July 16, 2010 — Mortgage rates fell a bit more this week amidst lackluster economic news to set yet another record, but failed to drum up much enthusiasm from would-be borrowers.
Minutes from the Federal Reserve’s policy-setting meeting of June 22-23 revealed a mixed bag of sentiments. Discussions outlined in the minutes noted the Fed’s trouble in finding enough desired MBS to purchase to finish its $1.25-trillion purchase plans, while at the same time discussing how best to plan for unloading the portfolio they’ve accumulated to date (and what to do with the proceeds). During the meeting, the FOMC group expressed optimism that the moderate recovery would continue, even as staff economists marked down their forecasts for economic growth for the rest of the year and beyond. While noting strong gains in the economies of some of our trading partners, they also took note that “concerns about the fiscal situation of several euro-area countries intensified sharply.”
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With regard to the labor situation, Fed staff reported that “Businesses continued to increase employment and lengthen workweeks in April and May” and that “Labor demand continued to firm in recent months.” As well, “Participants noted that the labor market was improving gradually.” However, this seems a little at odds with the employment report for May, “which [was] considerably weaker than investors expected.”
Much of the rest of the report contained similar offsetting concepts. With flight-to-quality panic out of the market for the moment, it’s little wonder that mortgage rates have been directionless.
HSH’s overall mortgage-rate gauge, our Fixed-Rate Mortgage Indicator (FRMI) includes rates for conforming, jumbo, and the GSE’s “high-limit” conforming products and so includes a broad swath of the mortgage-borrowing public. The FRMI closed the week by falling two basis points, landing at 4.98%. If a long-term fixed-rate mortgage isn’t the best option for you, perhaps you might consider a hybrid 5/1 ARM, which finished the week at 3.98%.
HSH has several lengthy series of statistics dating back to the 1980s for FRMs and ARMs, Conforming, Jumbo and FHA products. These can be licensed for use — interested parties should inquire here.
Yet it seems that the economic slowdown which began in May became more entrenched in June, as more signs of weak activity accumulate. Conforming 30-year loans shed two basis points from last week to establish the latest record low, but while low rates have created some new demand for refinancing, the applications index from the Mortgage Bankers Association of America stands at levels not seen since 1996 — and there is little indication that it will pick itself up off the mat anytime soon. Since the two homebuyer tax credits borrowed from future demand, that’s to be expected during these economic times. If home sales fail to improve — and there are no signs that they will — additional downward pressure on home prices will be the result. (Will that create Congressional impetus for yet another tax credit?) Some housing-related data are due next week, and if recent trends are any guide, they promise to be on the ugly side.
Retail Sales slumped by minus-0.5% in June, a second lackluster month in a row after a 1.1% downturn in May. Removing high-cost auto sales and erratic gasoline prices from the mix left a 0.1% rise in overall sales — a weak figure, especially when contrasted against the 1.2% and 1.3% increases in February and March. Consumer incomes remain challenged, job prospects are poor, and credit remains tight, with any considerable economic boost from consumer spending still somewhere in the future.
We are spending a little bit more domestically, though, or at least importing more goods. The nation’s imbalance of trade widened to $42.3 billion in May, as imports rose more than exports did. A widening trade gap probably reflects a combination of somewhat firmer growth here, coupled with the effects of a stronger dollar. On balance, a stronger dollar makes imports cheaper and exports somewhat more expensive. This can also be seen in the costs of imported goods during June, which declined by 1.3% (-0.5% excluding petroleum imports). Import prices had been increasing at a double-digit annualized rate as recently as April, but have since decelerated to a 4.5% clip. Despite the stronger dollar, goods destined for export also saw declines in aggregate costs, with a 0.2% dip during the month but a firm 4.3% increase over the past year.
Of course, some of the goods we’re importing are being stockpiled in hopes of improving downstream sales. The inventory rebuilding cycle we’ve been enjoying does seem to be running out of steam to some degree, however. The broadest measure of inventory levels at concerns of all stripes increased by 0.1% in May, with retail levels climbing 0.3% and wholesalers by 0.5%. Manufacturers pared holdings by 0.4%, but sales slowed somewhat more than that, leading to a slight uptick in the goods-on-hand-relative-to-sales ratio. This was also the case for retailers, and although inventory levels are still lean, points to a lack of confidence of firms to add goods without knowing whether they will come off the shelves at some point. That wariness may show in slowing (or smaller) orders for goods as we move forward.
