Mortgage Market Update – October 29th, 2018
Rates and Global Events
Hello everyone. It has been a few weeks since our last market update, and fortunately, we have seen rates generally move lower between that time and now. You will recall that a lot of positive buzz in the domestic economy helped propel equities—and rates by extension—higher. The news of a tri-party trade agreement between Mexico, Canada, and the US coupled with an extraordinarily robust labor market gave market participants plenty of room for optimism. Q3 GDP estimates have been trending higher as well, with the first read close to 3.5%. However, there was always some concern that higher funding costs associated with higher rates would negatively impact corporate earnings and serve to dampen demand on the part of the consumer as well. We saw some of that concern manifest itself over the last week and a half or so as stocks have lost quite a bit of their recent luster. Over the last month, the S&P is down over 9% and the 10yr yield, which had been trading in the low 3.20s is now about 12 to 15 basis points lower. So this is definitely good news for our business, but I will caution you that we have not enjoyed the full benefit of this move in Treasuries as the instruments that drive rate sheet pricing mortgage-backed securities have tended to underperform given the increased volatility.
Forecasting
Given the upcoming data calendar, I don’t see this trend towards higher volatility reversing any time soon. First up, we have the Fed’s favorite indicator of inflation—the Personal Consumption Expenditure (or PCE) indices out this morning, with Consumer Confidence, Construction Spending, regional Fed surveys, and of course the monthly payrolls report out later this week. Next week’s elections could also prove extremely impactful to price action. Pollsters currently have the House flipping from Republican to Democrat control while most believe the R’s hold on to the Senate. After the 2016 election, however, the reliability of these polls have become increasingly suspect. The initial reaction to a robust blue wave likely has stocks going lower—perhaps significantly so—with rates following suit. For now, rates remain above the multi-decade bull channel so continue to be defensive against another move higher. I still think that we will see a 2-handle on the 10yr before we call this year done. Good luck out there, and have a great week.
Hance Thurston
Head of Capital Markets, Southern Trust Mortgage