Bond prices improved and yields declined with 10-year Treasury note yields falling to their lowest level since the beginning of August after the release of economic news on Friday morning showing flat retail sales in July and the largest drop in producer prices in almost a year. Also, the major stock market indexes – the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite Index, all set record highs on Thursday, a conjunction that hasn’t happened since December 31, 1999. Before we cheer this occurrence, within three months after the last time it happened in 1999, the stock market began a free-fall through September 2002. By then, the NASDAQ ended up losing nearly 80% of its value, the S&P 500 ended up losing 43% of its value and the Dow Jones Industrial Average ended with a 27% decline. On Tuesday, what little economic news there was wasn’t particularly encouraging. The Labor Department reported 2
nd quarter Preliminary Productivity, measured as the output of goods and services produced by American workers per hour worked, fell at a 0.5% seasonally adjusted annual rate as hours worked increased faster than output. This is the third consecutive quarter of declining Productivity, the longest such string of declines since 1979. Productivity was also down 0.4% from the year ago period, the first annual decline in three years and just the sixth year-over-year decline recorded since 1982. The dismal Productivity report suggests worker income could stagnate along with economic growth in coming years. Wednesday, equity markets were generally lower on a drop in crude oil prices while weaker economic news in Europe helped to send bond prices higher and yields moving lower as investors continued to try and acquire the best yielding sovereign bonds globally. In housing, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending August 5
th showing the overall seasonally adjusted Market Composite Index increased 7.1%. The seasonally adjusted Purchase Index rose 3.0% from the prior week, while the Refinance Index increased 10.0%. Overall, the refinance portion of mortgage activity increased to 62.4% of total applications from 60.7%. The adjustable-rate mortgage share of activity was unchanged at 4.7% of total applications. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased from 3.67% to 3.65% with points decreasing to 0.34 from 0.30. Thursday, bond prices tumbled following a sharp 4% bounce higher in oil prices, solid economic data, and a lackluster Treasury auction of 30-year bonds. The Treasury also conducted a $15 billion 30-year bond auction having a high yield of 2.274% with a bid-to-cover ratio of 2.24 that was less than the 12-auction average of 2.36 indicating tepid demand. Indirect bidders (foreign central banks) bought 61.5% of the supply while direct bidders took 10.9% of the issue. Bond prices fell following the auction. Friday brought disappointing economic news out of China, and here domestically, to put a damper on the stock market despite higher crude oil prices, allowing a rebound to take place in the bond market with the yield on 10-year Treasuries falling during the morning to their lowest level since August 1. Bond prices then subsequently pulled back from their best levels during afternoon trading. Weaker than forecast industrial production, retail sales, and fixed-asset investment in China helped to curb investor enthusiasm while softer-than-expected readings on U.S. Producer Prices and Retail Sales suggested U.S. inflation may not be gaining enough steam to meet the Federal Reserve’s stated target of 2%. Producer prices as measure by the Producer Price Index (PPI) recorded their largest decline in nearly a year in July on declining costs for services and energy products. The PPI easily missed the consensus forecast of a flat 0.0% with a reading of -0.4%. Also, when excluding costs for food and energy, the so-called Core PPI fell 0.3% versus a forecast of +0.2%. Meanwhile, the Commerce Department reported Retail Sales were at a flat 0.0% for July, missing the consensus forecast calling for a 0.4% increase, as consumers cut back on purchases of clothing and other goods. Retail Sales excluding auto and truck sales declined 0.3% compared to expectations for a +0.2% increase. Overall, Retail Sales have risen 2.3% on a year-over-year basis. Bond investors savored the sour PPI and Retail Sales news because economists who had been predicting a surge in third-quarter growth might have to trim their forecasts. Bond investors also know this data feeds into the equation where lower inflation plus lower economic growth equals lower interest rates. This latest batch of economic data could also give the Federal Reserve pause to raise interest rates. The latest readings from the CME Group's FedWatch tool shows investors have reduced their expectations the Fed would raise rates before the end of the year. Traders now see a 40% chance the Fed will hike interest rates by its December 14 meeting, versus a 44.9% chance on Thursday. For the week, the FNMA 3.0% coupon bond gained 14.0 basis points to end at $103.78 while the 10-year Treasury yield decreased 7.2 basis points to end at 1.5101%. Stocks ended the week higher with the Dow Jones Industrial Average adding 32.94 points to end at 18,576.47. The NASDAQ Composite Index advanced 11.78 points to close at 5,232.90, and the S&P 500 Index gained 1.18 points to close at 2,184.05. Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 6.20%, the NASDAQ Composite Index has added 4.31%, and the S&P 500 Index has advanced 6.42%. This past week, the national average 30-year mortgage rate decreased to 3.37% from 3.41% while the 15-year mortgage rate decreased to 2.73% from 2.75%. The 5/1 ARM mortgage rate fell to 2.80% from 2.85%. FHA 30-year rates dropped to 3.15% from 3.25% while Jumbo 30-year rates decreased to 3.47% from 3.55%.
