Mortgage rates were relatively stable during the week as the bond market traded in somewhat of a choppy, sideways fashion until Friday. For most of the week, traders primarily concerned themselves with an extremely volatile stock market in China with its effects on global trading, and the Federal Reserve’s latest monetary policy decision and statement. Then, on Friday the Bureau of Labor Statistics reported the Employment Cost Index (ECI), a measure of wage and employer-paid benefits inflation, increased far less than expected during the second quarter to ignite a sharp rally in bond prices.
The Employment Cost Index rose just 0.2% in the second quarter when the consensus expectation was for a 0.6% increase. This was the smallest increase in employment costs in 33 years. Year-over-year, the ECI has grown only 2.0%, which conforms to the Federal Reserve’s overall inflation target suggesting real expected compensation growth is flat as a pancake.
Furthermore, growth in compensation and benefits was far weaker in the private sector than in the public sector. Overall compensation in the private sector was flat at 0.0% after a rise of 0.7% in the first quarter, while overall compensation for state and local government employees increased 0.6% during the second quarter after a 0.5% gain in the first quarter. The results of the ECI report encouraged investors to buy bonds, as the dreadful growth in wages and benefits in the private sector could push the Fed into postponing a rate hike until early 2016.
In housing and mortgage news, the Case-Shiller 20-City Index was released showing home prices increased 4.9% in May when analysts had been looking for a slightly stronger showing of 5.6%. Meanwhile, the latest data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 25, 2015 revealed mortgage applications increased 0.8%.
The Refinance Index increased 2.0% from the prior week, while the seasonally adjusted Purchase Index declined 0.1% from a week earlier. Overall, the refinance portion of mortgage activity rose to 50.6% of total applications from 50.3% the previous week. The adjustable-rate mortgage segment of activity dropped to 6.6% of total applications from 7.3% the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance fell to 4.17% from 4.23%, with points increasing to 0.36 from 0.34.
Additionally, the National Association of Realtors released its Pending Home Sales Index for June showing an unexpected decline of 1.8% to 110.3. However, the index was the third highest reading for 2015 and contracts to buy previously owned houses were up 8.2% from a year ago. The consensus forecast had Pending Home Sales rising 1.0% last month. Jennifer Lee, a senior economist at BMO Capital Markets, stated “The June decline is a hiccup. It is important to bear in mind that there is still plenty of fundamental support for the housing market.”
For the week, the FNMA 3.5% coupon bond gained 57.8 basis points to end at $103.84 while the 10-year Treasury yield fell 7.5 basis points to end at 2.19%. Stocks ended the week with the NASDAQ Composite gaining 39.65 points to close at 5,128.28. The Dow Jones Industrial Average added 121.33 points to end at 17,689.86, and the S&P 500 increased 24.19 points to close at 2,103.84.
To date for 2015, and exclusive of any dividends, the NASDAQ Composite has gained 7.65%, the Dow Jones Industrial Average has lost 0.75%, and the S&P 500 has increased 2.14%. The national average 30-year mortgage rate moved to 4.03% from 4.02% while the 15-year mortgage rate increased to 3.23% from 3.21%. The 5/1 ARM mortgage held steady at 3.04%. FHA 30-year rates held steady at 3.75% while Jumbo 30-year rates rose to 3.80% from 3.79%.
Mortgage Rate Forecast with Chart
The FNMA 30-year 3.5% coupon bond ($103.84, +57.8 bp) traded within a 79 basis point range between a weekly intraday high of 103.88 and a weekly intraday low of $103.09 before closing at $103.84 on Friday. The week’s greatest move took place on Friday when the bond powered its way 45 basis points higher to move above overhead resistance at $103.64. Trading was choppy during the week, and after a negative stochastic crossover sell signal on Thursday, the slow stochastic oscillator abruptly reversed direction resulting in a positive stochastic crossover buy signal on Friday to create conflicting signals.
Both signals took place while the slow stochastic oscillator showed the bond was “overbought” and susceptible to a downward reversal. A security can remain “overbought” for a longer than expected period of time. As such, when an “overbought” condition exists, it is a sign to have an extra cautious outlook and be wary of any developing signs of trading weakness. The closest technical support level is now found at $103.64 while overhead resistance is found at the 100-day moving average at $103.94.
Technical signals will take a backseat to economic news with the next major catalyst for both the stock and bond markets arriving at the end of the week when the Labor Department releases the Employment Situation Summary for July on Friday. In addition to the latest number of new jobs created, traders will be paying particular attention to the hourly earnings number after the dismal growth in private sector compensation and benefits shown in the Employment Cost Index report last Friday.
If the job creation and hourly earnings numbers are reported above the consensus forecast, the bond market will sell-off as it raises the prospect for an interest rate hike as soon as September by the Federal Reserve. If the jobs data is below forecast, it lowers the likelihood for an interest rate hike in 2015, and bond market prices could continue to move higher with yields and mortgage rates moving lower.
Chart: FNMA 30-Year 3.5% Coupon Bond
Economic Calendar – for the Week of August 3
The economic calendar expands with a number of potential market-moving reports headlined by the July Employment Situation Summary from the Bureau of Labor Statistics, a unit of the United States Department of Labor. Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.
Road Signs – iPetCompanion lets you play with your pets via telepresence
By Michael Savoie
iPetCompanion have developed telepresence technology that allows you to manipulate toys so you can play with your pets while you’re away. The team has installed the system in hospitals and animal shelters to connect sick kids to homeless pets in need of interaction. Now they are crowdfunding on Kickstarter to bring a consumer version into people’s homes.
This is not new, but it is one of a few products out there designed specifically for play. I’ve previously written about a Microsoft engineer who used Robotics Studio to design DarwinBot, a mobile robot to play fetch with his dog. There are also web based pet feeders, like
iPetCompanion has been doing this for a few years and is installed at several pet shelters across the US. It has actually increased adoptions at these facilities as humans fall in love with these furry creatures and take them home. Stories are written everyday about how technology disconnects us from the real world; this is one where technology allows us to form new connections and potentially in real life.
About the author: Michael is the founder and Chief Robot Wizard at Frostbyte Technologies, a start-up aimed at developing autonomous outdoor mobile robots. He also writes for TelepresenceRobots.Com, because due to all his interests he is constantly trying to be in multiple places at any given time.