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Rates Improve on July FOMC Minutes

| August 18th, 2017 | Comments Off on Rates Improve on July FOMC Minutes

Mortgage interest rates improved slightly on the week on the Fed FOMC Minutes from the July meeting. The minutes called into question whether the Fed will begin tapering its balance sheet in September as well as whether the Fed will increase the Fed Funds rate this year due to continued soft inflation. Economic data, though, was mostly stronger than expected. Economic data stronger than expected included July Retail Sales, July Export Prices, the August Empire State Manufacturing Index, June Business Inventories, the August NAHB Housing Market Index, weekly jobless claims, the August Philadelphia Fed Business Index, and the August University of Michigan Consumer Sentiment Index. The University of Michigan Consumer Sentiment Index reached its highest level since January. Economic data weaker than expected included July Import Prices, July Housing Starts, July Building Permits, and July Industrial Production.

The Dow Jones Industrial Average is currently at 21,693, down over 160 points on the week. The crude oil spot price is currently at $46.85 per barrel, down almost $2 per barrel on the week. The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Tuesday’s FHFA House Price Index, Wednesday’s New Home Sales, Thursday’s Jobless Claims, PMI Composite Flash, and Existing Home Sales, and Friday’s Jackson Hole Economic Policy Symposium and Durable Goods Orders as potential market moving events.


| August 18th, 2017 | Comments Off on MORTGAGE CREDIT NEWS BY LOUIS S. BARNES

Cause and effect this week covered a wide and improbable range.

Perhaps the most important actual, real fact arrived on Monday, before the nation scattered its marbles altogether: the economy is fine. July retail sales jumped .6%, double the forecast, and without any phony boost from auto sales fueled by subprime lending. June retail sales were revised up, and year-over-year sales have risen 4.2%.

Despite that excellent result, by early this morning the 10-year T-note fell below 2.20% for the first time since June, and that the first time since last November. Causes: an overdue fainting spell in the stock market and political chaos. No-point mortgages are approaching 3.875% — not even today’s defenestration of Steve Bannon has relieved political tension and produced a ”relief rally” upward, rates and stocks still down.

Instead of attempting a forecast of political effects on markets (see concluding addendum), take on something simple: the mechanics and market and economic effects of the Fed’s reversal of quantitative easing (RQE) to be announced in September and begin before year-end.

Bill Dudley, president of the New York Fed and proxy for Chair Yellen said on Monday, “We’re probably going to see a balance sheet five years from now that’s probably in the order of $2.5-$3.5 trillion rather than $4.5 Trillion.”

The dreaded double-probably aside, and converting Dudley to workable arithmetic… the Fed is going to unload $1 to $2 trillion of Treasurys and MBS over five years. That would be a range of $17 billion to $35 billion per month. The cumulative size of Treasury and mortgage markets: $25 trillion. Big.

The greatest concern to housing of course is damage to mortgage rates. However, the Fed’s total holdings of MBS are $1.6 trillion; even at the Fed’s outsize number for shrinkage, assuming some balance between Treasury and MBS runoff, the Fed will unload only about half of its MBS holdings over five years, one-half the pace of initial purchase.

Wall Street fright-mongers are already raising the alarm: this will be a shift to “quantitative tightening” of bank reserves and the money supply, and a shock to Treasury and MBS markets. Here follow the reasons to reject that view.

First, the Fed will not sell its holdings. During this whole QE period, since January 2009 whenever a Treasury or MBS which it has bought has matured, the asset extinguished and cash flowed back into the Fed, the Fed has “reinvested” — bought more of the same asset which has matured. Beginning sometime this fall the Fed will trim its reinvestments. As assets mature and cash arrives, the Fed will reinvest only a portion, resulting in a net decline in the size of its balance sheet — but no direct sales of anything.

What portion? Stick with Dudley-math. The Fed’s own communication is awful, describing a “cap” on a drawdown when they mean a floor. Maturities of Treasurys are known — each bond, note, and bill has a maturity date. Thus the Fed can anticipate exactly the amount of Treasury runoff to divide between continuing reinvestment and cash retained in favor of net reduction of Treasurys.

