consecutive increase. That was quite a surprise as most analysts were looking for home sales to decline. Even condo sales were up. Small increases in the Northeast and Midwest overcame modest declines in the South and West. Basically, sales were static over the month, which given all the worries, were not that bad. In addition, prices were essentially flat for both single-family homes and condos. That is even more surprising given the surge in inventories. The number of single-family homes on the market is up by almost one-third over the year and the number of condos for sale has nearly doubled. In just one month, the supply of single-family homes rose 5.5% and condos 16%. And prices are stable? Strange, very strange. How long inventories can rise without triggering significant price cuts is unclear, but there are so many homes on the market already that we could see the market break soon.
MARKETS AND FED POLICY IMPLICATIONS: So far, the pull back in housing remains orderly, at least in the existing market. But the red flags are up. Inventories continue to rise and that is a warning that prices cuts could be coming, and soon. I suspect that the members of the Fed will be as confused about what is going on in the housing market as I am. But as long as housing does not tank, their job is more difficult. There appears to be growing worries at the FOMC that further increases could create problems down the road when the full impact of the rate hikes ultimately take effect. The FOMC members probably would like to pause. But the data right now are not giving them much cover. It is likely that we will get another rate hike on May 10th. It will be interesting to see if Mr. Bernanke sheds any light on that in his testimony on Thursday.
Rate Watch
As was the case last week, oil and inflation dominated the markets and continued to push mortgage rates higher. Freddie Mac's weekly survey marked a 6.53 percent average for the benchmark 30-year fixed rate mortgage (FRM) up from the previous week's 6.49 percent. The 30-year FRM has not been higher since July, 2002. Other programs continued to follow the 30-year. The average for the 15-year FRM is 6.17 percent, up from the previous week’s average of 6.14 percent. And one-year Treasury-indexed ARMs averaged 5.63 percent, up from the previous week when it averaged 5.61 percent.
On Tuesday, PPI was released with a fairly positive reaction from the markets. That same day, the minutes from the Fed's last FOMC meeting added to the positive feelings. Some Fed members gave indications that they might be about finished with their rate raising bonanza. As a result of these two releases, rates moved slightly down by Tuesday’s close.
With Wednesday came CPI, the most watched measure of inflation and the results were not as promising as Tuesday's. The headline CPI number matched the forecasts, but Core CPI, which removes the volatile food and energy components, increased at a 2.1% annual rate, compared to a consensus of 2.0%. While the markets watched this report come in, oil prices were sky rocketing. The price per barrel of oil reached $75 last week. The highest price ever recorded. These two factors helped shift the momentum back to the bears and forced mortgage rates up for a 4th straight week.
This week the economic calendar will be dominated by economic growth reports. The most important will be released on Friday with the initial release of 1st quarter GDP numbers. This report is the broadest measure of economic activity and it does take a couple of tries to get it right. However, this initial release can have a big impact on the markets. Next in importance will be Wednesday’s report on Durable Goods Orders. This report measures the demand for "big-ticket" items with long lasting lifespan, such as automobiles, airplanes, etc. We'll also get some insight into the effects of higher mortgage rates on the real estate industry, when Existing Home Sales and New Home Sales are released on Tuesday and Wednesday respectively.
I would recommend that borrowers lock their rates as soon as possible. The path of inflation is still uncertain, and the upcoming GDP report adds an extra layer of uncertainty.
Rate Watch
As was the case last week, oil and inflation dominated in markets and continued to push mortgage rates higher. Freddie Mac's
weekly survey marked a 6.53 percent average for the benchmark 30-year fixed rate mortgage (FRM) up from the previous week's 6.49 percent. The 30-year FRM has not been higher since July, 2002. Other programs continued to follow the 30-year. The average for the 15-year FRM last week is 6.17 percent up, from the previous week’s average of 6.14 percent. And one-year Treasury-indexed ARMs averaged 5.63 percent, up from the previous week when it averaged 5.61 percent.
