The Market Today
Residential Refinancing Continues to Support Mortgage Applications, Existing Home Sales Expected to Soften
by Craig Dismuke, Dudley Carter
Today’s Calendar – Mortgage Applications and Home Sales: Mortgage applications edged higher last week as increased refinance activity offset another week of declining purchase inquiries. Total applications rose 0.6% (+2.8% week before) as refinance inquiries grew by 2.1% (+9.2% week before) but purchase applications shrank by 1.0% (-2.8% week before). Refinance activity continues to be supported by the pullback in rates that has more or less defined the 2017 trend. According to the MBA, the 30-year fixed rate was unchanged at 4.13% last week, the lowest since the week of the election. Purchase applications have slipped in five of the last six weeks, although the single week’s gain where activity actually improved was strong enough to offset the other five weeks’ declines.
At 9 a.m. CT, the NAR’s May existing home sales data is expected to show a 0.4% decline in the number of closings on existing residential property sales. The small decline would push the annualized pace slightly lower to 5.55MM units. If estimates are accurate, it would extend the recent sideways trend for the series. The expected pace would keep sales near the highs of the current expansion but would be another indication that momentum has slowed.
Overnight Activity – Oil Stabilizes in Bear Market Territory: Oil prices remain the major focus for global markets Wednesday after U.S. crude officially entered into bear market territory on Tuesday. Overnight, the commodity stabilized with both Brent and U.S. WTI less than 0.1% changed. Global equities weakened overnight with the financial sector leading losses in most exchanges. Shares in China gained against the grain after MSCI announced it would add a couple of hundred A shares – equity shares of Chinese companies historically available only to Chinese citizens – to its emerging markets index. While the initial step gives China less than a 1% weighting in the index, it could be the first step in allowing more capital inflows. U.S. equity futures are little changed. Sovereign yields are mixed, Treasury yields are higher by 0.5 bps to 1.2 bps, with an upward move in U.K. gilt yields the most notable shift. After Bank of England Carney sent the pound tumbling and yields lower on Tuesday when he talked down an imminent rate hike, his Chief Economist noted overnight that a hike could happen before the year is out if the data remain steady. The Pound recovered more than half of yesterday’s losses which has helped to push the Dollar lower for the day.
Yesterday’s Trading Activity – Treasury Yields Fall as Stocks Drop with Crude Oil: U.S. equities finished near their daily lows as crude prices dropped 2% and officially entered a bear market. Tuesday’s losses left crude down more than 20% from the 2017 peak reached on February 23. The S&P fell 0.7% with shares of energy companies finishing near the bottom. The Dow dropped a more modest 0.3% while the Nasdaq led losses with a 0.8% pullback. Equities’ losses evolved despite comments from House Speaker Ryan aimed at reinvigorating the tax reform talk. Ryan told CNBC, “We are going to cut taxes. But if we are going to truly fix our tax code, we have to fix all of it, …We are going to get this done in 2017.” The Treasury curve flattened on lower yields with the 2-year yield down 1.2 bps to 1.34% and the 10-year yield 3.1 bps lower at 2.16%. The move was consistent with lower oil prices and reinforced by additional comments about inflation weakness from Chicago Fed President Evans (more below). Despite the lower yields, the Dollar finished higher as the British pound remained weaker and the Euro softened.
Evans Echoes his Monday Comments on Below-Target Inflation: In an interview with CNBC on Tuesday morning, Chicago Fed’s Evans continued to discuss his concerns about recent inflation trends. Consistent with his Monday remarks, he believes the economy is doing well. Evans, admittedly less sanguine on the inflation outlook, noted “Up to this point, I think that we can still expect that inflation will go up to 2 percent, although I will say that the most recent inflation data make me a little nervous about that, so I think it’s much more challenging from here on out.” As to when he believes the Fed might hike again, Evans said, “we can go until December and make a judgment that maybe three [2017 hikes] is the right number, maybe two is the right number.” On the balance sheet, he said the beginning of the unwind is “probably pretty close.”
Kaplan Supports 2017 Start for Balance Sheet Unwind, Wants Evidence Inflation Weakness is Transitory: Dallas Fed President Kaplan expects growth will bounce back in 2Q and average roughly 2% for 2017, consistent with the trend-rate of the current expansion. According to his paradigm, this should tighten the labor market further, eventually creating wage pressures which should help remedy the sluggish inflation trends. While he doesn’t think the Fed should wait for signs of overheating inflation, he does think they can afford to be patient for more evidence that recent weakness is transitory. He supports beginning the balance sheet unwind this year but reinforced the fact that the process won’t involve outright sales of assets. In comments aimed at Washington, he admitted the Fed can’t take the place of fiscal reforms but doesn’t believe deficit-financed tax cuts are the answer.