Concerns over the upcoming “Brexit” vote in Great Britain scheduled for June 23 drove much of the week’s investor sentiment, not only on Wall Street, but in many foreign equity and bond markets. Polls early in the week showed an increase in support for Britain leaving the European Union (EU) and this weighed on equities while providing a rally for bonds. However, the tragic shooting death of British Parliament member Ms. Jo Cox appeared to heighten the prospects for the “remain” vote as Ms. Cox was an outspoken proponent for Britain remaining in the EU. The bond market also got a shot in the arm from the Federal Reserve’s latest interest rate decision on Wednesday. Once the Fed’s Federal Open Market Committee (FOMC) announced monetary policy would remain unchanged while downgrading its forecast for 2017 GDP growth, bond prices shot higher and yields fell. The policy statement was dovish in tone and stated slowing growth in labor markets and persistently low inflation as reasons for leaving rates unchanged. The FOMC is now forecasting 2016 GDP growth of 1.9-2.0% (down from 2.1-2.3% in March); Unemployment at 4.6-4.8% (unchanged from March); PCE inflation between 1.3-1.7% (up from 1.0-1.6% in March); and Core PCE inflation between 1.6-1.8% (up from 1.4-1.7% in March). The FOMC is also predicting 1-2 rate hikes in 2016, down from 2 hikes in March and 2-4 rate hikes in 2017, down from 4 hikes in March. Also, the FOMC maintained its dot-plot projection of two interest rate hikes with a target rate of 0.9% by the end of 2016. Yet, the FOMC lowered its projection for the fed funds rate by the end of 2017 to 1.6% from 1.9% and lowered its projection for 2018 to 2.4% from 3.0%. Other reports during the week showed economic data were mixed. Industrial Production fell by a larger than forecast 0.4% in May following a downwardly revised 0.6% increase in April while Capacity Utilization declined to 74.9% from a revised 75.3%. However, the Commerce Department reported May Retail Sales came in higher than expected with an increase of 0.5%, exceeding the consensus forecast of 0.3%. May's Producer Price Index (PPI) also came in higher than expected at 0.4% in May, rising at its fastest rate in a year. While this partially reveals the impact of rising energy prices, a strong increase in producer services inflation also suggests companies are successfully passing on higher costs. However, the Core PPI, which excludes volatile food and energy prices, increased marginally last month by 0.3% and 1% year-on-year to remain well below the Fed’s 2.0% inflation target. Meanwhile, the Consumer Price Index (CPI) rose 0.2% in May after advancing 0.4% in April. The consensus forecast called for the CPI to rise by 0.3%. The Core CPI, which excludes food and energy prices, rose 0.2% to match the increase seen in April as well as the consensus forecast. On an annual basis, CPI growth slowed to 1.0% in May from 1.1% in April while Core CPI growth increased to 2.2% from 2.1%. Elsewhere, the Mortgage Bankers Association (MBA) released their latest Mortgage Application Data for the week ending June 11
th showing the overall seasonally adjusted Market Composite Index fell 2.4%. The seasonally adjusted Purchase Index increased 5.0%, while the Refinance Index decreased 1.0%. Overall, the refinance portion of mortgage activity increased to 55.3% of total applications from 53.8%. The adjustable-rate mortgage share of activity increased to 5.3% from 5.0% 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 3.83% to 3.79%, the lowest level since January 2015. Furthermore, the National Association of Home Builders reported a slight improvement in their Housing Market Index with a seasonally adjusted level of 60 in June from May’s reading of 58. This was the highest reading since January, and indicated builders expect favorable home building conditions to continue as the sales expectations index rose five points to 70, the highest level since last October. The consensus forecast had called for a reading of 59. Also, the Commerce Department reported Housing Starts fell in May by 0.3% to a 1.164 million annualized rate from a downwardly revised 1.167 million rate in April, but exceeded