Mortgage rate volatility could spike starting Wednesday

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Published Date 8/7/2017

The ripples of the better-than-expected July employment report on Friday continue this morning. About 60K more jobs in July than were anticipated and a 0.3% increase in average hourly earnings, with manufacturing jobs reported +16K in July and 12K (revised from +1K) in June. The bond and mortgage reactions reversed the improvements from last Thursday. Overall, the reactions in the bond markets were not that severe. Stocks Friday continued to improve--no stopping the indexes. The volatility index (VIX) at 9.93 Friday still shows complacency in equities.

Early trade this morning (8:00 am EDT): the 10-yr. note yield unchanged at 2.27%, still holding in its narrow range that is now going on to four weeks with little change, and the same in mortgage rates.

This week’s key economic data hits later Wednesday, Thursday, and Friday. In the meantime, Treasury will conduct its quarterly refunding, issuing new 10-yr. notes and 30-yr. bonds (see calendar). Crude oil lower this morning; after increasing about $5.00/barrel recently oil hit $50.00 early last week where our technical pivot resides, now backing down somewhat. OPEC and non-OPEC technical committee are meeting in Abu Dhabi today and tomorrow to discuss ways to boost compliance with the deal. Still, the overriding issue is simple: as noted numerous times, there is more oil than demand and most oil producing countries rely on oil sales to fund their economies.

Some may have wondered why we quote LIBOR rates each day. LIBOR rates are used in ARM financing to set rates. Such mortgages were popular before the financial crisis when lenders used their low teaser rates to get borrowers into bigger homes, but since the meltdown those teasers have declined. Our friend Lou Barnes, quoted today in the WSJ: “In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be” for this kind of mortgage. LIBOR won’t disappear until 2021, though. Although ARMs have been less they still account for 14% of the market, according to recent data. Interest rates are expected to increase; that over time will add to ARM mortgages.

Still, all our technical work remains neutral--neither bullish or bearish. If the 10 stays between 2.22% and 2.32% the momentum will remain flat. This morning in early trade, the VIX (volatility index in stocks) is higher, at 10.23 from Friday’s 9.93; volatility still extremely low and implies investors are not concerned about the high levels of key stock indexes.

This Week’s Calendar:

Monday
- 11:45 am James Bullard St. Louis Fed
- 1:25 pm Neel Kashkari Minneapolis Fed
- 3:00 pm June consumer credit (+$16.0B from $18.4B in May)
Tuesday
- 10:00 am June JOLTS job openings (5.600 mil from 5.666 mil in May)
- 1:00 pm $24B 3 yr. note auction
Wednesday
- 7:00 am weekly mortgage apps from MBA
- 8:30 am Prelim Q2 productivity and unit labor costs (productivity +0.8%, pro in Q1 0.0%; unit labor costs +1.4%, costs in Q1 +2.2%)
- 10:00 am June wholesale inventories (+0.6%, up from +0.4% in May)
- 1:00 pm Charlie Evans Chicago Fed
- 1:00 pm $23B 10 yr. note auction
Thursday
- 8:30 am weekly jobless claims (241K +1K) July PPI (+0.1%; ex-food and energy +0.2%)
- 10:00 am Wm Dudley New York Fed
- 1:00 pm $15B 30 yr. bond auction
Friday

8:30 am July CPI (+0.2% yr./yr. +1.7%; ex food and energy +0.2%, yr./yr. +1.8%)

Source: TBWS

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