This past week investors were rewarded with the three major stock indexes reaching new record all-time highs.  The rally began last Monday following early reports that damages from Hurricane Irma were not as severe as first projected when Irma was classified as a category 5 before slamming into Florida.  Also, the equity markets shrugged off another launch of a ballistic missile by North Korea that flew over the northern Japanese island of Hokkaido on Friday to continue the week's safe-haven sell off.

The week's most significant economic news arrived Thursday from a Commerce Department report showing the Consumer Price Index (CPI) rising by a greater than expected 0.4% in August resulting in a year-over-year increase of 1.9%.  The consensus estimate had called for a 0.3% increase in the August CPI.  This report led investors to consider the Federal Reserve's view that the recent weaker than forecast inflation data was temporary might be true.  Expectations are now significantly increasing for another interest rate hike at the Fed's December 13 FOMC policy meeting.  In fact, the Fed Funds futures market shows the probability of another rate hike by year end has jumped higher to 57.8% from 27.3% last week while the current implied probability for a rate-hike at the June 2018 FOMC meeting increased to 76.9% from last week's 47.1%.

In housing, mortgage application volume increased during the week ending Sept. 8. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 9.9%. The seasonally adjusted Purchase Index increased 11.0% from the prior week while the Refinance Index advanced 9.0%.

Overall, the refinance portion of mortgage activity increased to 51.0% of total applications from 50.9% in the prior week.  The adjustable-rate mortgage share of activity decreased to 6.7% of total applications from 7.2%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance fell to 4.03% from 4.06% with points increasing to 0.40 from 0.38.

For the week, the FNMA 3.5% coupon bond lost 54.7 basis points to close at $103.28. The 10-year Treasury yield increased 14.82 basis points to end at 2.2023%. The major stock indexes ended the week higher.

The Dow Jones Industrial Average gained 470.55 points to close at 22,268.34, a new all-time high.  The NASDAQ Composite Index added 88.28 points to close at 6,448.47 and the S&P 500 Index gained 38.80 points to close at 2,500.23.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 12.68%, the NASDAQ Composite Index has advanced 19.79%, and the S&P 500 Index has added 11.68%.

This past week, the national average 30-year mortgage rate increased to 3.94% from 3.84%; the 15-year mortgage rate increased to 3.22% from 3.12%; the 5/1 ARM mortgage rate moved higher to 3.20% from 3.10% and the FHA 30-year rate rose to 3.50% from 3.35%.  Jumbo 30-year rates increased to 4.19% from 4.10%.

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

The FNMA 30-year 3.5% coupon bond ($103.28, -54.7 bp) traded within a 54.7 basis point range between a weekly intraday low of $103.703 on Monday and a weekly intraday high of $103.156 on Thursday before closing the week at $103.28 on Friday.

The stock market continued to move higher while bonds sold off in response.  Mortgage bonds fell below last week's nearest support levels and these now become resistance levels.  The bond is no longer severely "overbought" and the slow stochastic oscillator is now moving toward an "oversold" level, but has not yet reached this position.  Technically it appears the bond will continue a little lower to test support at the 50-day and 100-day moving averages.  As a result, mortgage rates may rise slightly in the coming week.  Also, bond traders will be focusing on this coming week's Federal Reserve FOMC meeting on Tuesday and Wednesday.  It is widely anticipated Fed Chair Janet Yellen will announce the beginning of a gradual reduction of assets, including mortgage bonds, to shrink its huge balance sheet resulting from its response to the 2008 financial crisis.  While Yellen is unlikely to "upset the apple cart" with such an announcement, you never know how traders will respond to the Fed's plan for shrinking their balance sheet by selling bonds.