MMG WEEKLY – WHAT ARET HEY SAYING THIS WEEK?

MMG Weekly / Vantage Production.blueForecast for the Week

After last week’s quiet economic calendar, this week brings key reports across a wide spectrum of the economy.

  • Economic reports begin on Tuesday with Retail Sales, which will give us a read on consumer spending for April.
  • Look for a double dose of inflation data, with the wholesale-measuring Producer Price Index on Wednesday and the Consumer Price Index on Thursday.
  • Also on Thursday, weekly Initial Jobless Claims will be delivered as usual.
  • Two key manufacturing reports are on tap for Thursday, with May’s readings of the Empire State Index and Philadelphia Fed Index.
  • Thursday brings housing news as well via the National Association of Home Builder’s Housing Market Index. More housing news follows Friday with Housing Starts and Building Permits.
  • Ending the week, the Consumer Sentiment Index will also be reported Friday.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond on which home loan rates are based.

When you see these Bond prices moving higher, it means home loan rates are improving—and when they are moving lower, home loan rates are getting worse.

To go one step further—a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.

As you can see in the chart below, Bonds and home loan rates reached some of their best levels this year. I’ll be watching closely to see if this trend continues.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 9, 2014)

Japanese Candlestick Chart
The Mortgage Market Guide View…

Why Bad News Can Be Good for Home Loan Rates

It’s counterintuitive that negative economic news can actually be good for home loan rates, but there’s a pretty simple explanation, and once you “get it” it makes perfect sense.

First, remember that big money managers in search of higher returns avoid holding onto cash by investing in both Stocks and Bonds.

Second, despite what the financial media often reports, home loan rates are based on the performance of Mortgage Backed Securities—a type of Bond.

Putting these two facts together, it begins to make sense that when the economy is “on fire” and economic reports are on the uptrend, investors tend to put more money into Stocks. That’s because Stocks offer higher returns, even though they are generally more risky.

However, in order to put money into Stocks, investors must remove some of their money from less-risky Bonds. The result is a decreased demand in Bonds causing Bond prices to worsen, and therefore home loan rates to go higher.

On the other hand, when the economy is sluggish and economic reports are negative, money managers tend to take money out of higher-risk Stocks and move it into less-volatile Bonds. As demand for Bonds increase, Bond pricing improves and home loan rates go down.

While it may seem odd that home loan rates improve when economic news is sluggish, it actually makes sense when you look at the bigger picture!

Feel free to pass this info along to your team, clients and colleagues. If you have any questions about how economic news is impacting home loan rates right now, please call or email any time.

Economic Calendar for the Week of May 12 – May 16

Date
ET
Economic Report
For
Estimate
Actual
Prior
Impact
Tue. May 13
08:30
Retail Sales
Apr
NA
1.2%
HIGH
Tue. May 13
08:30
Retail Sales ex-auto
Apr
NA
0.7%
HIGH
Wed. May 14
08:30
Producer Price Index (PPI)
Apr
NA
0.5%
Moderate
Wed. May 14
08:30
Core Producer Price Index (PPI)
Apr
NA
0.2%
Moderate
Thu. May 15
08:30
Empire State Index
May
NA
1.3
Moderate
Thu. May 15
08:30
Core Consumer Price Index (CPI)
Apr
NA
0.2%
HIGH
Thu. May 15
08:30
Consumer Price Index (CPI)
Apr
NA
0.2%
HIGH
Thu. May 15
08:30
Jobless Claims (Initial)
5/10
NA
319K
Moderate
Thu. May 15
10:00
Philadelphia Fed Index
May
NA
16.6
HIGH
Thu. May 15
10:00
Housing Market Index
May
NA
47
Moderate
Fri. May 16
08:30
Housing Starts
Apr
NA
946K
Moderate
Fri. May 16
08:30
Building Permits
Apr
NA
990K
Moderate
Fri. May 16
10:00
Consumer Sentiment Index (UoM)
May
NA
84.1
Moderate

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