What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.00 MBS) lost -5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
We were trapped in a very narrow technical range, squeezed in between our 50 day and 100 day moving averages. We did have a lot of speeches by Federal Reserve members and they all certainly leave the door open for a rate hike in June/July but the bond market was effectively “on hold” until next week’s jobs data.
Housing: Pending Home Sales for April were much higher than expected with a nice jump of 5.1% when market only anticipated a 0.6% MOM gain. YOY, it is up 4.6% which is a big increase over the last reading of 1.4%.
New Home Sales surprised to the upside by jumping 16.6% on a MOM basis, hitting 619K units vs forecasts of 523K. The median price increased 7.8% to $321,100 which tells you that they are not building for the first time home buyer segment where we have huge inventory shortages.
Manufacturing: April Durable Goods were much higher than expected (3.4% vs est of 0.4%). Now, we have seen huge swings in that headline numbers due to air craft orders, etc. So, lets strip that out and look at Durable Goods ex-Transports and it increased by 0.4% vs est of 0.3%, plus March was revised from -0.2% to +0.1%. Overall, a very robust report but there was an area of weakness as the Core Capital Goods dropped -0.8% and marks the third straight month of declines in that component of this index.
The Talking Fed:
St. Louis Fed President James Bullard stressed that the labor markets are relatively tight and may put upward pressure on inflation. (note: this is why we focus so much on Average Hourly Wages).
Philly Fed President Patrick Harker told the Philadelphia Bond Club that “There will likely be two or perhaps even three rate hikes over the course of the year,” which follows the big wave of Talking Feds pointing to a June/July Rate Hike.
Dallas Fed President Robert Kaplan was also on board with two rate hikes this year: “If economic data keeps going the way it is, I’ve said I will advocate for an increase in the near future,” and “That may not be June or July, My approach is take one meeting at a time.” He also mentioned that a “Brexit” could be a factor at this June’s meeting.
S.F. Fed President John Williams said that the Federal Reserve is on track to hike interest rates in June or July despite risks such as a “Brexit” vote, and will continue with even more hikes next year given U.S. economic strength.
Fed Reserve Chair Janet Yellen said that the economy has picked up from the slow pace of 4th and 1st QTRs and that she expects that both the labor market will continue to tighten and the economy to grow at the pace that it has been so far in 2nd QTR at the least. And if that is the case, then the Fed will be ready to act in the “coming months” however it is contingent on the data.