MBS on the other hand are a black art. The blackest of arts on Wall Street is forecasting the rate of prepayment on MBS pools. The mortgages inside MBS prepay 1) when homes sell, 2) when owners refinance, 3) by amortization, and 4) when crazy people send in extra principal. Number three is predictable, the other three… not. The rate of prepayment in Street slang is known as “speed.”

Skip to conclusion: MBS RQE will be self-correcting, offsetting shocks. If rates fall and refis boom, speed increasing, the Fed will keep RQE on net schedule by increasing reinvestment — a floor under runoff. If rates rise, and refis and sales and speed falling, the Fed will have less cash and make fewer reinvestments, but net runoff will be the same.

The other elements of worry: first, when the Fed receives excess cash over reinvestment it will pay down bank reserves which it created when it bought the Treasurys and MBS from banks in the first place. The people today who worry about a tightening effect are the same as those who warned that QE would ignite credit creation and inflation. Oh-for-2. The bloated bank reserves and money supply created since 2009 have been secured in mayonnaise jars under the porches of banks, inert, coming and now going.

The Fed’s purpose in QE was not a traditional reserve/money operation. Bernanke understood quickly that a broken banking system could not create credit no matter how packed with excess reserves. The purpose of QE was direct injection of credit into the economy around a broken banking system. The Fed stopped adding to its balance sheet in 2014 as soon as it was clear that banks could generate credit. Today there is so much cash sloshing in the world (corporate balance sheets!) that business is self-funding its credit needs on net, and not bothering with banks (see minutes of Fed meeting July 26, page 4).

Which leaves the last concern: can markets absorb new MBS and Treasury production while the Fed gradually withdraws as a bidder? Nobody knows for sure, but if the Fed does damage it will reduce or stop RQE. Likelihood? One of the favorites of Wall Street charlatans is to scare the public via zero-sum closed-market boogeymen: more Treasurys and MBS, less Fed, rates must go up.

Not so. At any given moment, buyers and sellers are in balance. If a buyer withdraws, rates may rise a little or a lot depending on the size, depth, breadth, and liquidity of the particular market. The market for US Treasurys is the largest of any market for sovereign IOUs, and the highest quality. The MBS market is smaller, but rich in yield to compensate for unknowable speed of prepayment. The Fed owns only one-quarter of the $6.5 trillion agency MBS market, itself only two-thirds of all US first mortgages outstanding.

Says here that it will take very little increase in yield to attract buyers of other IOUs to the Treasury and MBS markets as the Fed enters slow RQE.

A political addendum follows. Those of tender sensibilities had better skip.

———- ———-

This has been a watershed week: the president’s behavior cannot continue. Not for his full term, nor even many months. Follow the decision tree….

Either he changes, or he goes, or the Republican party will suffer greater damage than any in our history. The odds against change are enormous; he is who he has always been. Odds of confinement and micromanagement by a team of regents are similarly low.

If he goes, he has choices. The ghostwriter of “Art Of The Deal,” Tony Schwartz who spent 18 months in close contact with him, tweeted last night: “Trump’s presidency is effectively over. Would be amazed if he survives till end of the year. More likely resigns by fall, if not sooner.” Schwartz and many others assume that the intent of resignation would be to stop Mueller’s probe, and in exchange for a pardon. It is too soon to know about that; for all of the smoke there may not be actual wrongdoing and discovery for Trump to fear.

The second motivation to resign: to escape a second posse. Republican leadership in Congress is exceptionally hollow, souls sold in exchange for a majority. The Devil is a tricky fellow: Republicans got their majority, but Tea Party radicals are an iron bar stuck in the spokes of action.

This week, Congress still in recess, the Republican leadership finds itself way behind the country, which is a good place to be, if for cowardly and clueless reasons. In defense of the leadership, given a choice between suicide and regicide, better to follow than to lead.

