Volatility returned to the stock market this past week as geopolitical events exerted noticeable influence on traders. Concerns about a potential military conflict with North Korea subsided to spark a rally in stocks last Monday that led the S&P 500 Index to record its largest one-day gain in almost four months. However, these gains were entirely erased on Thursday with the S&P 500 Index's largest decline in three months following protestor violence in Charlottesville, Va., in addition to new terrorist attacks in Spain. Investors are becoming increasingly worried that President Trump's ability to move forward on economic and tax policy is being derailed by the constant criticisms voiced by opposing politicians and most of the so-called mainstream media.

The week's economic data were mixed. Retail sales were reported stronger than expected and despite numerous negative headlines for retailers over the past several months, July's retail sales were up 0.6% versus a +0.3% forecast. Further, revisions in the data showed a +0.3% increase in June rather than the originally reported -0.2% decline. For the trailing 12-month period, retail sales were 4.2% higher and near the five-year average.

In housing, July's new housing starts and building permits were both more than 4% lower than June's numbers with starts declining by 4.8% to a seasonally adjusted annual rate of 1.155 million versus 1.217 million expected. Permits fell by 4.1% to a seasonally adjusted annual rate of 1.223 million compared to expectations for 1.247 million. Although housing starts were 5.6% lower than July of last year, the total for the first seven months of 2017 are about 2.5% ahead of 2016's pace.  Also, July's home builder sentiment was four points higher, recovering from an eight-month low in June.

As for mortgages, mortgage application volume increased minimally during the week ending August 11. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 0.1%. The seasonally adjusted Purchase Index declined 2.0% from the prior week while the Refinance Index increased 2%.

Overall, the refinance portion of mortgage activity increased to 47.8% of total applications from 46.7% in the prior week. The adjustable-rate mortgage share of activity decreased to 6.6% of total applications from 6.8%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance declined to 4.12% from 4.14% with points unchanged at 0.38.

Following this past week's political turmoil and economic news, the Fed Funds futures market now points to either the May or June 2018 FOMC meetings as the most likely time for the next rate-hike announcement with an implied probability of 50.4% for May and 59.9% for June. Last week, the market expected the next rate hike to occur in June 2018 with an implied probability of 57.5%.

For the week, the FNMA 3.5% coupon bond lost 1.6 basis points to close at $103.281. The 10-year Treasury yield increased 0.69 basis points to end at 2.1974%. The major stock indexes ended the week lower.

The Dow Jones Industrial Average fell 183.81 points to close at 21,674.51. The NASDAQ Composite Index dropped 40.03 points to close at 6,216.53 and the S&P 500 Index lost 15.77 points to close at 2,425.55. Year to date on a total return basis, the Dow Jones Industrial Average has gained 9.67%, the NASDAQ Composite Index has advanced 15.48%, and the S&P 500 Index has risen 8.34%.

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

This past week, the national average 30-year mortgage rate fell to 3.94% from 3.96%; the 15-year mortgage rate decreased to 3.22% from 3.24%; the 5/1 ARM mortgage rate was unchanged at 3.17% and the FHA 30-year rate was also unchanged at 3.60%.  Jumbo 30-year rates decreased to 4.22% from 4.24%.

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

The FNMA 30-year 3.5% coupon bond ($103.28, -1.60 bp) traded within a 42 basis point range between a weekly intraday low of $103.00 on Tuesday and Wednesday and a weekly intraday high of $103.42 on Friday before closing the week slightly lower at $103.28 on Friday.

Following a week of increased volatility in the financial markets the bond ended the week very nearly where it began with a loss of less than two basis points. Technically, not much has changed since the last newsletter. The next level of overhead resistance remains at $103.53. It will take a further stock market correction for the bond to reach this target as the bond continues to be extremely "overbought" and susceptible to a turn lower. With an expansion in the range between support and resistance as identified in the chart below, the bond could continue to be range-bound in the coming week. Mortgage rates should hold at relatively stable levels in the coming.