There has been some discussion in the popular media about the possibility of deflation, which is a widespread decline in prices throughout the economy. This is still a remote possibility, as the Fed acknowledged at its recent meeting, but more likely is a period of low price growth or even disinflation. That said, there is a potential for renewed asset deflation, which has already occurred most notably in the cost of homes and equity prices and may again show.
At present, price pressures remain subdued, and with plenty of “resource slack” in the economy they seem likely to remain that way for at least a while. June’s Producer Price Index (PPI) came in at minus-0.5%, the third consecutive month of declines. The ‘core’ figure, which omits its most volatile components, inched up a scant 0.1%. Over the past 12 months, headline PPI has climbed by 2.8%, but the core PPI has risen by just 1.1%. The report also notes that producer prices for ‘intermediate’ (in production) goods have weakened, largely due to lower fuel costs. That could translate to slower price growth down the road.
The Consumer Price Index also bettered expectations with a minus-0.1% reading for June, helped along by falling energy costs (including cheaper summertime gasoline). The ‘core’ CPI rose 0.2%, a modest gain which nonetheless will help to quell fears of deflation. June’s core figure represented an increase of 0.9% from a year earlier. Without job and wage growth, and until it’s clear that the economy is in a real growth cycle, it’s going to be difficult for prices to get much traction.
So far, the recovery has been led by manufacturers as retailers have been busily rebuilding their inventories as they anticipated more consumers buying more goods as the recession ended. That has helped to boost economic output in the last quarter of 2009 through the first half of the year, but with the continued distress in the employment picture, that boost is fading as consumers just aren’t buying enough to encourage more production. June’s report that Industrial Production rose 0.1% came as a mild surprise since most observers expected a negative number after May’s 1.2% growth. Capacity utilization was unchanged at 74.1%. Reasonably strong business spending is keeping factories reasonably busy, but the slippage reinforces June’s ISM report which is signaling a slowdown in the forward momentum for growth.
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The manufacturing surveys released late this week from the Federal Reserve branches in New York and Philadelphia confirm the slowdown. The Philly Fed’s “general business conditions” index fell to 5.1 for July, down from 8.0 in June and on the heels of a sharp drop from 21.4 in May. The NY area’s ‘headline’ number, also 5.1, was a nosedive from 19.6 in June; it now stands at the lowest level since December. The employment picture in the two surveys was mixed, but the reports suggest that layoffs could be imminent.
The weekly jobless outlook from the Department of Labor, however, brought better news. For the week ending July 10, 429,000 new claims were filed; this was actually somewhat better than expected, and was the lowest level for initial weekly claims since July 2008. The improvement stems from the fact that many manufacturers, particularly in the automotive sector, aren’t following the usual pattern of shutting down manufacturing facilities for the summer. While that’s a good sign since it stems from increased demand, it does introduce some distortion into the weekly job numbers. Continuing claims for benefits increased by 247,000 for the week ending July 3.
After moving to match a year’s high of minus-41 just a couple of weeks ago, somewhat darker moods have descended again on the participants of the ABC News/Washington Post poll of Consumer Comfort. The minus-44 notched during the week ending July 11 continues a step back from the 2010 high, itself a still-poor reading. Another popular gauge, the University of Michigan consumer sentiment index, plummeted to 66.5 in July, down nearly 10 points from June’s 76. Given that June represented the highest point in well over two years, some decline was probably inevitable, but the weak economy — particularly unemployment and Congress’ inability so far to extend jobless benefits — is weighing more heavily on respondents’ minds.
With all of the above in mind, we have stepped fully into the Summer doldrums. While never a period of precise autopilot, activity levels slow and sizable erratic moves become less common (excepting a market completely breaking here or there). With June’s economic data sporting largely soft numbers, low mortgage rates should continue to provide refinancing opportunities and vital support for housing markets. With demand soft and the factors which serve to create housing demand still absent, the market can use all the help it can get. While too soon to know, we tend to think that if home sales fail to improve by Summer’s end to any real degree, we just might see another homebuyer tax credit get some play.
Over the next week or so, we’ll see a slew of housing-related numbers, including Housing Starts, Building Permits, Builder Sentiment, and of course new and existing home sales. In the quiet aftermath of the spring expiry of the last homebuyer tax credit, none of these reports hold much promise.
With the May-June global panic behind us, and apparently some new (if mild) appetite for equities or other riskier investments, underlying interest rates have stopped falling or even firmed a bit, and so should mortgage rates in the week ahead.
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