US INFLATION PULLS BACK IN MARCH ___ Published Date 5/2/2017 More price declines yesterday in…
MORTGAGE RATES FLAT AS MARKETS AWAIT FED STATEMENT
Published Date 5/3/2017
A flat start this morning in the bond and mortgage markets after improving yesterday. At 7:00 this morning the weekly MBA mortgage applications; the composite index -0.1%, purchase apps +4.0% while refinances declined 5.0% after increasing 7.0% the prior week. Purchase apps have been lower the last two weeks, a nice rebound today. The unadjusted purchase index to a level 5% higher than a year ago, a 4.6 percentage point increase from the prior week. The strong rebound in purchase applications stands in sharp contrast to refinancing, where a 5% decline from the previous week took back gains that came on the back of declining mortgage rates. The refinancing share of mortgage activity fell 2.4% to 41.6%. The increase in purchase apps brings the data in line with existing and new home sales in March and does relieve the view some were holding that housing markets were slowing.
At 8:15 this morning ADP reported April private jobs increased 177K, 7K better than what the consensus was. March jobs were revised lower to 255K from 263K originally reported. The gain was in line, and close to the BLS private jobs estimate at 180K to be reported Friday. There was little initial reaction to the report, but after 20 minutes MBS prices slipped from +5 b to -2 bp.
Not good news for the economic outlook yesterday; April auto sales were weaker than thought, adding more questions about the Trump economic boom that has driven stocks higher here and globally. Q1 advance GDP released last week was the weakest in three years at +0.7%. The initial reaction to the soft Q1 growth was, Q1 has always been weak and some are questioning the way the Commerce Dept. calculates its data. Now, however, an increasing fear that the economic outlook is too high with more economists beginning to re-think their forecasts. Investment managers are tempering their optimism, with 44% saying in a Northern Trust survey taken in late March that they expect the economy to accelerate over the next six months, down from 55% in the previous quarter.
The current sentiment change on growth that is increasing brings the Fed policy decision this afternoon in more focus. There is no rate increase coming today, but currently markets are focusing on an increase in June with 70% odds being bet in the federal funds futures markets that the June FOMC meeting will result in a 0.25% increase in the federal funds rate. In the WSJ this morning, one of my favorite economists, Lacy Hunt, was talking about the slow growth in M2 money supply slowing down. M2 is an indicator of overall demand; it has grown at a below-average annual rate of 5.5% over the three months that ended in mid-April, down from 6.8% in 2016. M2’s pace tends to rise and fall with demand for goods and services. Together with decelerating credit growth, tightening lending standards and a rising fed funds rate, slowing money growth and velocity suggests softer economic growth ahead according to history and Lacy Hunt. “We’re headed for a severe slowdown and the risk of an accident is high,” he said. Hopefully, he is well off the mark, but we agree to appoint; the economy is not likely to grow at the pace investors have bet on. One of the proofs; the stable US long end of the yield curve, 10s and 30s not increasing as we might expect with that glowing economic forecast now cooling somewhat.
At 10:00 April ISM services sector index, expected at 55.8 from 55.2 in March; the index hit at the second best high reading since Oct 2015 at 57.5. The employment component essentially unchanged from March but the new orders index jumped to 63.2 from 58.9, a big increase. The reaction initially wasn’t much, but the better serving sector will help the economic bulls and keep interest rates from improving today. The service sector accounts for about 70% of the economy.
This afternoon the FOMC policy statement at 2:00 pm. No rate increase but we will find out what the Fed is thinking now. Markets, as noted above, are presently believing the Fed will move rates higher at the June meeting (June 13 and 14). I don’t think that it will happen unless there is a sea change in the coming economic data between now and then; and the policy statement regardless of other detail will include the ‘data dependency’ fallback all Fed officials have been saying recently.
Between now and the FOMC statement at 2:00 markets are likely to remain quiet. The low yield on the 10 yr. over the last seven sessions 2.26%, the high 2.36%, a tight range with no significant selling. MBS prices over the last seven sessions in a 40-basis point range. Nothing changing in our technical models, still neutral readings. The 10 yr is coiling, and that usually precedes a larger movement. The general belief is that rates should be increasing with the Fed expected to tighten and the belief the economy will improve. March personal income and spending didn’t meet forecasts on Monday, the April ISM manufacturing index was a little weaker than expected and March core personal consumption expenditures, Yellen’s inflation favorite, up 1.6%, not close to the 2.0% the Fed and the ECB are targeting. And crude oil, usually seen as an indicator of commodity inflation has fallen to five-month lows.
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