Mortgage Rates Drop The Most In Over 10 Years

Mortgage Rates - Stocks Set To Have Best Q1 Since 1998

Before getting into mortgage rates, let's review the current market. Technically speaking, each modest correction in the market is setting it up better to reach its record high. The big decline last Friday and the swings this week have kept the bulls honest even though the market is within striking distance of its record high. 

S&P 500 was up 0.36% on Thursday, while CNN fear and greed index fell 3 points to 48 which is neutral.

The S&P 500 is down slightly more than 1% since its recent high last week. But the CNN fear and greed index has fallen about 20 points. I’m using the CNN index as a proxy for whether the market is overbought or oversold. Some oscillators still show stocks as overbought. After all, this has been the best first quarter since 1998. It’s ironic to see this year compared to 1998. That’s the year the yield curve inverted and there wasn’t a recession until almost 3 years later.

In keeping with the theme that there isn’t extreme greed in the market even though stocks have done so well, the chart below shows the NAAIM active manager sentiment survey this week. 

As you can see, the average exposure fell from 78.25% to 61.7% and the median fell from 90% to 70%. The bang for the buck this decline from the recent high has gotten, in terms of removing the froth from the market, has been high.

Mortgage Rates - Sector By Sector Breakdown

Only 2 sectors declined on Thursday. They were communication services and utilities which fell 0.5% and 1.25%. Finally, we saw proper ‘risk on’ action where the utilities underperformed. The catalyst for their decline Thursday and their rally this year was, of course, the treasury market. 

The bond market was extremely overbought heading into Thursday. It finally corrected as the 10 year yield is back at the Fed funds rate which is 2.4%. That’s 6 basis points ahead of its recent low. I could easily see this jetting back up another 10 basis points. Level of extension on Wednesday rivals the selloff last fall which ended in November.

2 year yield is at 2.25% which is 9 basis points ahead of its recent low. That puts the difference between the 2 yields at 15 basis points. This differential is one of the ones which didn’t invert during the treasury rally. It’s interesting how investors started to ignore this differential during the recent rally. It didn’t give them what they wanted which was an inversion. 

Mortgage Rates - This differential is traditionally the most followed one. 

It’s important although the best metric is the percentage of the curve that’s inverted. Both indicators show there is no reason to panic just yet.

Best 2 sectors were the financials and materials which increased 0.83% and 0.95%. Financials love rising interest rates. KBW regional bank ETF was up 1.32%. This index is way oversold even after this rally. It can continue to increase with yields in the short term. 

Good news for these banks is the curve will probably steepen in a few quarters. Bad news is default rates will rise once the economy falls into a recession. Healthcare sector was only up 0.26%, meaning it slightly underperformed the market. 

As you can see from the chart below, that’s not new as the sector has been underperforming since the market bottomed late last year. It outperformed during the mini-bear market as it acted like the defensive play it can be.

Mortgage Rates - Housing Update

Mortgage interest rate was set to fall heading into this week. Yields have been cratering and the difference between the contract rate and the consumer rate was high. That difference is like when oil prices fall, but the prices at the pump are still high for a few days. Eventually they do come down. 

As you can see from the chart below, the average 30 year fixed mortgage rate fell from 4.28% to 4.06% which was the biggest weekly decline in over 10 years. This rate is the lowest since January 18th, 2018. It’s not that far away from the all-time low of 3.31%. In fact, it’s closer to that low than the recent high of 4.94% it hit in November of last year.

Pending home sales fell 1% month over month. That missed estimates for a 0.8% decline and January’s reading of 4.3% growth (which was revised lower from 4.6%). The report had tough comparisons, but it was still weak. 

This is a leading index of the housing market and it isn’t pretty. None of the regional yearly growth rates in this pending home sales report were in the positive column as the overall reading was down 4.9%. The West was the worst region again as yearly growth was -9.6%.

Mortgage Rates - GDP Won’t Tell You Much

The revision for the Q4 GDP report was 2.2% which was down from 2.6%. That make sense because September is when I first spotted the economic slowdown. In quarterly terms, this makes it slightly tougher for Q1’s growth rate to continue the trend lower. The median estimate is for 1.5% growth. Either way, 2018 was a solid year for GDP growth.

Consumer spending was a big part of the negative revision as growth fell from the initially reported 2.8% to the revised growth of 2.5%. Residential investment fell 4.7% which was the worst decline out of the 4 declines in 2018. I wouldn’t be surprised if it falls again in Q1. The decline streak should end next quarter as the decline in rates should be a boon for the housing market.

As you can see from the chart below, the initial GDP report doesn’t tell you anything about the possibility of a recession coming soon. 

Somehow, in November 2007 the initial estimate for GDP growth was 4.9%. It ended up being revised lower, but that initial information missed the coming recession. Before the 2001 recession, initial GDP growth was 1.1%. The point of this chart is to show you a recession can come soon after a strong initial GDP report. 

To be clear, there have been a few very weak GDP reports this cycle which weren’t followed by a recession.

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