Mortgage Rates Back in the Narrow Range Movement

Mortgage rates are moving sideways so far today.  May housing starts and permits did not meet expectations, and April data was revised lower than what was originally reported. All components show declines with both single-family and Multifamily starts. Total completions did rise which adds supply to a thin market, but homes under construction slipped a little bit.  No matter how we look at it, this is disappointing and will be a drag on Q2 GDP. It is yet another weaker than expected measurement. May retail sales, reported on Wednesday, also well below economist’s estimates. We also got the preliminary June U. of Michigan consumer sentiment index which declined to the lowest since November.

Initial reaction was rather subdued but did improve the market a little this morning.  There was not much of a reaction given the weakness, and adding to the reality that regardless of the reasons, are not meeting expectations for growth. No inflation fears and weak data should support the long end of the yield curve. At 11:00AM, we see the 10yr at 2.15% and MBSs are slightly positive. 

The dollar strength or weakness has influence over the US markets, especially bonds. Yesterday, the dollar had a nice improvement (the index +0.51). This morning, the index a little weaker. If the dollar is thought to decline more it is a plus for lower interest rate expectations.

Markets still absorbing the FOMC and Yellen last Wednesday. The Fed is not likely to increase the Federal Funds rate at the September meeting based on the soft economy, but it does appear based on the Fed’s update of its ‘normalization’ plans announced on Wednesday that in September the Fed will begin cutting back support. Presently, the Fed is set to begin unwinding its balance sheet by not reinvesting principal payments, and the plan calls for $4B a month reduction in MBS purchases and $6B cut in Treasury purchases. It is another way the Fed can tighten without increasing the Federal Funds rate. The reduction of MBS purchases will cause MBS markets to adjust the relationships between MBSs and Treasuries; the MBS market is very thin; the Fed has been buying about 30% of MBSs for the last eight years. Although it remains a moving target, and as the Fed says, it’s data dependent, presently markets are leaning to another federal fund increase at the December meeting. Unless there is an increase in growth and inflation that view will change.

While watching my favorite TV show this morning (Squawkbox) - the big news this morning is that Amazon will buy Whole Foods for $13.9B in cash. Stocks of grocers are under pressure, and Jim Cramer on CNBC has been almost apoplectic over it - thought he might have an aneurysm. Kroger stock over this week down 31%.

Less economic data today than yesterday, as I expect mortgage rates to trade in a fairly narrow range heading into the weekend.  The technicals are still holding bullish biases.