On target inflation data and strong demand for the longer-term Treasury auctions were favorable for mortgage rates this week. The other major economic reports contained few surprises. As a result, mortgage rates ended the week lower.

In recent weeks, the primary influence for mortgage rates has shifted from global events in Japan and the Middle East to the outlook for inflation. Last week’s rate hikes in Europe and China to fight inflation raised concerns that the Federal Reserve was falling behind with its lack of tightening, and mortgage rates moved higher. This week’s tame inflation data eased those concerns, however, and mortgage rates improved. The March Consumer Price Index (CPI) rose 0.5% from February, matching the consensus forecast, and was 2.7% higher than one year ago. Core CPI, which excludes food and energy, increased at a low 1.2% annual rate, which was a little lower than expected.

Rising commodity prices have focused attention on the distinction between overall inflation levels and core inflation levels. Core inflation excludes the volatile food and energy components, so it is often viewed as a better indicator of short-term inflation trends by economists and Fed officials. While consumers certainly struggle with higher gas prices, longer-term inflation trends generally are more influenced by other factors such as wages and housing costs, which recently have been increasing very slowly. In short, stronger than expected demand for commodities and violence in the Middle East have pushed energy prices significantly higher, but Fed officials forecast that this represents a temporary increase in overall inflation levels. Commodity prices are not expected to climb at this pace indefinitely. If food and energy prices stabilize, then the gap between overall and core inflation levels will likely shrink.

Also Notable:

• The Beige Book reported that economic activity “generally continued to improve”
• Capacity Utilization rose to the highest level since August 2008
• The sovereign debt of Ireland was downgraded again
• Gold prices reached a record high above $1,480 per ounce

Week Ahead

Next week will be shortened by a holiday and will be a light week for economic data. Housing Starts will be released on Tuesday. Existing Home Sales will come out on Wednesday. Philly Fed and Leading Indicators are scheduled for Thursday. Mortgage markets will close early on Thursday and will be closed on Friday in observance of Good Friday.

The week of April 4^th – 8^th has a quiet week when it come to economic reports, though news from Japan and the Middle East may keep the market volatile.  With the job report coming in lower on unemployment and flat on earnings, inflation is the primary concern both around the world and in the U.S., especially with the current monetary policy.

REMEMBER: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates to improve, while strong economic news normally has the opposite result.

MARKET COMMENTS:

Mortgage Backed Securities are up +22 bps from yesterday’s close (4.5% coupon now @ 101.91) and the Stock Market is up +20.13 at 12,396.85 this morning. No economic reports today. Oil is $108.11 per barrel and Gold is $1,433.20 per ounce.

With no major developments in Japan or the Middle East and little economic data on the schedule, mortgage markets had one of their quietest weeks of the year. The only significant market moving news was an unexpected announcement from the Treasury on Monday, which pushed mortgage rates a little higher. For the rest of the week, mortgage rates barely changed.

The Treasury announced on Monday that it will begin selling its remaining $142 billion in agency-guaranteed mortgage-backed securities (MBS) holdings. Beginning this month, the Treasury plans to sell up to $10 billion per month, as they wind down the emergency programs put in place in 2008 during the financial crisis. The expected increase in future supply pushed MBS prices lower. Mortgage rates, which are largely based on MBS prices, moved higher. The big question now is what the Federal Reserve plans to do with its larger $944 billion MBS portfolio. A similar announcement from the Fed would have a much larger negative effect on mortgage rates.

The housing sector data released this week was weaker than expected. February Existing Home Sales fell 10% from January. The inventory of unsold existing homes rose to an 8.6-month supply from a 7.5-month supply in January. Distressed sales accounted for 39% of all sales. Median existing home prices dropped 5% to the lowest level since April 2002. February New Home Sales fell 17%. As a result of price declines and continued low mortgage rates, home affordability is at the most favorable level in years, according to data from both the NAR and the NAHB.

The meeting will be held January 25-26. MoneyRate’s Federal Reserve Update shares this:

The Federal Reserve policy-making committee, the FOMC, sets interest-rate policy and releases officials statements that chart the course for U.S. monetary policy. At the FOMC’s last meeting, the target range for the federal funds rate was kept at between 0 percent to 0.25 percent. In addition, the discount rate was kept at 0.75 percent.

There has been some internal debate at the Fed about raising the discount rate to 1.25 percent to maintain the traditional one percentage point spread over the fed funds rate. If this happens, consumers may be largely unaffected because the prime rate will likely remain at 3.25 percent. But it will be viewed as a precursor to a Fed rate hike.

Thank you to Stuart Brown of The Valley Mortgage Group for the alert about this upcoming meeting.

Stuart Brown
Sr. Loan Officer Team Leader
Valley Mortgage Group
(503) 538-1072
heystuartbrown@gmail.com