Both the stock and bond markets moved lower while displaying greater volatility and increased trading volumes ahead of an approaching 4th of July holiday-shortened trading week. Technology stocks in particular came under selling pressure triggered by news the European Union was fining Alphabet (Google) $2.7 billion for supposed antitrust violations. An additional negative influence on the stock market stemmed from news the U.S. Senate was going to postpone a vote on health care reform resulting in a delay for a bill to overhaul taxes.

Meanwhile, the bond market was punished by comments made by European Central Bank President Mario Draghi on Tuesday suggesting higher eurozone inflation and economic growth will lead to higher interest rates in the not too distant future. Global bond markets reacted very negatively to Draghi's comments with yields jumping higher during the remainder of the week.  

As far as when the next rate hike may occur here in the U.S., the fed funds futures market is suggesting with an implied probability of 54.4% that the December FOMC meeting on December 13 will be the most likely time for the next rate-hike announcement.

In housing, strong levels of home price appreciation continue to be seen even though the latest Case-Shiller Home Price Index showed slight moderation in the 20-City Composite Index for April. The 20-City Composite Index showed home prices increased 5.7% on a year-over-year basis which was lower than the prior month's reading of 5.9%, while the broader National Index showed home prices increasing 5.5%, down from 5.7% in March. After seasonal adjustment however, the National Index recorded a 0.2% month-over-month increase while the 20-City Composite posted a 0.3% month-over-month increase.

Mortgage application volume decreased during the week ending June 23. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 6.2%. The seasonally adjusted Purchase Index decreased 4.0% from the prior week while the Refinance Index decreased 9.0%.  

Overall, the refinance portion of mortgage activity decreased to 45.6% total applications from 46.6% in the prior week. The adjustable-rate mortgage share of activity decreased to 7.0% of total applications. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance was unchanged at 4.13% with points decreasing to 0.32 from 0.34.

The National Association of Realtors (NAR) reported their Pending Home Sales Index for May slipped 0.8% to record its third-straight monthly decline.  The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed.  The index dropped to 108.5 in May and the April level was revised lower to -1.7% from an initially reported -1.3%. The consensus forecast had been for a 0.5% increase. NAR chief economist Lawrence Yun noted "Buyer interest is solid, but there is just not enough supply to satisfy demand.  Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast."

For the week, the FNMA 3.5% coupon bond lost 57.8 basis points to close at $102.67. The 10-year Treasury yield increased 15.97 basis points to end at 2.3037%. Stocks ended the week lower.

The Dow Jones Industrial Average fell 45.13 points to end at 21,349.63.  The NASDAQ Composite Index dropped 124.83 points to close at 6,140.42 and the S&P 500 Index lost 14.89 points to close at 2,423.41.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 8.03%, the NASDAQ Composite Index has advanced 14.07%, and the S&P 500 Index has risen 8.24%.

This past week, the national average 30-year mortgage rate rose to 4.07% from 3.98%; the 15-year mortgage rate increased to 3.32% from 3.26%; the 5/1 ARM mortgage rate increased to 3.16% from 3.07%; and the FHA 30-year rate rose to 3.75% from 3.65%.  Jumbo 30-year rates increased to 4.33% from 4.25%. 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

The FNMA 30-year 3.5% coupon bond ($102.67, +9.4 bp) traded within a wider 77 basis point range between a weekly intraday low of $102.56 on Friday and a weekly intraday high of $103.33 on Monday before closing the week lower at $102.67.

Bond prices were driven lower by negative comments from central bankers and mortgage bond prices moved below previous support levels that now become resistance levels. Mortgage bonds are now deeply "oversold" and will look to bounce back after pulling up from their 100-day moving average support level on Friday.

Economic news, especially the latest job report on Friday, will likely determine market direction in the coming week. If new job formation exceeds expectations on Friday, we could see bond prices test support levels resulting in slightly worse mortgage rates. However, if the economic news is favorable for bonds, bond prices should test resistance levels resulting in an improvement in rates.