Mortgage rates edged lower on Tuesday, as pricing on U.S. government bonds improved and demand for mortgage-backed securities (MBS), which most directly impact interest rate movement, increased as well. As MBS moves higher, mortgage interest rates tend to move lower, and that was the case yesterday. This is a nice start of the holiday-shortened week for mortgage rates, as they managed to erase some of the losses they experienced late last week, when rates ticked up. The average lender is now quoting the benchmark 30-year fixed mortgage rate at 3.875%, while some of the more agressive lenders are offering the same type of loan at a rate of 3.75%.
In the secondary market, the yield on the benchmark 10-year treasury note fell to 2.06% from the previous 2.12% during Tuesday’s trading session, which marks a 6 basis points decline. The long-term 30-year treasury bond finished the trading day at a lower yield as well at 2.89%. A day earlier this type of treasury note was hovering at 2.94%.
This morning MBS prices are jumping, following the release of some tepid domestic economic data. September’s retail sales data came out well below expectations (more on that later), and this has a downward pressure on current mortgage rates.
Two pieces of first-tier domestic economic data got released today, in the form of September’s retail sales data and a fresh report on Producer Price Index. The Commerce Department reported Wednesday, that retail sales rose 0.1% in September, following August’s flat reading. Economists had projected an increase of 0.2% for last month’s retail sales data. Core retail sales, which excludes automobile sales, were down by 0.3% in September versus the expectation of a 0.1% decline. Now, these are not very strong figures, and certainly not strong enough that would support a rate hike this year, according to experts.
A key metric of producer price inflation declined in September for the first time in five months, according to a report released by the Commerce Department earlier today. The Producer Price Index for September missed expectations big time, showing a seasonally adjusted 0.5% decline compared to expectation of a 0.2% decrease. The index was down 1.1% year-over-year compared to the forecast for a fall of 0.7%. This marks the biggest drop for the PPI since January. Core producer prices eased 0.3% last month. The consensus expectation was for a gain of 0.1%. The core PPI was up 0.8% year-over-year, but it’s still below economists’ forecasts, which had projected a 1.2% increase.
On the other hand, the Federal Reserve released its latest Beige Book, which showed that the U.S. economy continued to expand at a modest pace during the period of mid-August through early October. However, the Beige Book revealed that the pace of growth have slowed in two districts, as a strong dollar is holding back manufacturing activity and tourism spending. The Fed Beige Book is usually released two weeks before the Fed meets to discuss its future interest rate policy.
As wee mentioned in our previous mortgage report, a number of Fed members were scheduled to speak in the beginning of the week. And these Fedspeaks are showing us that central bank officials remain divided over the timing of an interest rate hike. St. Louis Fed President James Bullard said on Tuesday, that he is concerned about the current zero-level interest rate policy, which potentially could lead to a bubble in financial markets. Bullard, who supports rate hike, was opposed to the central bank’s decision to hold off on raising rates in September. However, it’s unlikely that the incoming U.S. economic data will convince Fed members to begin tightening monetary policy in October, Bullard added.
One of the dovish members of the U.S. central bank, Chicago Fed President Charles Evans said on Monday, that he would prefer waiting until 2016 to lift rates. Citing concerns about global economic slowdown, low inflation and slack in the labor market, Evans doesn’t expect a liftoff this year.
On Monday, Fed governor Lael Brainard said that the central bank should be „watching and waiting” instead of hiking short-term rates prematurely. Fed board governor Daniel Tarullo said on Tuesday, that he doesn’t believe it would be appropriate to begin tightening monetary policy this year.
On the other hand, Atlanta Fed President Dennis Lockhart, who is centrist on monetary policy, said on Monday, that there could be sufficient incoming U.S. economic data on hand for the Fed to consider raising rates at the upcoming FOMC meeting in October, and a lot more data will be available in December.
According to the CME FedWatch, which is used by investors and traders to predict future interest rate policy, the market now sees a 5% chance for a rate hike in October. The probability of a monetary tightening in December is 27%. As per the latest CME FedWatch data, there’s 37% chance that a 25 basis points rate hike will happen in March 2016. These fresh predictions came on the heels of a disappointing retail sales data, which makes it less likely that the U.S. central bank will lift rates in October.
As for current mortgage rates, interest rates are still hovering near the best levels since April. If you are in the process to buy a home or refinance your existing loan this is certainly a good opportunity to lock in a rate. If you are averse to risk, it’s a smart decision to lock in the lows, while if you’re a gambler you can wait to see whether or not mortgage rates will fall even lower in the near future.
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