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Market Matters, October 14, 2017

By Oscar Busch

Mortgage and Lending with Brand Lending Company NMLS# 1326698

October 14, 2017 09:41 AM

MBA mortgage applications for the week of October 6th fell by 2.1%, following a .4% decline in the prior week. While refinance apps dropped by 4.2%, purchase apps only fell modestly, down .1%. Looking at the refi index, this is now the fourth straight week of declines, while the last weekly increase was an 8.9% rise back in the week ended September 8th. If we look at the 10yr during that week, we touched a new intraday low of 2.01%. Looking at the purchase index, it is now 7% higher than a year ago in the same week.

To recap Wednesday’s FOMC Minutes release, it is evident that there is definitely a “divided” feeling amongst the group. Most of the difference of opinion focuses on the nature of inflation weakness, as well as the levels of data that will be needed before continuing the Fed’s gradual pace of tightening. Overall, the largest group, although not a majority, seems comfortable with a December rate move. However, there is still concern among many that it’s not just temporary factors that could be affecting the data and could possibly affect the overall pace. All in all, the release pretty much came and went and was a non-event for the markets.

PPI for September came in hotter than expected, up .4% on both the headline and core. Expectations today were for a .2% increase, so the numbers were better than markets anticipated. Looking at the year-over-year rate, we now see an increase to 2.6% on the headline, and up to 2.2% on the core (ex-food and energy). Diving into some details, goods prices were up .7% with food prices overly flat and energy prices up 3.4%, primarily off a 10.9% spike in gasoline. Goods prices ex-food and energy rose by .3%. As the BLS noted, “higher energy prices were likely the result of reduced refining capacity in the Gulf Coast area due to Hurricane Harvey.” Looking at CPI, the headline number rose by .5%, bringing the year over year rate to 2.2%. This print was slightly below expectations of an increase of .6% month over month and an annualized 2.3%. Looking at the core, we see a minimal .1% increase, bringing the year-over-year number now to 1.7%. The core results also missed market expectations by .1%. Now that we have seen weaker inflation data, this will further add to the doubts on the need to hike rates. The odds of a December hike were at 77% before the CPI data hit and are now likely to drop after Friday’s results.

Retail Sales rose 1.6% in September, now the biggest monthly increase since March 2015 (+1.9%). Ex-autos, sales rose 1% and well beyond the expectations of a .3% gain. Sales at motor vehicle and parts dealers jumped 3.6%, while gas station receipts rose 5.8%, their largest increase in over 4.5 years. This is likely to due to higher prices at the pump than higher consumption rates, so we are bound to see a decline come October. Food and beverage sales rose .8%, their largest increase in 16 months. Overall, a fairly strong sales report for September.

The 10yr note has been hovering around the bottom-end of the recent trading range from ~2.31-2.42% during the past week or so, keeping interest rates stable. After some softer CPI data on Friday, we saw a trade below resistance at 2.31% and a close there would be very bullish for interest rates as we head into the new week. If we can put in multiple closing marks below 2.31% early next week, we should see a new trading range start to build, ~2.18-2.31%. For now, the market has given us a few days of better pricing and rates, and until we see that new range develop, it’s probably a good idea to take advantage of current levels and lock in some loans!

Oscar Busch