On Tuesday,
PPI was released and everyone was fairly positive about the numbers. That same day, the minutes from the Fed's last
FOMC meeting added to the positive feelings. Some Fed members gave indications that they might be about finished with their rate raising bonanza. As a result of these two releases, rates moved slightly down by Tuesday’s close.
With Wednesday came
CPI, the most watched measure of inflation, and the results were not as promising as Tuesday's. The headline CPI number matched the forecasts, but Core CPI, which removes the volatile food and energy components, increased at a 2.1% annual rate, compared to a consensus of 2.0%. While the markets watched this report come in, oil prices were sky rocketing. The price per barrel of oil reached
$75 last week. The highest price ever recorded. These two factors helped shift the momentum back to the bulls and forced mortgage rates up for a 4th straight week.
This week the
economic calendar will be dominated by economic growth reports. The most important will be released on Friday, when the initial release of 1st quarter
GDP numbers. This report is the broadest measure of economic activity and it does take a couple of tries to get it right. However, this initial release always has a big impact on the markets. Next in importance will be Wednesday’s report on
Durable Goods Orders. This report measures the demand for "big-ticket" with long lasting lifespan, such as automobiles, airplanes, etc. We'll also get some insight to the effects of higher mortgage rates on the real estate industry, when
Existing Home Sales and
New Home Sales are released on Tuesday and Wednesday respectively.
I would recommend that borrowers lock their rates as soon as possible. The path of inflation is still uncertain, and the upcoming GDP report adds an extra layer of uncertainty.
Links of the Week
HoustonNational
Treasury yields back up
After a small decline in Treasury yields yesterday, the Consumer Price Index helped to push them back up. Oil prices are continuing to push consumer prices up and the Fed will more than likely going to raise rates to offset this trend. This development will more than likely push mortgage rates as well. Reuter's has the details:
U.S. Treasury debt prices fell on Wednesday after a stronger-than-expected U.S. core consumer prices reading for March, suggesting the Federal Reserve might continue raising interest rates beyond May.
U.S. March core consumer prices, which exclude food and energy, rose 0.3 percent, above economists' expectations for a rise of 0.2 percent month-on-month.
Benchmark 10-year notes -- which respond closely to inflation expectations -- turned lower in price to trade down 2/32 for a yield of 5.00 percent, up from 4.96 percent just before the report and versus 4.99 percent late on Tuesday. Bond yields and prices move inversely.
Producer Prices and Housing Starts contribute to lower yields
The Producer Price Index came in lower than expected today, and bond investors reacted positively. They pushed down the yield on the benchmark 10-year Treasury 1 basis point to 4.99 percent. Nothing to get too excited about, but it is definitely better than the alternative. Let's hope we have similar to better results in tomorrow's Consumer Price Index.
Also, contributing to the decline was the New Housing Starts release. New Housing starts fell 7.8 percent in March.
For further detail on today's events, here's a
report excerpt from Reuter's:
NEW YORK, April 18 (Reuters) - U.S. Treasury debt prices rose on Tuesday after milder-than-expected inflation data and a weak housing construction reading trimmed expectations of two more Federal Reserve rate increases by mid-year.
Benchmark 10-year Treasury notes up 6/32 in price and their yield fell below key 5 percent level to 4.99 percent after the government's latest reports on U.S. producer price index and housing starts. [ID:nN18340795]
A softer-than-expected 0.1 advance in the core PPI, which strips out volatile food ane energy prices, soothed worries that high energy costs have seeped into the broader economy, which could warrant more rate increases by the Fed.
"Today's PPI report clearly tells us the higher oil price is not inflationary. The Fed has little reason to continue raising rates, especially in view of a serious downturn in the housing market," said Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, New York.
U.S. crude futures on Tuesday climbed to $70.88 a barrel, smashing through its previous record of $70.85.
Reacting to the economic data, U.S. short-term rate futures have fully priced a quarter percentage interest rate increase at the Fed's May policy meeting , but the likelihood that the Fed will lift rates again at its June meeting slipped to 44 percent from 54 percent on Monday.
