The data and economic developments of the past week came fast and furious: Treasury yields broke through the 3 percent ceiling, housing data and consumer confidence impressed, gas prices moved higher, and even North Korea surprised the world with a historic step toward peace and economic prosperity on the Korean peninsula.
Why does it all matter? These headlines all point to inflationary pressure and economic growth. For investor and analysts, these are also signs pointing to more interest rate hikes by the Federal Reserve and increased likelihood bond yields will keep rising.
As a result, mortgage rates have very little chance of decreasing if these trends continue. Modest increases are likely into the second half of 2018. We’ve been saying this for most of the year, and this week’s data underscores it, volatility with upward pressure on rates is going to be with us for a while.
Let’s take a quick look at this week’s headlines:
- Korea: While certainly not the biggest direct impact on the mortgage industry, peace in Korea would remove a major headache for foreign policy watchers and reduce geopolitical risks in the economy. On Friday, leaders of North and South Korea met near the rival nation’s border and shook hands on a deal to end their decades-long cold war and begin to denuclearize the peninsula. The talks are just that for now — talks — but it is the most significant step toward peace since the Korean War erupted in 1950.
- Treasury Yields: The marketplace passed a major watermark on Wednesday when the yield on the 10-Year U.S. Treasury bond eclipsed 3 percent for the first time since late 2013. Mortgage rates follow the direction of the 10Y Treasury, so the trajectory points to more upward pressure on rates. As I have noted before expect plenty of volatility over the coming months as rates go up and down but the longer term trend will be higher in rates.
- GDP: The U.S. economy grew 2.3 percent in the first quarter of 2018, beating analyst expectations of just 2 percent. The growth in gross domestic product (GDP) is an indicator of total economic expansion. The increase, though short of the 3-4 percent range Trump Administration officials have targeted, was able to beat estimates thanks to strong business investment. Consumer spending was a bit soft, due in part to winter weather during the quarter. However, the consumer confidence index rebounded in April to within a point of its 18-year high, signaling consumer spending is likely to gain steam this spring and summer.
- Home data: Existing home sales increased more than expected in March, driven by increases in single-family and multi-family homes. Meanwhile, the Case-Schiiler home price index this week showed year-over-year home price inflation hit a 3.5-year high of 6.8 percent. Combined with continued tight inventory, these factors point to more inflation in the months ahead for the residential market.
- Gas prices: Finally, another inflationary factor is the price of fuel. This week, the U.S. government estimated drivers will pay 14 percent more for fuel this summer than last, with an average price per gallon of unleaded gasoline forecasted at $2.74. The price of oil has climbed because of efforts by OPEC and Russia. Brent crude, the global benchmark, surged on Tuesday to $71.04 a barrel, the highest since late 2014, suggesting gas prices could go even higher. Brent crude averaged just $51 last summer.
These numbers all tell different sides of the same story we’ve been discussing on this blog for months. The U.S. economy is expanding, inflation concerns are in play, home prices are rising, bond yields (and mortgage rates) are moving higher, and the Federal Reserve is feeling pressure to keep it all in check.
Could the Fed increase its rate hike forecast to four increases in 2018, up from three hikes predicted now? The chances of that increased to about 50 percent this week. It’s worth watching when the Fed’s Open Market Committee convenes again next week.