This week, just this week: the CEOs of America’s best and largest corporations have rejected and fled the president. The chiefs of all five branches of military service messaged to their commands a rejection of the president’s statements about Charlottesville — after completely ignoring the president’s order to ban transgender people from military service. in perhaps the strongest telltale, James Murdoch, CEO of 21st Century Fox, parent of Fox News wrote this yesterday: “I can’t even believe I have to write this: standing up to Nazis is essential; there are no good Nazis. Or Klansmen, or terrorists. Democrats, Republicans, and others must all agree on this, and it compromises nothing for them to do so.”

McConnell and Ryan will either be forced to lead a delegation to the White House to say “or else,” or the party will suffer even more. And the nation. Impeachment is unlikely, too awkward and in the absence of an identifiable “high crime.” Assisted resignation is most likely. But if the president refuses, the 25th amendment is available. Its linchpin and trigger man: VP Pence. Killers of kings are later rarely popular, especially if they assume the crown of the dead monarch. It would take real guts for Pence, and we don’t know if he has any. He wants the job but may be fussy about stepping over the body.

Now the good news: markets will soar upon Trump exit. Markets and the economy are at risk until then, not just the Republican party. Non-political godfather of the stock market, Art Cashin on CNN this morning: “If you had more than one resignation… Steve Cohn and Wilbur Ross — I think it would have a very formidable effect — 500 or 1,000 points on the Dow possibly.” Bad guys leaving do not help (see Bannon); the markets fear losing the good-guy regents, presently holding the government together and protecting us from the president.

In the days after Trump exits, markets will make book on president Pence, and Ryan and McConnell and their ability to move forward any useful agenda. But even if they cannot we’ll be in a far better place than today.

Here follows the entire text of the 25th amendment, paragraph four the operative one:

Section 1. In case of the removal of the President from office or of his death or resignation, the Vice President shall become President.

Section 2. Whenever there is a vacancy in the office of the Vice President, the President shall nominate a Vice President who shall take office upon confirmation by a majority vote of both Houses of Congress.

Section 3. Whenever the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that he is unable to discharge the powers and duties of his office, and until he transmits to them a written declaration to the contrary, such powers and duties shall be discharged by the Vice President as Acting President.

Section 4. Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.

Thereafter, when the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that no inability exists, he shall resume the powers and duties of his office unless the Vice President and a majority of either the principal officers of the executive department or of such other body as Congress may by law provide, transmit within four days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office. Thereupon Congress shall decide the issue, assembling within forty-eight hours for that purpose if not in session. If the Congress, within twenty-one days after receipt of the latter written declaration, or, if Congress is not in session, within twenty-one days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his office, the Vice President shall continue to discharge the same as Acting President; otherwise, the President shall resume the powers and duties of his office.

Premier Shield

| August 18th, 2017 | Comments Off on Premier Shield


| August 11th, 2017 | Comments Off on MORTGAGE CREDIT NEWS BY LOUIS S. BARNES

In the absence of useful economic news, begin with a little political-money stuff, then remembrance of the 10th anniversary of the beginning of the credit disaster, the advent of QE, and now its reversal, RQE.

Nobody can handicap the DPRK/Trump engagement. But to say it doesn’t matter… bull byproduct. Ray Dalio, billionaire founder and top dog of Bridgewater, the world’s largest hedge fund, who very rarely comments on investments or politics: “The emerging risks appear more political than economic, which makes them especially challenging to price in.” But then he described them: “Two confrontational, nationalistic, and militaristic leaders playing chicken with each other” and “the odds of Congress failing to raise the debt ceiling rising.” Dalio then advised all to expand their holdings of gold.

The DPRK/tweet effect has been clear in real time, the stock market cracking, bond yields falling close to the lows of the last year, and gold rising.

The biggest political event of the week got lost in DPRK noise. Trump’s assault on McConnell makes more dangerous the debt-limit vote in September. Be as even-handed as possible: each political party has a road-rage wing — angry and irrational with its own set of fantasy-facts. The Republicans hold the congressional majority, but their minority ragers demand accommodation. The recurrent debt-limit issues in the House finally forced John Boehner to leave in exasperation, replaced by empty-suit accommodator Paul Ryan. Now Republicans control the Senate as well, and McConnell is as boxed as Boehner.

McConnell will need as many Democrats to pass the debt limit as Republicans. The ragers in each party will demand hostages: mutually exclusive riders to the limit bill.