The U.S. housing market, which had been a driver of economic growth, showed more weakness. The Commerce Department said March housing starts fell 7.8 percent to an annualized rate of 1.960 million units, below the forecast 2.030 million rate. Housing starts also fell 7.8 percent in February.
"Higher mortgage rates are having the expected impact on the housing market," said Anthony Chan, chief economist at J.P. Morgan Private Client Services in Columbus, Ohio.
Two-year note yields were at 4.87 percent, down from 4.90 percent late Monday. Five-year notes were up 5/32 in price to yield 4.89 percent, down from 4.92 percent. The long bond rose 6/32 for a yield of 5.07 percent, down from 5.08 percent......
Rate Watch
Despite, a light economic calendar, rates continued to climb pretty steadily last week. The benchmark 30-year fixed rate mortgage in Freddie Mac's
weekly survey reported a 6
basis point increase from the previous week's survey. The popular program's average came in at 6.49 percent. This average is the highest that Freddie has reported since July 12, 2002. Other programs followed. The average for the 15-year FRM was 6.14 percent, up from the previous week's average of 6.10 percent, and one-year Treasury-indexed ARMs averaged 5.61 percent this week, up from the previous week when it averaged 5.57 percent.
This week's rise in rates were attributed to two things. First, the
Employment report issued the previous week continued to concern the markets. As you may remember, the Employment report showed a lower than expected Unemployment rate. As the economy moves closer and closer to full employment, there is the fear that it could force wages higher (i.e. inflation). Second, thanks to saber rattling in Iran, nationalization of oil in Venezuela, and the possibility of civil war in Nigeria, the price of oil continues to sky rocket. Today a barrel of oil will cost you
70 bucks, and many analysts are predicting that it could go as high as $80/barrel. Even though that's good news for the Houston economy, $80/barrel oil would have ramifications throughout the economy. It could lead to higher prices for goods and services (i.e. inflation). Almost without exception inflation leads to higher rates, and these two dynamics could stem inflation fears for a while.
Hopefully, the
economic calendar will allow some of the inflation fears to be allayed. This is a big week because the
Producer Price Index and the
Consumer Price Index will be released on Tuesday and Wednesday respectively. PPI and CPI are the most widely watched indicators of inflation. PPI focuses on the increase in prices of intermediary goods used by companies to produce finished products, while the CPI looks at those finished goods which are sold to consumers. If these two reports show a lower than expected inflation results, then we could see rates fall. However, I would not suggest that anyone bet on that result. If you can lock your rates prior to the PPI and CPI releases, then you definitely should.
Beyond the inflation data,
Housing Starts data will be released on Tuesday. This will give us some perspective on how rates are affecting the real estate market. Also on Tuesday, the
minutes from the March 28 FOMC meeting will be released. This detailed description of the discussion during the last Fed meeting will be scrutinized for clues about future policy. Many investors believe the rate hike jamboree that has occurred in 15 consecutive meetings is coming to a close and they will be eagerly looking for proof.
Links of the Week
LocalNationwide
Rates keep going and going!
Rates have been steadily going up this week. Until today, there hasn't been much activity on the economic calendar front, and the market has relied heavily on geopolitics and last week's employment report to justify further increases. Then we got a retail report today that helped to push rates even higher. Here are some excerpts from Holden Lewis’ (Bankrate.com's mortgage guru)
blog from Wednesday and Thursday:
Wednesday:
The average rate on a 30-year, fixed-rate mortgage is up 5 basis points this week, to 6.56 percent. I blame the way the bond market interpreted last week's report on March employment, when job creation was better than expected and the unemployment rate went down. Wages weren't up much, a factor that implies that the unemployment rate is somehow understated. But the bond market paid more attention to the unemployment rate than to the wage data and reacted to signals implying inflation.
Blogger Billmon takes a crack at explaining why working people don't seem to think the economy is going gangbusters. You can see it in the first two charts, which show corporate profits rising smartly while wages stagnate.
