- Retail Sales will be released on Tuesday. This report gives the markets some insight to how consumer spending is holding up.
- Also on Tuesday, the Consumer Price Index (CPI) will report on inflation at the consumer level. Last week’s Producer Price Index showed that inflation at the wholesale level has moderated, thanks to lower energy prices. Will CPI follow suit?
- Manufacturing from the New York Empire and Philadelphia Fed Index will also be released Tuesday and Thursday, respectively.
- Housing Starts and Building Permits data will be delivered on Wednesday.
- Last — but not least — will be the Weekly Initial Jobless Claims numbers on Thursday. Last week's data was the lowest in a month.
When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse.
To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.
It may seem odd that negative economic news can actually be good for home loan rates, but there's a pretty simple explanation for this phenomenon. Here’s a concise explanation you can share with your clients or you can use to gain a better understanding yourself.
First, we need to remember that big money managers who are in search of higher returns avoid holding onto cash by investing in both Stocks and Bonds.
Second, we need to dispel the myth about how home loan rates are determined. Despite what it may sound like in news stories covering the Federal Reserve’s meeting, home loan rates are based on the performance of mortgage-backed securities — which are a type of Bond.
When we put those two points together, we see that whenever the economy is on fire and there are good economic news reports, investors tend to put more money into Stocks. That’s because Stocks offer higher returns, even though they are generally more risky. To put money into Stocks, however, investors must remove some of their money from less-risky Bonds. The result is a decreased demand in Bonds that causes Bond prices to worsen, which causes home loan rates to go higher.
Inversely, when the economy is sluggish and economic reports are negative, money managers tend to take money out of higher-risk Stocks to put it into less-risky Bonds. As demand for Bonds increase, Bond pricing improves and home loan rates go down.
So while it may seem odd that home loan rates improve when economic news is sluggish, it actually makes sense when you look at the big picture.
If you have any questions about how the economic news is impacting home loan rates, please just call or email. I’m always happy to chat about what’s happening in the markets and what it means to home loan rates.