The stock market traded in a rather subdued fashion on Tuesday and Wednesday in a holiday shortened week before jumping higher on Thursday and Friday. Stocks advanced Thursday following news the U.S. is pulling out of the Paris Climate Accord that was seen as having a destructive impact on the U.S. economy while bond prices modestly declined. On Friday, both stocks and bonds reacted positively to the May Employment Situation Summary (jobs report). The Goldilocks report was not too “hot” and not too “cold” – it was just right enough to pacify the bears.
While the headline nonfarm payrolls number was reported at 138,000, it easily missed the consensus forecast of 185,000 as did nonfarm private payrolls at 147,000 versus 172,000 expected. Furthermore, each of the last two monthly job gains were downwardly revised with March’s payroll growth losing 29,000 while April’s gains dropped by 37,000 jobs. Average hourly earnings also missed the consensus forecast with a 0.2% increase versus expectations of 0.3%.
The one encouraging piece of data was the unemployment rate falling to a 16-year low of 4.3%. Also, the underemployment rate, which adds those who are working part-time but would prefer full-time work, fell to 8.4% from April’s reading of 8.6%. Gary Cohn, President Trump’s chief economic advisor, has stated in recent months that the administration is concentrating on bringing the underemployment rate lower.
There were no housing reports released during the week other than the latest mortgage data.
Mortgage application volume declined during the week ending May 26. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 3.4%. The seasonally adjusted Purchase Index dropped 1.0% from the prior week, while the Refinance Index decreased 6.0%.
Overall, the refinance portion of mortgage activity decreased to 43.2% total applications from 43.9% from the prior week. The adjustable-rate mortgage share of activity decreased to 7.7% of total applications. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance remained unchanged at 4.17% with points decreasing to 0.32 from 0.39.
For the week, the FNMA 3.5% coupon bond gained 31.2 basis points to close at $103.38 while the 10-year Treasury yield decreased 9.09 basis points to end at 2.159%. Stocks ended the week higher.
The Dow Jones Industrial Average added 126.01 points to end at 21,206.29. The NASDAQ Composite Index advanced 95.61 points to close at 6,305.80 and the S&P 500 Index gained 23.25 points to close at 2,439.07.
Year to date on a total return basis, the Dow Jones Industrial Average has gained 7.31%, the NASDAQ Composite Index has advanced 17.14%, and the S&P 500 Index has risen 8.94%.
This past week, the national average 30-year mortgage rate fell to 3.98% from 4.02%; the 15-year mortgage rate declined to 3.24% from 3.28%; the 5/1 ARM mortgage rate dropped to 3.04% from 3.09%; and the FHA 30-year rate was unchanged at 3.75%. Jumbo 30-year rates decreased to 4.27% from 4.30%.
Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond
The FNMA 30-year 3.5% coupon bond ($103.38, +31.2 bp) traded within a narrow 47 basis point range between a weekly intraday high of $103.47 on Friday and a weekly intraday low of $103.00 on Thursday before closing the week at $103.38.
The bond moved only eight basis points higher from Tuesday through Thursday until jumping 24 basis points higher on Friday following a rather benign May Situation Summary (Jobs Report). Friday’s trading powered the bond above a tough dual layer of overhead resistance at the 200-day moving average (103.24) and prior resistance at 103.297. These levels should serve as nearest technical support. If these support levels can manage to hold in the coming week, the bond could take out resistance at Friday’s intraday high of 103.469. Further resistance lies considerably higher at the 23.6% Fibonacci retracement level at 103.967. However, further movement to the upside will be difficult as the slow stochastic oscillator is at an extreme level suggesting a pending pullback in upward momentum. Mortgage rates should hold fairly steady in the coming week.