Based on a couple of speeches that Richard W. Fisher, president of the Dallas Fed, made in the last week, I think the Fed is beginning to drop hints that globalization is keeping wages down, and thus, keeping inflation in check.
If this is the beginning of a PR campaign by the Fed, the central bank is trying to send a message that the rate hikes are about to end, and markets need not worry about inflation. Bond traders could react either of two ways. They could take the Fed at its word, and keep long-term yields relatively steady, or they could conclude that the Fed isn't serious about inflation, and send long-term yields higher. I think the first possibility is more likely.
Thursday:
Bond traders leapt right over the 5 percent hurdle today, humbling me and at least one other prognosticator who thought that the 10-year Treasury yield would flirt with, but not exceed, 5 percent for a while.
After the report on March retail sales came out today, the 10-year Treasury's yield jumped. This afternoon it's 5.04 percent. Retail sales rose 0.6 percent in March(better than expected), and the initial estimate for February, which showed a 1.4 percent decline in retail sales, was revised to reflect a smaller decline of 0.8 percent. All relatively good news, and enough to spur investors to sell bonds and buy stocks. Bond prices fell and the yields rose.
Mortgage rates are rising a similar amount today -- the national average is probably about one-sixteenth of a point higher today than yesterday.
SPEAKING OF RATES: The average rate on a 30-year fixed went up 5 basis points, to 6.56 percent, in the last week, according to Bankrate's weekly mortgage rate survey. The 5/1 ARM went up 8 basis points, to 6.25 percent.
Rate Watch
As concerns about inflation, oil prices, and additional Fed hikes linger, mortgage rates continued to rise. As I posted on the blog last week, Bankrate's overnight average reached its highest mark since 2002. Additionally, Freddie Mac's
weekly survey posted the highest average it has seen since Sept. 5, 2003. The benchmark 30-year Fixed Rate mortgage (FRM) averaged 6.43 percent, up from the previous week's 6.35 percent. Other products saw similar bumps. The average for the 15-year FRM was 6.10 percent up from 6.00 percent, and one-year Treasury-indexed ARMs averaged 5.57 percent up from the previous week when it averaged 5.51 percent.
Throughout the week, Friday’s
employment report was ever present. The markets anticipated strong employment numbers and the report did not disappoint. Against a consensus estimate of 190,000, the US economy added 211,000 new jobs. The Unemployment Rate slipped lower to 4.7%, while it had been expected to remain at 4.8%. Of course, this is great news for workers. Jobseekers are finding it much easier to find jobs than they have in recent memory. Unfortunately, the closer the economy gets to full employment the greater the opportunity for accelerating inflation. A shortage of workers would lead to a bidding war for new hires which would lead to higher prices for goods and services (i.e. inflation). In order to combat this scenario from transpiring the Federal Reserve must raise rates to cool off the economy. So as we get this employment report and higher prices at the
gas pump, inflation fears are running high. Inflation is a bond's kryptonite. As inflation accelerates, it destroys a bond's value and
yields must go up to attract buyers.
The markets will have to brood over this report for the next few days. The
economic calendar is completely empty Monday and Tuesday. Starting Wednesday, there will be a string of moderately important reports released. Wednesday’s
Trade Balance report shows us how large our trade deficit has gotten this month. This report rarely has a big impact on rates. On Thursday, the
Retail sales report has the potential to make a little more noise. Consumers account for a majority of economic activity. There will also be a
Consumer Sentiment report release that same day. On Friday, the focus will shift to business performance. The
Industrial Production report provides us with the output of US factories, mines, and utilities. This report will be closely watched by the Fed and the markets.
Overall, it will be a pretty slow week. I imagine that rates will either will go unchanged or move even higher. There is currently no end in sight for the Fed’s rate hike bonanza. This uncertainty does not bode well for low interest rates. Borrowers should lock their rates at the earliest time possible.
Rates: Still going!