The security team is obviously well-along in an effort to encapsulate the president. There is no comparable team or effort in domestic affairs. The Republican right (just like the Democratic “progressives”) is self-enraptured, unable to process that two-thirds of the nation is opposed. The harder the ragers in each party try, the more opposition rises.

There is a lot riding on McConnell’s skill, head-and-shoulders above Ryan’s. If the debt limit increase fails, Dalio again: “…Leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system.”

Now look back on a superb reaction to crisis by US leadership. Yes, the Fed, SEC, FDIC, Comptroller, Treasury all had missed the rise of the crisis, and it took 18 months after the explosion to fully react, but react we did and with extraordinary success.

The greatest bank run of all time began in late July 2007 — a wholesale run, banks on banks, not old folks in lines out front. The Fed reacted, injecting cash and trimming the cost of money, but did not perceive the systemic meltdown underway. From a Fed funds crest at 5.25% in July 2007, Bernanke had cut to 4.25% by year-end (the onset of recession by retrospective technical measure). In January 2008 he saw the greater magnitude of trouble, and in panicked steps by February 6 cut to 3.00%.

Bernanke’s book on the Great Depression identifies the key marker of any economic disaster: yields on ultra-safe Treasurys fall and fall, while yields on everything else rise, markets locking up altogether.

In July 2007, typical 30-fixed mortgages were 6.70%, and the benchmark 10-year Treasury traded at 5.16% — the spread of 1.50% a reasonable historical one. By October mortgages were down to 6.38%, but Treasurys were falling faster, to 4.68%, spread opening to 1.70%. In March of 2008 Bear Stearns failed in a Fed-assisted collapse, briefly reassuring to markets thinking a firewall might be in place. But then 10s nosedived to 3.34%, safety-buyers in mass, mortgages to 5.97%, the spread now blown open to 2.63%.

The Fed cut its rate in May to 2.00%. In false security, 10s by June 2009 rose to 4.25%, but so did mortgages, up to 6.32%, and typical loan fees had doubled. By late summer most of us in markets felt the ground moving again: Treasurys in August fell again to 3.79%, but mortgages rose to 6.48%, the spread opening to 2.70%, mortgage markets closing altogether, housing collapsing.

Then heaven-help-us September… the Treasury seized Fannie and Freddie on the 6th, Lehman took bankruptcy on the 15th, and the Fed set another firewall, over $100 billion in guarantees to AIG. 10s fell to 3.47%, mortgages at last down to 6.04%, but the spread still oceanic. TARP passed on October 3, 10s up to 3.99% in hope of a lasting firewall. Not: by November 24, 10s were down to 3.35%, mortgages 6.09% but nobody applying.

At Thanksgiving… salvation. Bernanke announced that the Fed would buy long-term Treasurys and mortgages, the Fed for the first time ahead of the curve of disaster. 10s kerplunked to 2.08% in two weeks. Mortgages took longer, to 5.29% in December — spread 3.20%!! — then down to 5.00% and below. As fear faded and QE took hold, 10s by summer rose back to 3.91%, and the spread down toward 2.00%, mortgage markets functioning.

Skip forward ten years. It’s till easy to find idiots and crazies who think the Fed should have let everything go — the “Austrian” creationists and right-side ragers.

The Fed has since it stopped QE buying in 2014 owned a surplus $1 trillion in Treasurys, but has already bled off the long-term ones. In the immense global market for Treasuries ($14.4 trillion), letting these extras run off is likely not a big deal.

But the Fed also owns $1.6 trillion in MBS, one-quarter of that market. The Fed will confirm in September the beginning of RQE, the monthly rundown at the outset to be $4 billion. In a time of tepid borrower demand, hence few new MBS, and huge global demand for high-quality IOUs, nothing to worry about. The Fed does intend to increase the runoff to $20 billion monthly, $240 billion annually, 15% of its QE holding now, and that might push rates up a bit.

Of all the things to worry about today, don’t add RQE to the list. The Fed and all in markets will watch the Treasury/MBS spread, and if it begins damaging widening, then the Fed will stop or slow the rundown.
If you’re worried today, look back at that 2007-2009 story and consider what we can do if only one man in the whole government is on his “A” game.

