Mortgage Market Update – September 17, 2018
Hurricane Florence’s Impact
First of all, I hope all of our friends, colleagues, and clients made it through hurricane this weekend with limited damage and that the rebuilding process will be quick. We know there will be continuing impact over the next few days due to flooding and our thoughts are certainly with those suffering during this time. From a business standpoint, Southern Trust has been making extensive preparations and have a plan in place for any properties that require reinspections. If anyone has any questions, please don’t hesitate to reach out to the management team.
Indexes and Reports
I know the weather was front and center on everyone’s mind, but we did have a bit of non-hurricane related news out last week. Inflation watchers were keen to see how the Producer Price Index and the Consumer Price Index printed on Wednesday and Thursday. You will remember that Average Hourly Earnings increased in the latest employment report and that incited some fear of an upward trajectory for inflation. Well the PPI and CPI data certainly failed to contribute to that narrative as both indices came in well south of expectations. Retail Sales also disappointed last week, but a strong upward revision to July’s numbers muted a lot of the market reaction.
The economic calendar this week is quiet, so attention will be focused on trade and next week’s FOMC meeting. On the trade front, Canada and the United States have yet to come to terms that would include Canada in the US-Mexico trade agreement announced a couple of weeks ago, and time is running out. President Trump is still pushing for a tri-party deal, but Canada may be dropped if negotiations do not advance this week. China is still out there as well, and at this point, representatives are just trying to negotiate further talks during which negotiations on trade will occur. Needless to say, quite a bit of wood to chop on that front. In the meantime, the Trump administration is preparing to announce tariffs on an additional $200 billion worth of Chinese goods.
Rates and Forecast
Bond yields pressed higher last week (prices were lower) and the 10yr is back to 3%. 10s have traded in a 20 basis point range for about 3 months now with 3% representing that top of that range. A break of 3% could signal a retest of the high closing print of the year near 3.12%. Mortgage rates are pretty stable as Mortgage-Backed Securities have traded roughly in line with expectations, but I expect some underperformance to occur if the 10yr materially breaks out of its recent range. The Fed is scheduled to meet next week and odds of a 25bp rate hike are approaching 100%. This should serve to further flatten an already pancake flat curve. Only 22bps separates the 2yr yield from the 10yr yield and history has taught us that an inverted curve often presages a recession. This time will be different, right? We’ll see. Good luck out there.