Weekly Review

Along with Wednesday’s release of the minutes from the Federal Reserve’s FOMC meeting from October 27-28, a string of noteworthy economic indicators and closely watched statements by Fed officials caused Treasury yields and bond prices to fluctuate through the week.

The FOMC minutes showed a clear majority of Fed officials were agreeable to a December rate hike while a dovish minority of FOMC members believed the use of the phrase "next meeting" in the policy statement could have been misinterpreted by financial markets as too strong of a signal for a rate hike.

Bond yields rallied early in the week, as the Consumer Price Index (CPI) increased for the first time in three months with a gain of 0.2% in October to match the consensus forecast. An additional 0.2% gain was recorded for the year-over-year headline CPI while the Core CPI reading, which excludes food and energy, was 0.2% higher on the monthly reading and was at 1.9% on the year-over-year reading for October.

Housing Starts declined 11% during October to a seasonally adjusted annual rate of 1.06 million units, the lowest level since March. Yet, October Starts remained above one million units for the seventh straight month, the longest consecutive monthly run since 2007. This suggests a sustainable housing market recovery remains intact.

Meanwhile, Building Permits, a much more forward-looking metric, increased 4.1% to a 1.150 million unit rate last month, exceeding the consensus forecast of 1.137 million. Single family building permits increased 2.4% in October to their highest level since December 2007. Multi-family building permits increased 6.8%. September’s rate of 1,105,000 permits was revised higher from 1,103,000.

Also, the November National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell 3 points from an upwardly revised reading of 65 in October to 62. Although the November reading was lower than the consensus forecast of 64.5, the revised October reading was the highest since the end of the housing boom in late 2005.

As for mortgages, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 13 showing the overall Market Composite Index increased 6.2%. The Refinance Index increased 2.0% from the prior week, while the seasonally adjusted Purchase Index increased by 12% from a week earlier. Overall, the refinance portion of mortgage activity decreased to 58.6% of total applications from 59.8%. The adjustable-rate mortgage segment of activity decreased to 6.3% of total applications from 6.6% the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 4.12% to 4.18%, its highest level since July 2015.

On Friday, the bond market stalled with the yield curve flattening in anticipation of the Fed raising rates in December. Bond traders believe a rate hike within the current environment of low inflation and weakening commodity prices will push yields in shorter-term treasuries higher relative to longer-term Treasuries. This was evident when the yield gap or spread between the two and ten-year Treasuries and the yield gap between five-year and 30-year Treasuries contracted to their tightest levels since August.

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to end at $103.31 while the 10-year Treasury yield decreased 1.1 basis points to end at 2.26%. Stocks ended the week with the NASDAQ Composite gaining 177.04 points to close at 5,104.92. The Dow Jones Industrial Average added 578.57 points to end at 17,823.81, and the S&P 500 increased 66.13 points to close at 2,089.17.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 7.23%, the Dow Jones Industrial Average has gained 0.004%, and the S&P 500 has added 1.45%. This past week, the national average 30-year mortgage rate decreased to 4.00% from 4.03% while the 15-year mortgage rate remained unchanged at 3.24%. The 5/1 ARM mortgage rate decreased to 2.97% from 3.00%. FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.83% from 3.84%.