Mortgage Rate Forecast with Chart For the week, the FNMA 30-year 3.0% coupon bond ($103.78, +14 basis points) traded within a narrower 40 basis point range between a weekly intraday high of $103.95 and a weekly intraday low of $103.55 before closing at $103.78 on Friday.
Chart: FNMA 30-Year 3.0% Coupon Bond
Choppy, see-saw trading was evident Wednesday through Friday when most of the week’s economic news was released. Thursday’s substantial downward move was partially erased when the bond shot 23 basis points above the 25-day moving average located at $103.72 on Friday only to pull back 15 basis points by the close of trading. This pullback on Friday from the intraday high price resulted in a weak “shooting star” type of candlestick with a long upper shadow or wick calling into question the ability of the 25-day moving average to hold as support when trading resumes on Monday. If the bond can bounce higher from the 25-day moving average and continue toward resistance located at the 23.6% Fibonacci retracement level this coming week, mortgage rates should improve. If the 25-day moving average fails to hold as support and the bond continues to decline from that point, mortgage rates would slightly increase.
Economic Calendar - for the Week of August 15, 2016 The economic calendar features a couple of reports on regional manufacturing and housing that will be of interest to traders including the New York Empire State Manufacturing Index on Monday; the Philadelphia Fed Manufacturing Survey on Thursday; and Housing Starts and Building Permits on Tuesday. Inflation at the consumer level as measured by the Consumer Price Index will also be of interest on Tuesday as will the latest set of minutes from the Federal Reserve’s July 27 FOMC meeting on Wednesday. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
| Date | TimeET | Event /Report /Statistic | For | Market Expects | Prior |
| Aug 15 | 08:30 | N.Y. Empire State Manufacturing Index | Aug | 4.0 | 0.55 |
| Aug 15 | 10:00 | NAHB Housing Market Index | Aug | 59 | 59 |
| Aug 15 | 16:00 | Net Long-Term TIC Flows | June | NA | $41.1B |
| Aug 16 | 08:30 | Consumer Price Index (CPI) | July | 0.0% | 0.2% |
| Aug 16 | 08:30 | Core CPI | July | 0.2% | 0.2% |
| Aug 16 | 08:30 | Housing Starts | July | 1,167K | 1,189K |
| Aug 16 | 08:30 | Building Permits | July | 1,153K | 1,153K |
| Aug 16 | 09:15 | Industrial Production | July | 0.3% | 0.6% |
| Aug 16 | 09:15 | Capacity Utilization | July | 75.7% | 75.4% |
| Aug 17 | 07:00 | MBA Mortgage Index | 08/13 | NA | 7.1% |
| Aug 17 | 10:30 | Crude Oil Inventories | 08/13 | NA | 1.055M |
| Aug 17 | 14:00 | FOMC Minutes | July 27 | NA | |
| Aug 18 | 08:30 | Initial Jobless Claims | 08/13 | 265,000 | 266,000 |
| Aug 18 | 08:30 | Continuing Jobless Claims | 08/06 | NA | 2,155K |
| Aug 18 | 08:30 | Philadelphia Fed Manufacturing Survey | Aug | 0.5 | -2.9 |
| Aug 18 | 10:00 | Index of Leading Economic Indicators | July | 0.4% | 0.3% |
| Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability ** |
September 2016 | 20-21, (Tuesday-Wednesday)* | 6.0% Chance |
| November 2016 | 1-2, (Tuesday-Wednesday) | 7.8% Chance |
| December 2016 | 20-21 (Tuesday-Wednesday)* | 40.0% Chance |
| February 2017 | 01/31-02/01 (Tuesday-Wednesday) | 40.6% Chance |
| March 2017 | 14-15 (Tuesday-Wednesday)* | 41.9% Chance |
| May 2017 | 02-03 (Tuesday-Wednesday) | 42.0% Chance |
| June 2017 | 13-14 (Tuesday-Wednesday)* | 42.7% Chance |
| July 2017 | 25-26, (Tuesday-Wednesday) | 42.7% Chance |
* Meeting associated with a Summary of Economic Projections and a press conference by the Chairman.** Probability generated from the CME Group FedWatch tool based on the 30-day Fed Funds futures prices.