———- ———-

US 10-year T-note in the last year. The recent downtrend partly reflects inflation failing to rise, but don’t underestimate the political influence:

The NFIB’s monthly survey confirms its post-election pattern. NFIB members are heavily right-side Republican. After the election its optimism survey exploded upward as never before in its 45-year survey history. And without any economic foundation: the second chart, by components shows that nothing has changed in actual business, as in every actual-condition NFIB survey since:

The next charts illustrate the trip down memory lane in the copy above, 2007-2009. First the Fed funds rate, then the 10-year, then mortgages (Freddie Mac’s survey).

The Impact of a Market Without the Libor Index

| August 11th, 2017 | Comments Off on The Impact of a Market Without the Libor Index

The Libor index will be phased out over the next 5 years after allegations surfaced of bankers manipulating it. This will have the largest impact on adjustable rate mortgage loans (ARMs).

Our very own Lou Barnes had this to say on the subject: “In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be and that’s why it’s important.”

ARMs currently account for over 13% of the market, $1.3 trillion in outstanding mortgages, and many expect those number to increase if interest rates climb higher. If the Libor index is not available, most ARM contracts allow the investor to select a new index.

While that could seem troubling to have a slew of ARMs out there, all adjusting to different indexes, that doesn’t appear to be what the industry wants. Fannie and Freddie are both monitoring the situation closely and a survey of industry professionals shows they would prefer a mandate from regulators.

Investors are also on board with uniformity. “They [investors] don’t want to deal with mortgage pools where the underlying loans react differently to Libor’s disappearance”, Mr. Barnes added.

Whatever comes out of this, you can rest assured that we will keep you appraised of any changes and if you have any concerned clients currently with an ARM, please reach out and we will see how we can help.

Rates Flat on Soft Inflation Data

| August 11th, 2017 | Comments Off on Rates Flat on Soft Inflation Data

Mortgage interest rates were mostly flat on the week as inflation data was weaker than expected. The July Consumer Price Index (CPI) was up only 0.1% on expectations that it would be up 0.2%. Year over year, CPI is up just 1.7%, below the Fed’s 2% target. The July Producer Price Index (PPI) was down 0.1% on expectations that it would be up 0.1%. Year over year, PPI is up 1.9%. The softer inflation data may call into question the Fed’s tapering of its balance sheet starting in September. Other economic data was mixed. Economic data stronger than expected included the June JOLTS Job Openings, the first look at Q2 Productivity, and June Wholesale Inventories. Economic data weaker than expected included June Consumer Credit, the first look at Q2 Unit Labor Costs, and weekly jobless claims. The Treasury auctioned $62 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand. Geopolitical tensions have increased with North Korea which has supported the bond market.

The Dow Jones Industrial Average is currently at 21,872, down over 200 points on the week. The crude oil spot price is currently at $48.21 per barrel, down over $1 per barrel on the week. The Dollar weakened versus the Yen and Euro on the week.

Next week look toward Tuesday’s Retail Sales, Empire State Manufacturing Survey, Import and Export Prices, Business Inventories, and Housing Market Index, Wednesday’s Housing Starts and FOMC Minutes, Thursday’s Jobless Claims, Philadelphia Fed Business Outlook Survey, and Industrial Production, and Friday’s Consumer Sentiment Index as potential market moving events.

Rates Improve Slightly Despite July Jobs Report

| August 4th, 2017 | Comments Off on Rates Improve Slightly Despite July Jobs Report

Mortgage interest rates improved slightly on the week despite today’s stronger than expected employment report for July. July Non-Farm Jobs were up 209k on expectations that they would be up 180k. July Private Jobs were up 205k on expectations that they would be up 175k. The unemployment rate remained at 4.3% as expected and Average Hourly Earnings increased 0.3% as expected. The stronger than expected jobs report makes it more likely that the Fed will begin reducing its balance sheet in September by not reinvesting principal payments. Other data was mixed. Economic data stronger than expected included June NAR Pending Home Sales, the July ISM Manufacturing Index, July ADP Private Jobs, weekly jobless claims, June Factory Orders, and the June U.S. Trade Deficit. Economic data weaker than expected included the July Chicago Purchasing Managers Index, June Personal Income, June Construction Spending, July Auto and Truck Sales, and the July ISM Services Sector Index. The Bank of England kept interest rates low and cut its forecast for growth and wages.