This has been a slow news week, but rates are still on the rise. According to
Bankrate.com, long-term mortgage rates have risen to their highest levels since July 2002. In their national survey of large lenders, Bankrate.com found that the benchmark 30-year fixed-rate mortgage rose 7 basis points to 6.51 percent. Here's Holden Lewis', Bankrate's resident mortgage rate guru, explanation for the continuing rise in rates and an education about the yield curve.
Rates and bond yields continued to rise, partly as fallout from last week's rate policy meeting of the Federal Reserve. The Fed raised the target federal funds rate a quarter of a point on March 28 and implied that at least one more rate hike is forthcoming.
Such an increase in short-term rates doesn't always translate into an increase in long-term rates. In fact, sometimes short-term and long-term rates move in opposite directions. In the last few weeks, though, a phenomenon known as the "flat yield curve" has caused short-term and long-term rates to move in the same direction and by roughly the same amount.
The stone-and-mattress curve
"Flat yield curve" is a term that economists use. We ordinary mortals can picture the concept as a stone under a mattress.
The yield curve describes the difference among the yields on bonds of different lengths. Think of that difference as the thickness of a cushion. The cushion has gotten much thinner in the past year. Explaining the same phenomenon, economists and bond traders would say that the yield curve is flatter.
Take the two-year and 10-year Treasury notes. They make a good example because 30-year, fixed-rate mortgage rates tend to move roughly in concert with 10-year Treasury yields, while two-year Treasuries are more sensitive to Fed rate policy.
A year ago, the two-year Treasury yielded 3.75 percent and the 10-year, 4.48 percent. You could say that the cushion between the two was 73 basis points thick. On Wednesday morning, the two-year Treasury yielded 4.81 percent and the 10-year, 4.85 percent. The cushion had worn down to a paper-thin 4 basis points.
There's hardly any cushion between two-year and 10-year Treasury yields. In this laughably tortured metaphor, a rise in short-term yields is like a pebble under the mattress -- the long-term bond feels it immediately and rises accordingly.
Rate Watch
Economic data took a back seat to last Tuesday's Fed meeting. The decision by the Federal Reserves’
Federal Open Market Committee (FOMC) to raise their key interest rate 25 basis points and the corresponding statement given to justify it, led to steadily rising rates throughout the week. And for the first time in 3 weeks, Freddie Mac's
weekly survey produced a higher weekly average. The benchmark 30-year fixed rate mortgage (FRM) averaged 6.35 percent, up from the previous week's average of 6.32 percent.
Shorter term programs were impacted even more substantially. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.02 percent up from the previous week when it averaged 5.96 percent and one-year Treasury-indexed ARMs increased 10
basis points to 5.51 percent. Typically, the shorter the term, the more impact a Fed hike will have on the rate.
As I
posted last week, the biggest impact would be felt from the statement that came out of the Fed meeting. Prior to the meeting, investors believed that the Fed's rate hike streak might be coming to an end. The Fed has raised their Federal Fund rate in 15 consecutive meetings of the FOMC. After the meeting, the Fed released a statement that was identical to the statement released in February. The statement reaffirmed that more rate hikes might be needed to offset inflation. As a result, investors immediately reassessed their expectations and bid down the price of bonds which led to higher and higher rates throughout the week. Bond prices and yields/interest rates move in opposite directions.
The March
Employment Report will be released on Friday. As usual, this will be the biggest economic data of the month. The Employment report details the number of new jobs created and the Unemployment Rate. The strength of the labor market is the most popular indicator of a healthy, vibrant economy. Economists are currently predicting that we will add 200,000 new jobs. If the report comes in above or below this number, then it could have a big impact on interest rates. So lock rates prior to its release, you probably don’t want to chance it.
In the meantime, the economic calendar is pretty light. The
ISM Manufacturing Index will be released today. The Institute for Supply Management surveys nearly 400 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. This is one of the most comprehensive manufacturing reports, and it can have a big impact depending on the results.
Between Monday and Friday don’t expect much activity. However, their might be some lagging momentum that pushes rates even higher. Borrowers should lock rates at their earliest convenience.
