The stock market ended higher for the week while bond prices moved ever so slightly higher resulting in the yield on the 10-year Treasury note to fall by less than one basis point on the week.

Investors were bombarded by a bevy economic reports, the most significant of which were the inflation measuring core PCE Price Index for July and the August Employment Situation Summary.

The inflation data contained within both of these reports helped to alleviate investor concerns of another rate hike by year end as the numbers were below expectations.

The core PCE Price Index, which excludes food and energy prices, fell on a year-over-year basis to +1.4% from +1.5% in June to stay well below the Federal Reserve's year-over-year target of 2.0%.  It now seems unlikely that the Fed will be able to fulfill its forecast of one more rate hike by year-end.  Furthermore, the August Employment Situation Summary (jobs report) also showed no sign of accelerating wage inflation as there was only a weak increase in average hourly earnings of 0.1% when economists were expecting a 0.2% reading.

In housing, Pending Home Sales for July fell for the fourth time in five months with a decrease of 0.8% in the Pending Home Sales Index to 109.1.  Economists were expecting an increase of 0.5%.  Furthermore, June's initial reading of an increase of 1.5% in Pending Sales was revised lower to 1.3%.  Lawrence Yun, National Association of Realtors (NAR) chief economist, said “With the exception of a minimal gain in the West, pending sales were weaker in most areas in July as house hunters saw limited options for sale and highly competitive market conditions.  The housing market remains stuck in a holding pattern with little signs of breaking through.  The pace of new listings is not catching up with what's being sold at an astonishingly fast pace.  The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves."

The Fed Funds futures market currently shows a probability of another rate hike this year at just 40.8% while suggesting the June 2018 FOMC meeting as the next most likely time for a rate-hike  with a current implied probability of 58.3%.

As for mortgages, mortgage application volume decreased during the week ending August 25.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 2.3%.  The seasonally adjusted Purchase Index declined 3.0% from the prior week while the Refinance Index decreased 2.0%.

Overall, the refinance portion of mortgage activity increased to 49.4% of total applications from 48.7% in the prior week.  The adjustable-rate mortgage share of activity increased to 6.9% of total applications from 6.4%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance fell to 4.11% from 4.12% with points increasing to 0.43 from 0.39.

For the week, the FNMA 3.5% coupon bond gained 6.3 basis points to close at $103.469.  The 10-year Treasury yield decreased 0.37 basis points to end at 2.1657%.  The major stock indexes ended the week higher.

The Dow Jones Industrial Average gained 173.89 points to close at 21,987.56.  The NASDAQ Composite Index jumped 169.69 points to close at 6,435.33 and the S&P 500 Index added 33.50 points to close at 2,476.55.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 11.3%, the NASDAQ Composite Index has advanced 19.42%, and the S&P 500 Index has added 10.6%.

This past week, the national average 30-year mortgage rate decreased to 3.90% from 3.95%; the 15-year mortgage rate decreased to 3.18% from 3.23%; the 5/1 ARM mortgage rate moved lower to 3.18% from 3.20% and the FHA 30-year rate fell to 3.50% from 3.60%.  Jumbo 30-year rates decreased to 4.18% from 4.23%.

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

The FNMA 30-year 3.5% coupon bond ($103.469, +6.3 bp) traded within a 39.1 basis point range between a weekly intraday low of $103.359 on Monday and a weekly intraday high of $103.750 on Friday before closing the week at $103.469 on Friday.

This past week we ended up pretty much with a sideways move although there were a couple of days during the week showing an increase in intra-day volatility, most notably on Tuesday and Friday.  The bond continues to be extremely "overbought" but is now more vulnerable to a turn lower as there is a new sell signal showing from a negative stochastic crossover as a result of Friday's market action.  The bond closed on support on Friday, but any move lower will likely send prices toward the 25-day moving average leading to minimally higher mortgage rates in the coming week.