The Dow Jones Industrial Average is currently at 22,042, up over 200 points on the week. The crude oil spot price is currently at $49.23 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Monday’s Consumer Credit, Tuesday’s NFIB Small Business Optimism Index, Wednesday’s Wholesale Trade, Thursday’s Jobless Claims and Producer Price Index (PPI), and Friday’s Consumer Price Index (CPI) as potential market moving events.


| August 4th, 2017 | Comments Off on MORTGAGE CREDIT NEWS BY LOUIS S. BARNES

This week’s news is mostly a tale of misinformation. But first, some reliable data.

July payrolls released this morning grew by 209,000, enough to stop cold a decline in mortgage and other long-term rates. Also roughly double the monthly gain which would stabilize the unemployment rate at today’s 4.3% — either stop hiring, or add more people to the work force, or the rate of unemployment will continue to fall, presumably below zero, and with who-knows-what consequences for wages and inflation. The payroll data also showed average hourly earnings increasing just as they have been, 2.5% year-over-year.

The twin ISM surveys of purchasing managers have been excellent predictors of the overall economy. The July figures: manufacturing cooled slightly from red-hot, to 56.3 from 57.8, and the service sector more so, to 53.9 from 56.9 but healthy and consistent with GDP growing a bit above the Fed’s 2% estimate.

Trailing data from June were not quite so bright, and Q2 GDP may be revised down a little. Construction spending fell 1.3% in June, although still up 1.6% year-over-year. Personal income and spending were statistically unchanged, and a Fed-favorite inflation measure continued to tail, “core PCE” up only .1% in the month, year over year 1.4%.

Now the entertainment. Begin in a kindly way with the poor devils in markets and media who are talking about a “falling dollar” as though it’s important. Currencies are one of the very few financial creatures which trade only in relation to each other. The dollar has fallen versus the euro, from $1.05/euro in the last two years to $1.18 early this week. The decline has been caused by six months of Eurozone GDP growth higher than in the US (2.3% annualized), and anticipation of the ECB’s taper of emergency ease. Three years ago the euro was closer to long-term equilibrium at $1.40, which begs the question, rising to $1.18, who is still weak?

Another pattern: the dollar has fallen since last winter because the Fed looks less aggressive now than then. Higher rates expected here, global money flows here; lower and  flows out. Last: The WSJ dollar index is exactly the same today as it was one year ago (86.37 today vs. 86.86).

Shift to another market: stocks. “New record high” is the recent the daily chatter, and the silly thing really has gained 12% in the last year. I am personally grateful, and up is better than down. But I don’t know anyone with a solid theory, except that corporate earnings are good, and US multi-nationals are well-managed and very attractive. We do not send secret police to drag away the CEOs of major corporations who have violated Party policy by borrowing too many yuan to invest overseas to escape from the Party.

The most entertaining stock market analysis (and unintended humor) I’ve seen this week: Jeremy Grantham’s GMO Quarterly Letter. He says that stock investors and markets have not behaved the way he knows they should behave.

The Fed, oh my. Vice Chair Stanley Fischer gave an important speech on Monday which addressed the Fed’s leading challenge: “The Low Level of Global Real Interest Rates.” Are they low, or new normal? Should they rise, will they rise, or might we have to push them? Or will recovering economies and employment and wages reintroduce inflation and do the rate-lifting? Why are they so low, so persistently so, and all over the world at the same time?

Fischer is brilliant, arguably the most-experienced central banker ever, and has always demonstrated fine judgment. His speech is thorough, carefully thought-out, well-presented, and… no answers. It is very much worth reading, as it illustrates Yellen’s problem: do we pre-empt a potentially overheating job market, or continue imperceptible tightening, or stop?

