It was risk-off trading this past week for stocks with the major indexes negatively influenced by some disappointing corporate earnings reports in the retail sector, and threatening rhetoric between North Korea and the U.S. that increased concerns about a possible military conflict on the Korean Peninsula. As a result, the bond and precious metals markets received capital inflows with 10-year Treasury yields falling to 2.19%.

On Friday, the Bureau of Labor Statistics reported the latest inflation readings as measured by the Consumer Price Index (CPI) rose by only 0.1% in July when most economists were forecasting an increase of 0.2%. The Core CPI, which strips out volatile food and energy costs, also was less than consensus expectations of 0.1% versus a forecast of 0.2%. Over the past 12 months, consumer prices have increased 1.7%, which remains below the Federal Reserve's 2% inflation target. The subdued CPI data reduced the likelihood of a Fed rate hike with the Fed funds futures now showing just a 37.4% probability of a rate hike at the December FOMC meeting followed by probabilities of 38.8% and 45.7% for the January and March FOMC meetings respectively.

In housing, Mortgage application volume increased during the week ending August 4. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 3.0%. The seasonally adjusted Purchase Index gained 1.0% from the prior week while the Refinance Index increased 5%.

Overall, the refinance portion of mortgage activity increased to 46.7% of total applications from 45.5% in the prior week.  The adjustable-rate mortgage share of activity increased to 6.8% of total applications from 6.6%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance declined to 4.14% from 4.17% with points increasing to 0.38 from 0.36.

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to close at $103.297.  The 10-year Treasury yield decreased 7.32 basis points to end at 2.1905%.  The major stock indexes ended the week lower.

The Dow Jones Industrial Average fell 234.49 points to close at 21,858.32.  The NASDAQ Composite Index dropped 95.00 points to close at 6,256.56 and the S&P 500 Index lost 35.51 points to close at 2,441.32.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 10.60%, the NASDAQ Composite Index has advanced 16.23%, and the S&P 500 Index has risen 9.04%.

This past week, the national average 30-year mortgage rate fell to 3.96% from 3.99%; the 15-year mortgage rate decreased to 3.24% from 3.29%; the 5/1 ARM mortgage rate decreased to 3.17% from 3.18%; and the FHA 30-year rate fell to 3.60% from 3.65%.  Jumbo 30-year rates decreased to 4.24% from 4.28%.

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

The FNMA 30-year 3.5% coupon bond ($103.297, +25.0 bp) traded within a 44 basis point range between a weekly intraday low of $103.03 on Tuesday and a weekly intraday high of $103.47 on Thursday before closing the week higher at $103.297 on Friday.

The FNMA 30-year 3.5% coupon bond was able to move above resistance at $103.20 during the week on a flight to safety trade and this level now becomes nearest technical support.  The next level of overhead resistance is found at $103.53, and it will likely take a continuing decline in the stock market for the bond to reach this target as the bond remains extremely "overbought" and susceptible to a turn lower.  However, the bond could become range-bound between support and resistance as identified in the chart below and remain "overbought" for an extended period of time.  Regardless, mortgage rates should hold at relatively stable levels in the coming week unless there is a significant sell-off in stocks which would drive bond prices higher and yields and rates lower.