Mortgage Rates Slightly Higher Following Postive Data Reports

Mortgage rates are slightly higher this morning as we see that the mortgage bonds are retreating a bit from yesterday’s upward movement.  Even before the data was released this morning, both the bond and mortgage markets were under pressure.  One of those reasons is that the banks are now having to face higher borrowing costs after the Fed increased the federal funds rate 0.25% yesterday and bank prime increased to 4.50% from 4.25%. At 11:00AM, the 10yr remains tethered in its narrow long-lasting range and keeping mortgage rates generally unchanged for almost three months now.

We saw the data was much stronger than forecasts when it came out. November retail sales were expected up 0.3%, sales increased 0.8%.  October retail sales were revised from +0.2% to +0.5%, as most major components outside of autos show gains including a 2.5% jump in non-store sales and unusual strength in e-commerce. Electronics & appliances appear to be early holiday favorites with these stores reporting a 2.1% jump on top of a 1.2% rise in October.

November import prices came in as expected, but the November export prices beat the forecast. Weekly jobless claims even beat the estimates as it declined to 225K - even the Puerto Rico claims did not impact the totals as jobs continue to increase. If this is not full employment, not sure what the definition is. Until now, in history at 4.0% unemployment was considered full economic employment. Now Janet Yellen and the FOMC are expecting more job gains… hmmm?  If that occurs, wages will spike as job competition heats up even more. The last report that did come out did show October business inventories as estimated -0.1%, the second time this year we have seen such a decline.

Budget director Mick Mulvaney said today he expects a completed tax bill vote by next Tuesday or Wednesday. He made the comment on CNBC this morning. There is no finalized version yet, but most of the key differences between the House and Senate appear to have been worked out. No Democrat will vote for it in the House or Senate, but that is expected. No Republican voted for Obamacare. It amazes me to see two political parties so far apart on everything.  Next year, we will see a fight in the elections.

The ECB increased its economic growth forecast to 2.3%, but stuck to its pledge to provide stimulus for as long as needed, predicting inflation would remain below target into 2020. The central bank kept its interest rates unchanged.

Overall, nothing has changed as what we saw yesterday with the 10yr hitting 2.42% and closing at 2.35% - this morning it has settled in its comfort range of 2.30% to 2.40%. As I have stated before, technically, as long as the ranges stay intact, the bond and mortgage markets can best be described as neutral, neither bullish nor bearish. Fundamentally, inflation is not increasing, and yesterday the Fed’s own data suggested inflation is not going to increase much in 2018, from 1.7% in 2017 to 1.9% in 2018 and not until 2019 increasing to 2.0%. Rates will remain stagnant with the only change is the fees charged to get those rates quoted.