This past week was a repeat of the underlying forces impacting the financial markets so far in 2016: volatile oil prices, diverging monetary policy, and concerns about the global economy. The stock market’s largest daily decline came on Monday, following another sharp decline in oil prices, which reached new multiyear lows by Thursday. However, renewed prospects for production cuts by OPEC caused U.S. crude oil prices to rally more than 11% in early trading on Friday, helping to trigger a rebound in the stock market to the detriment of the bond market. Additionally, cautious testimony from Federal Reserve Chair Janet Yellen before the House and Senate Banking Committees concerning the economic outlook also seemed to weigh on investor sentiment. Yellen recognized tightening financial conditions and uncertainty over China pose risks to the U.S. economic recovery. Yellen stated
"I don't expect the (Federal Open Market Committee) is going to be soon in the situation where it is necessary to cut rates. There is always a risk of a recession...and global financial developments could produce a slowing in the economy. I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don't think it is going to be necessary to cut rates." Yellen also acknowledged that negative interest rates are not off the table as a potential policy tool of accommodation, and the stock market reacted by moving to new weekly lows. The week’s economic data were generally seen in a positive light. December job openings increased and both initial and continuing jobless claims declined. Retail sales increased more than forecast in January, driven by an increase in vehicle sales. The positive retail sales data on Friday sparked a late sell-off in Treasuries to push yields higher, but not before the benchmark 10-year yield fell on Thursday to 1.529%, a level not seen since August 2012. As for housing, CoreLogic released its December 2015 National Foreclosure Report showing foreclosure inventory fell by 23.8% and completed foreclosures dropped by 22.6% compared to December 2014. The number of completed foreclosures nationwide fell year-over-year from 41,000 in December 2014 to 32,000 in December 2015. The number of completed foreclosures in December 2015 was 72.8% lower from the peak of 117,722 in September 2010. Elsewhere, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending February 6 showing the overall seasonally adjusted Market Composite Index increased 9.3%. On an unadjusted basis, the Composite Index increased by 12% week-over-week. The seasonally adjusted Purchase Index increased 0.2% from the prior reporting period while the Refinance Index increased 16.0%. Overall, the refinance portion of mortgage activity increased to 61.2% of total applications from 59.2%. The adjustable-rate mortgage segment of activity increased to 6.4% of total applications from 5.9%. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 3.97% to 3.91%. For the week, the FNMA 3.5% coupon bond lost 9.4 basis points to end at $104.66 while the 10-year Treasury yield decreased 9.6 basis points to end at 1.75%. Stocks ended the week with the Dow Jones Industrial Average losing 231.13 points to end at 15,973.84. The NASDAQ Composite Index dropped 25.63 points to close at 4,337.51, and the S&P 500 Index fell 15.27 points to close at 1,864.78. Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 9.08%, the NASDAQ Composite Index has lost 15.44%, and the S&P 500 Index has lost 9.61%. This past week, the national average 30-year mortgage rate decreased to 3.66% from 3.77% while the 15-year mortgage rate fell to 2.98% from 3.05%. The 5/1 ARM mortgage rate decreased to 2.87% from 2.99%. FHA 30-year rates fell from 3.35% to 3.25% while Jumbo 30-year rates decreased to 3.48% from 3.58%.
Mortgage Rate Forecast with Chart For the week, the FNMA 30-year 3.5% coupon bond ($104.66, -9.4 bp) traded within a 75 basis point range between a weekly intraday low of $104.58 and a weekly intraday high of 105.33 before closing at $104.66 on Friday. From a technical viewpoint, there is a clear sign of a reversal with the bond gapping slightly lower and making a solid move toward support at the $104.516 level on Friday while remaining “overbought.” The stochastic oscillators are showing new sell signals from negative crossovers while the candlestick patterns indicate market weakness. If crude oil can sustain its current level and not sell off again or manage to move higher next week, stocks would likely mirror such performance to put additional selling pressure on bonds. Under such a scenario, mortgage bonds would move lower for a test of primary support. A break below the $104.516 support level could send prices toward secondary support at $104.15 resulting in a slight rise in mortgage rates.
Chart: FNMA 30-Year 3.5% Coupon Bond
Economic Calendar - for the Week of February 15, 2016 The economic calendar picks up this coming week with several key reports on inflation and manufacturing. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
| Date | TimeET | Event /Report /Statistic | For | Market Expects | Prior |
| Feb 16 | 08:30 | N.Y. Empire State Manufacturing Index | Feb | -9.9 | -19.4 |
| Feb 16 | 10:00 | NAHB Housing Market Index | Feb | 60 | 60 |
| Feb 16 | 16:00 | Net Long-Term TIC Flows | Dec | NA | $31.4B |
| Feb 17 | 07:00 | MBA Mortgage Index | 02/13 | NA | 9.3% |
| Feb 17 | 08:30 | Producer Price Index (PPI) | Jan | -0.2% | -0.2% |
| Feb 17 | 08:30 | Core PPI | Jan | 0.0% | 0.1% |
| Feb 17 | 08:30 | Housing Starts | Jan | 1,171K | 1,149K |
| Feb 17 | 08:30 | Building Permits | Jan | 1,200K | 1,232K |
| Feb 17 | 09:15 | Industrial Production | Jan | 0.3% | -0.4% |
| Feb 17 | 09:15 | Capacity Utilization | Jan | 76.6% | 76.5% |
| Feb 17 | 10:30 | Crude Oil Inventories | 02/13 | NA | -0.754M |
| Feb 17 | 14:00 | FOMC Minutes | Jan 27 | NA | NA |
| Feb 18 | 08:30 | Initial Jobless Claims | 02/13 | 274,000 | 269,000 |
| Feb 18 | 08:30 | Continuing Jobless Claims | 02/06 | 2,237K | 2,239K |
| Feb 18 | 08:30 | Philadelphia Fed Manufacturing Survey | Feb | -2.9 | -3.5 |
| Feb 19 | 08:30 | Consumer Price Index (CPI) | Jan | -0.1% | -0.1% |
| Feb 19 | 08:30 | Core CPI | Jan | 0.1% | 0.1% |
| Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability ** |
| March 2016 | 15-16, (Tuesday-Wednesday)* | 4% Chance |
| April 2016 | 26-27, (Tuesday-Wednesday) | 6% Chance |
| June 2016 | 14-15, (Tuesday-Wednesday)* | 14% Chance |
| July 2016 | 26-27, (Tuesday-Wednesday) | 16% Chance |
| September 2016 | 20-21, (Tuesday-Wednesday)* | 21% Chance |
| November 2016 | 1-2, (Tuesday-Wednesday) | 23% Chance |
| December 2016 | 20-21 (Tuesday-Wednesday)* | 33% Chance |
| February 2017 | 01/31-02/01 (Tuesday-Wednesday)* | 39% 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. Source: MBSHighway 