Happy Saturday!
Bond Market Update
This week we saw a lot of movement in the bond world, some of it against what would traditionally be the reaction to the data.
In the financial world, unexpected movements can cause confusion and speculation. This was the case when the bond market sold off in response to a big miss in Retail Sales, with the catch being that the drop wasn't necessarily significant. Retail Sales came in at -1.0% versus expectations of -0.4%, causing confusion for traders who expected bonds to rally.
When searching for alternative explanations, the control group data, which excludes cars, fuel, food, and building materials, proved to be a better candidate. Additionally, January was the strongest month of Retail Sales in exactly one year, and in the context of the past 3 months, the drop averages out to a quarterly level of growth that is very close to as high as it's been since early 2021. However, for bond traders looking for decisive confirmation of a shift in consumer behavior, the data was not weak enough.
Bank earnings were suggested as a possible explanation for the bond market sell-off, but this was dismissed as there was only one significant winner among S&P banks in terms of stock price reactions. In the end, traders were left with a bit of a mystery move and the explanation that Retail Sales weren't weak enough.
Overall, unexpected market movements can often lead to speculation and confusion. Traders should take a step back and analyze all the available data before making hasty decisions. While there may not always be a clear explanation for a market move, a calm and rational approach is always best.
Mortgage Application and Rate Update
The Mortgage Bankers Association (MBA) has released its Weekly Mortgage Applications Survey, which shows that there was an 8% increase in home purchase applications in the first week of April 2023. Refinancing activity, on the other hand, experienced only a 0.1% increase, and is now 57% lower than it was one year ago. Refinancing accounted for only 27% of applications, compared to 28.6% at the end of March.
The average loan size also increased, with the average loan now at $387,700, up from $381,100 the prior week, and purchase loans rising from an average of $428,000 to $481,900. The share of Federal Housing Administration (FHA) applications increased from 12% to 12.3%, while the Veterans Affairs (VA) share jumped from 11% to 12.8%. Applications for United States Department of Agriculture (USDA) loans only accounted for 0.5% of the total.
Mortgage rates have decreased, with the average contract interest rate for conforming 30-year fixed-rate mortgages (FRM) dipping to 6.30%, the lowest level in two months. The average rate for jumbo 30-year FRM also fell to 6.26%. The rate for 15-year FRM decreased from 5.97% to 5.78%, while the 5/1 adjustable-rate mortgage (ARM) had a rate of 5.51%.
MBA's Chief Economist, Mike Fratantoni, commented on the data, saying that last week's data showed that the job market is beginning to slow, which led to the drop in the 30-year fixed rate. Prospective homebuyers have been sensitive to any drop in mortgage rates, leading to the increase in purchase applications. Refinancing activity remains low, with most homeowners currently locked into lower rates.
Overall, the housing market is showing signs of a recovery, with increased purchase applications and decreased mortgage rates. As rates attempt to pull back from their recent highs, it is likely that purchase applications will keep increasing as buyer's sitting on the sidelines may get back in the game.