Capital Markets Update for the Week of 8/16/21

While the Fed can’t control the supply and demand imbalance in the housing market, nor does it directly set mortgage rates, it can influence mortgage rates. This issue will probably push up the tapering process, especially for MBS purchases. And the Fed is watching plenty. Wide-spread price inflation continues to be one of the main economic themes of the moment. The Consumer Price Index increased for the seventh consecutive month in July and nearly every sub-component is above the Fed’s 2 percent annual threshold; many significantly. Energy prices were up 24 percent over the last twelve months and used cars are up 42 percent. Core prices gained 4.3 percent for the year. Producer prices have also held above the Fed’s threshold with headline prices up 7.8 percent for the year, the highest annual reading since 2011. Elsewhere, last week we learned that initial claims for unemployment were 375,000 for the week ending August 7, more or less within the range observed for most of the summer. Purchase mortgage apps remain a little soft, which may indicate soft new and existing home sales for July when those numbers are released.

The question on many people’s lips these days is if the global recovery is in jeopardy. It will certainly have an impact on mortgage rates, whichever way things go versus expectations. Maybe it was just some start-of-the-week nervousness yesterday, but economic slowdown concerns driven by weak data out of China, a weaker than expected Empire State Manufacturing Survey at home, and the Delta variant around the world, weighed on sentiment. That isn’t even mentioning the Taliban forces quickly taking control of Afghanistan. By the end of the day, Treasuries had rallied slightly and the MBS basis closed mostly wider.

Today’s economic calendar contains the most market moving data of the week, and is already out of the gate with July retail sales (-1.1 percent, not good but June revised higher). Later this morning brings Redbook same store sales for the week ending August 14, July industrial production and capacity utilization, June business inventories, and the NAHB Housing Market Index for August. Fed Chair Powell and Minneapolis Fed President Kashkari are both scheduled to speak in the afternoon. The Desk will purchase up to $4.4 billion of conventional MBS across 15-year 1.5 percent and 2 percent and 30-year 2 percent and 2.5 percent. Yesterday, Boston Fed President Rosengren said the economic outlook has improved despite the Delta variant and that he expects the Fed will soon begin reversing accommodative policy by saying in September that it is going to start tapering its asset purchases in October. The Fed wants to avoid a repeat of the 2013 “taper tantrum” where rising Treasury yields got away from them quickly. We begin the day with Agency MBS prices roughly unchanged and the 10-year yielding 1.24 after closing yesterday at 1.26 percent on continued virus fears and international unrest causing a flight to quality in our bond market.

Market Commentary by Rob Chrisman