The majority of stock market indexes continued to advance into record territory led by a surge in earnings from technology companies Alphabet (Google), Amazon, Intel, and Microsoft.  Strong 3^rd Quarter earnings reports from 3M, Caterpillar, Corning, and General Motors also provided a market boost to the S&P 500 and the overall market.  The week's economic reports were favorable suggesting a stronger future economy, and this dampened investor sentiment in the bond market with the realization the Federal Reserve might institute more rate hikes next year than currently anticipated.  The probability for a December rate hike is currently 99.9%, up from 93.1% last week.

On Wednesday, the Commerce Department reported Durable Goods Orders increased by a greater than forecast 2.2% in September, the largest gain in three months, versus expectations for a 1.3% increase.  Friday, the Commerce Department released their Advance GDP report for the 3^rd Quarter showing the economy had unexpectedly grown at an annualized rate of 3.0% despite the negative impact of two major hurricanes.  This was a surprise as economists had only forecast a 2.4% growth rate.  Although these reports pressured bond prices lower (yields higher), the bond market saw some price relief on Friday following rumors that President Trump was favoring Fed Governor Jerome Powell as the central bank's next chair.  Powell is viewed more as a monetary policy "dove" by bond market participants and would likely continue Janet Yellen's measured approach in raising short-term interest rates.

The week's housing reports were strong overall.  The Census Bureau announced New Home Sales surged higher in September to a seasonally adjusted annual rate of 667,000, a 18.9% month-over-month increase over August's  rate of 561,000.  The median sales price of new homes sold in September 2017 increased 1.6% year-over-year to $319,700 with the average sales price jumped 5.2% to $385,200.  New home inventory at the end of September stood at 279,000 representing a supply of 5.0 months at the current sales rate.

The National Association of Realtors reported Pending Home Sales was unchanged in September at the lowest level since the start of 2016 as Hurricane Irma slowed sales in the southeast while tight inventory levels of available homes for sales limitied sales activity elsewhere.  August Pending Home Sales were revised lower by -0.2% to -2.8% from -2.6%.  Lawrence Yun, NAR's chief economist, said "While most of the country, except for the South, did see minor gains in contract signings last month, activity is falling further behind last year's pace because new listings aren't keeping up with what's being sold."

As for mortgages, mortgage application volume decreased during the week ending October 20.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell by 4.6%.  The seasonally adjusted Purchase Index decreased 6.0% from the prior week while the Refinance Index decreased 3.0%.

Overall, the refinance portion of mortgage activity increased to 49.5% of total applications from 48.6% in the prior week.  The adjustable-rate mortgage share of activity increased to 6.4% of total applications from 6.1%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.18% from 4.14% with points decreasing to 0.42 from 0.44.

For the week, the FNMA 3.5% coupon bond lost 10.9 basis points to close at $102.563.  The 10-year Treasury yield increased 3.28 basis points to end at 2.4155%.  The major stock indexes ended the week higher.

The Dow Jones Industrial Average gained 105.56 points to close at 23,434.19.  The NASDAQ Composite Index increased 72.21 points to close at 6,701.26 and the S&P 500 Index advanced 5.86 points to close at 2,581.07.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 18.58%, the NASDAQ Composite Index has advanced 24.49%, and the S&P 500 Index has added 15.29%.

This past week, the national average 30-year mortgage rate rose to 4.06% from 3.98%; the 15-year mortgage rate increased to 3.34% from 3.28%; the 5/1 ARM mortgage rate was unchanged at 3.22% and the FHA 30-year rate increased to 3.75% from 3.60%.  Jumbo 30-year rates increased to 4.24% from 4.17%.

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

The FNMA 30-year 3.5% coupon bond ($102.563, -10.9 bp) traded within a 62.5 basis point range between a weekly intraday high of $102.797 on Monday and a weekly intraday low of $102.172 on Wednesday before closing the week at $102.56 on Friday.

The bond managed to push just above the key 200-day moving average resistance level last Monday, but was unable to advance as further nearby resistance from the 38.2% Fibonacci retracement level stopped the advance dead in its tracks.  The bond then moved lower during the week until bouncing back on Friday on rumors that President Trump was strongly considering Fed Governor Jerome Powell to replace Janet Yellen as the central bank's next chair.

Friday's trading action from a support level triggered a new buy signal from a positive crossover in the slow stochastic oscillator.  If this technical signal proves true, we should see bond prices climb to test the identified resistance levels once more.  A move above the resistance levels would lead to a slight improvement in mortgage rates, while range-bound trading between current support and resistance should maintain rates close to where they currently are.