MIG Market Watch, August 17th, 2020
MARKET COMMENT Mortgage bond prices finished the week sharply lower which put upward pressure on rates. Producer prices rose 0.6% vs the expected 0.3% increase. The core, which excludes volatile food and energy prices, rose 0.5% vs the expected 0.1% increase. The inflation data on the consumer side basically mirrored the data from the producer side. CPI rose 0.6% vs the expected 0.3% increase. The core rose 0.6% vs 0.2%. Inflation, real or perceived, erodes the value of fixed income investments such as mortgage backed securities. Weekly jobless claims were 963K vs the expected 1.15M. Retail sales were a weaker than expected +1.2% vs +1.8%. Productivity was 7.3% vs 3.5%. Industrial production rose 3.1% vs 3%. Capacity use was 70.6% vs 70.2%. Consumer sentiment was 72.8 vs 70.5. Mortgage interest rates finished the week worse by approximately 1/4 to 3/8 of a discount point.
LOOKING AHEAD
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
| NAHB Housing Index | Monday, Aug. 17, 10:00 am, et | 60 | Moderately Important. A measure of single-family housing. Weakness may lead to lower mortgage rates. |
| Housing Starts | Tuesday, Aug. 18, 8:30 am, et | 1.23M | Important. A measure of housing sector strength. Weakness may lead to lower rates. |
| 20Y Treasury Bond Auction | Wednesday, Aug. 19, 1:15 pm, et | None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Weekly Jobless Claims | Thursday, Aug. 20, 8:30 am, et | 1.1M | Important. An indication of employment. Higher claims may result in lower rates. |
| Philadelphia Fed Survey | Thursday, Aug. 20, 8:30 am, et | 21 | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. |
| Leading Economic Indicators | Thursday, Aug. 20, 10:00 am, et | Up 1.1% | Important. An indication of future economic activity. A smaller increase may lead to lower rates. |
| 30-year Treasury TIPS Auction | Thursday, Aug. 20, 1:15 pm, et | None | Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates. |
| Existing Home Sales | Friday, Aug. 21, 10:00 am, et | 5.1M | Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
RATE SPIKE Mortgage interest rates rose recently with higher than expected inflation readings. Both producer and consumer inflation data showed spikes last week. The rate increases were a bit of a shock considering how calm the mortgage-backed securities mark has been the past few months. The Fed has made a concerted effort to keep things stable with billion-dollar MBS purchases daily. Rates had pushed lower gradually over time. That pattern changed and is an important lesson for everyone. There are no certainties when attempting to predict the future of mortgage interest rates. The Fed is clear that they want to keep rates low but also are clear that they will adjust policy and MBS buying as data dictates.
Analysts do not expect a large spike in rates inthe near term. However, if future data shows inflationary pressures, we could see spikes here and there. With that in mind timing is essential.
The great news is that rates remain near historic lows today despite the recent volatility. Now is a great time to take advantage of these favorable levels.