It may not be Yellen’s problem for long. Speculation has ex-Goldman Gary Cohn, presently Director of the National Economic Council in the lead as her successor. He would be far better than several others, but is still questionable. This morning Cohn was the designated White House bugler taking credit for the excellent job numbers (all administrations do that). But he continued to speak, auditioning for the Fed job: big-talk determination to ramp GDP growth to 3% — which nobody knows how to do. His boss has indicated preference for a “low interest rate” Fed chair, common to all presidents, not just to real estate developers.

Last on the Fed front, 91-year-old Alan Greenspan this week gave one of his standard Tales From The Crypt interviews: “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise. We are moving into a… stagflation not seen since the 1970s.”

With all respect due to the Fed chair who allowed the worst credit disaster of all time, three things: first, if long-term rates rise suddenly, we will have a recession and then they will fall. Second: if you have evidence of stagflation — any ‘flation of any kind — tell us where we can go to see it. Third, please never speak in public without first apologizing, and then conclude by apologizing.

———- ———-

The US 10-year T-note in the last year. For a while this week it looked as though it might make a run at the 2.15% bottom in June, but the payroll numbers ended that:

The US 2-year T-note has been unmoved by everything, essentially the same Fed forecast since mid-June: don’t bother us until the Fed begins its balance sheet bleed in September:

The Atlanta Fed has posted its first tentative hint for Q3, a burst to 3.7% annualized growth. That likely won’t last, but the Tracker is the best week-to-week GDP forecaster we’ve ever had.

The ECRI is dead-center Goldilocks:

What Impacts Mortgage Rates?

| August 4th, 2017 | Comments Off on What Impacts Mortgage Rates?


It’s the middle of summer and the market remains strong. Interest rates have been holding in the low 4s and, as you know, the strong seller’s market continues.

The Federal Reserve has increased the Prime Rate (Fed Funds Rate +3%) 4 times in the last year and a half. These have been the first changes to the Prime Rate that we have seen in nearly ten years so it can naturally lead to a lot of confusion. I often get calls from clients looking to buy a home concerned of how these changes will impact mortgage rates and their purchasing power.

While it may seem logical that increasing the Prime Rate will cause mortgage interest rates to be higher, there isn’t necessarily a direct correlation. Below outlines the impact from changes to the Prime Rate and the major causes of mortgage rate fluctuations.

Changes to the Prime Rate impact:

  • Credit cards
  • Student loan debt
  • Rates for home equity lines of credit

Mortgage interest rates are impacted by:

  • Inflation
  • Economic growth
  • The Bond Market

While economic growth has been strong recently with second-quarter GDP up 2.6%, inflation has remained low and US Treasury rates are higher than overseas treasuries causing money to flow into our bond market. This all has led to 30-year mortgage rates holding around 4%.

Rates Increase Slightly on Mixed Economic Data

| July 28th, 2017 | Comments Off on Rates Increase Slightly on Mixed Economic Data

Mortgage interest rates increased slightly on the week on mixed economic data. Economic data stronger than expected included the July Consumer Confidence Index, June Durable Goods Orders, the June U.S. Trade Deficit, and the University of Michigan Consumer Sentiment Index. Economic data weaker than expected included June Existing Home Sales, the May FHFA House Price Index, the May Case Shiller Home Price Index, June New Home Sales, weekly jobless claims, the Q2 price index, and the Q2 employment cost index. The first look at Q2 GDP was in line with expectations, up 2.6%. As expected, the Fed left the Fed Funds rate unchanged after its FOMC meeting. The Fed indicated that inflation is unlikely to reach its 2.0% target for the medium term. The Treasury auctioned $88 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes, which were met with strong demand.

The Dow Jones Industrial Average is currently at 21,780, up about 200 points on the week. The crude oil spot price is currently at $49.69 per barrel, up over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.

Next week look toward Monday’s Chicago Purchasing Managers Index and Pending Home Sales Index, Tuesday’s Personal Income and Outlays, ISM Manufacturing Index, and Construction Spending, Wednesday’s ADP Employment Report, Thursday’s Jobless Claims, Factory Orders, and ISM Services Sector Index, and Friday’s employment report for July and International Trade as potential market moving events.