Mortgage Market Update – December 11th, 2018
Recent Events Recap
Hi guys! So, if you took a poll at the beginning of this year, I’m not sure how many respondents would have anticipated the 10yr Treasury yield below 3% for year-end. But here we are with just 14 shopping days until Christmas and 10s are at 2.88%. You don’t need me to tell you the story here. The damage in the stock market has been significant enough for media outlets beyond CNBC to carry this story. Even as the underlying fundamentals of the domestic economy remain strong and consumer confidence shows no signs of failing, yield curve flattening along with unresolved trade tensions between the US and China have led to a significant reallocation of assets away from risk and into Treasuries. Hope for a trade agreement with China was buoyed following the G20, but conflicting statements not only between representatives of China and the US but also out of Trump and his staff have caused that optimism to fade. The most recent leg down in equities followed the arrest and extradition to the US of the CFO of a prominent Chinese company that has been long suspected of stealing intellectual property. Just this weekend, the US ambassador to China was summoned to Beijing so that Chinese officials can file a formal complaint about the arrest. This isn’t going to make getting a trade deal done any easier. That said, Trump officials have re-engaged with their Chinese counterparts overnight and both countries do have a significant economic incentive to reach an agreement. We definitely need to pay attention to developments here.
The Fed
Next week, of course, the Fed will be gathering for its final FOMC meeting of the year and investors are anxious to see if the recent volatility in risk assets will cause the Fed to slow down its pace of rate hikes. Right now, the most recent Dot plot which is just a compilation of each Fed member’s expectations for forward rates would suggest a 25-basis point hike at the December meeting and then 3 hikes in 2019. This conflicts with what the market is telling us. Futures indicate basically two more hikes between now and the end of 2019 with odds of a hike next week around 70%. In various forums in recent weeks, Fed officials have themselves offered differing views about the relative strength of the economy and how many more hikes are necessary for this cycle. The language of next week’s FOMC policy decision will get a lot of attention.
Forecasting
Ahead of that, though, we have a lot to wade through this week. From a data standpoint, key releases include the Producer Price Index today, the Consumer Price Index on Wednesday and then Retail Sales on Friday. News headlines should continue driving price action. Trump knows he needs a deal with China to stop the stock market free fall so maybe we are in for some conciliatory tweets even if the reality of a deal remains a stretch. Brexit is back in the news as well, as the UK’s exit from the EU no longer appears to be a foregone conclusion. Treasury yields are starting the week just about a basis point or so higher than where they went out last week. Mortgage-backed securities—the asset that directly impacts rate sheet pricing—has significantly underperformed the move in Treasuries thus far, but they did ok on Friday and modestly outperformed again during yesterday’s session. If Treasuries can stabilize here, it will give mortgages a chance to catch up and then we should see a more meaningful improvement in our rates…just in time for the holidays.
Enjoy this season with your friends and families and let’s finish out the year strong. Have a great week.
Hance Thurston
Head of Capital Markets, Southern Trust Mortgage