the consensus forecast of 1.150 million. Although this was a strong housing report, it may be another sign the economy is beginning to stagnate along with other major sectors, and may be another reason St. Louis Fed President and FOMC voter James Bullard (a noted monetary policy “hawk”) has just slashed his U.S. economic growth projection. Bullard is now saying that only one rate hike may be appropriate through 2018! One has to wonder how Bullard can change from being one of the most hawkish FOMC members to one of the most dovish members in about a two week time span. Additionally, Building Permits increased 0.7% in May to a 1.138 million annualized rate versus a consensus forecast of 1.150 million. Because Building Permit applications trail Housing Starts, it is unlikely we will see additional gains in construction over the next month or two. Construction of single-family houses increased by 0.3% to a 764,000 rate, the most in three months, but the often volatile multifamily home segment declined by 1.2% to a 400,000 unit rate after a 11.9% jump in April. For the week, the FNMA 3.0% coupon bond gained 9.4 basis points to end at $102.97 while the 10-year Treasury yield fell 3.3 basis points to end at 1.611%. Stocks ended the week with the Dow Jones Industrial Average losing 190.18 points to end at 17,675.16. The NASDAQ Composite Index dropped 94.21 points to close at 4,800.34, and the S&P 500 Index fell 24.85 points to close at 2,071.22. Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has gained 1.42%, the NASDAQ Composite Index has lost 4.31%, and the S&P 500 Index has gained 1.32%. This past week, the national average 30-year mortgage rate fell to 3.53% from 3.58% while the 15-year mortgage rate decreased to 2.84% from 2.88%. The 5/1 ARM mortgage rate fell to 2.96% from 2.97%. FHA 30-year rates held steady at 3.25% while Jumbo 30-year rates decreased to 3.58% from 3.60%.
Mortgage Rate Forecast with Chart For the week, the FNMA 30-year 3.0% coupon bond ($103.00, -1.6 bp) traded within a 49 basis point range between a weekly intraday high of $103.33 and a weekly intraday low of $102.84 before closing at $102.97 on Friday. Thursday’s candlestick was a “bearish” shooting star and this negative signal carried over to Friday with another similar candlestick showing a long upper shadow or wick indicating market weakness. The 103.00 line failed to hold as the bond slipped just below this support level. Further support is found at the 25-day moving average at $102.58. Furthermore, the slow stochastic oscillator is showing a negative crossover sell signal from an extremely “overbought” level suggesting further weakness may lie ahead early next week. Should the bond continue lower this coming week, we could see mortgage rates edge slightly higher.
Chart: FNMA 30-Year 3.0% Coupon Bond
Economic Calendar - for the Week of June 20, 2016 The economic calendar focuses on the housing sector and durable goods orders this coming week. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
| Date | TimeET | Event /Report /Statistic | For | Market Expects | Prior |
| Jun 22 | 07:00 | MBA Mortgage Index | 06/18 | NA | -2.4% |
| Jun 22 | 09:00 | FHFA Housing Price Index | Apr | NA | 0.7% |
| Jun 22 | 10:00 | Existing Home Sales | May | 5.50M | 5.45M |
| Jun 22 | 10:30 | Crude Oil Inventories | 06/18 | NA | -0.933M |
| Jun 23 | 08:30 | Initial Jobless Claims | 06/18 | 273,000 | 277,000 |
| Jun 23 | 08:30 | Continuing Jobless Claims | 06/11 | NA | 2,157K |
| Jun 23 | 10:00 | New Home Sales | May | 560,000 | 619,000 |
| Jun 24 | 08:30 | Durable Goods Orders | May | -0.6% | 3.4% |
| Jun 24 | 08:30 | Durable Goods Orders excluding transportation | May | 0.1% | 0.4% |
| Jun 24 | 10:00 | Final Univ. of Michigan Consumer Sentiment | June | 94.0 | 94.3 |
| Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability ** |
| July 2016 | 26-27, (Tuesday-Wednesday) | 7% Chance |
| September 2016 | 20-21, (Tuesday-Wednesday)* | 24% Chance |
| November 2016 | 1-2, (Tuesday-Wednesday) | 24% Chance |
| December 2016 | 20-21 (Tuesday-Wednesday)* | 23% Chance |
| February 2017 | 01/31-02/01 (Tuesday-Wednesday)* | 27% 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 