August 13, 2010 — It goes without saying that the deceleration in economic activity has become more pronounced in recent months. At the close of its meeting on Tuesday, the Federal Reserve acknowledged as much, and got itself back in the “quantitative easing” game but in a different way than before.
The Federal Reserve undertook steps to help long-term interest rates to be more stable and lower than they would otherwise have been when they initiated programs to purchase both MBS and Treasury obligations in 2008, 2009 and 2010. Those programs came to a close at varying intervals over the past year and generally had the desired effect on rates and credit availability.
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Since the end of the MBS program, the Fed has spent considerable time talking about how it would reduce the size of its balance sheet over time — and do so without disturbing the markets for fixed-income investments. On Tuesday they unveiled a new wrinkle, and mortgage rates reacted with another downward shift. This decline was probably related more toward a loss of optimism about the economy and reduction in concerns over inflation than any anticipated support for mortgage markets.
Every week throughout its 30-year history, HSH has produced an overall mortgage monitor — our Fixed-Rate Mortgage Indicator (FRMI) and never before have we seen values at these ultra-low levels. The FRMI includes rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public. The FRMI shed eight basis points (.08%) this week, finishing the period at 4.79%. If anyone wants them, an alternative to a fixed-rate mortgage can be found in the form of a Hybrid 5/1 ARM; these shorter-term solutions can be had at an average rate of just 3.77%.
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.
The Fed announced on Tuesday that instead of shrinking its balance sheet from over $2 trillion, it will instead change the composition of its holdings and keep their books at present levels for some time. As the mortgages it holds are paid off — through refinancings or by borrowers moving — the Fed will take those monies and purchase more Treasury obligations. It was expected that these mortgage holdings would run off at about a $200 billion annual rate, but with low mortgage rates in the market and high levels of refinancing, that run rate may be picking up. If the Fed simply retired those funds and shrank its holdings of debt it would represent a kind of tightening of economic policy as the global economy’s capacity for debt would have been reduced measurably.
In general, it is a small, symbolic move — but one which could produce great value to the Fed as time progresses. With this program operating again, the Fed would find it easier to expand its holdings if need be; it can change its mix of purchases to influence rates of differing maturities for the benefit of different audiences… and even re-include MBS purchases down the road should it become necessary. With outstanding rates already in the market, that probably won’t need to occur anytime soon; in fact, the Fed’s move to snap up Treasury debt may serve to increase interest and private investment in higher-yielding MBS, and so indirectly help keep mortgage rates low. Purchases are slated to begin next week.
Whatever boost to the economy accrues to this program will surely be welcome. None of the economic news has been particularly good over the past ten to twelve weeks and there was certainly little to cheer in the latest batch.
The nation’s imbalance of trade exploded during June, rising by $7.9 billion for the month. Exports slowed by several billion dollars, probably related to the euro-zone mess at that time (not that there’s been much improvement since), and imports jumped sharply. The stronger dollar during that period no doubt played a role, but the surge in imports might have revealed a little more domestic demand in June than was previously thought.
Some of the boost in imports may have been reflected in the 0.1% increase in inventory levels at the wholesale level in June. With the recession’s stockpile drawdowns behind us, the process of replenishing the shelves and larder continues, but at the slowest pace since January. Also, a second consecutive month of slowing sales may signal growing caution about the need for future orders. Inventories at retail concerns ballooned by 0.8% during the month, but sales were such as to keep the ratio of goods on hand relative to demand at a steady level. Manufacturers were accumulating goods at a rapid pace earlier in the year, but have now pared holdings in back-to-back months.
Retail Sales for July were lackluster at best. The 0.4% gain failed to meet expectations, and was half the headline amount once auto sales were excluded. The back-to-school shopping season seems to be off to a very sluggish start as weak job markets and income gains make substantial new spending a challenge for many parents this year.
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After two months of declines, prices of imported goods have firmed a little bit lately. In July, the aggregate value of goods brought to these shores rose by 0.2%, a fair turnaround from the -1.3% figure for June. Goods destined for export showed a 0.2% decline in value. The annual rate of increase in import costs has slowed markedly in the last three months, while exports prices have been comparatively stable.
Inflation remains a worry for the future, even if the Consumer Price Index nudged just 0.3% higher in July. That rise was the first increase in the last three months and the largest one-month increase since last year, but the 1.3% annual rate for headline inflation remains well below the Fed’s hoped-for target, let alone any danger zone. Core CPI, which leaves out unpredictable food and energy costs, rose by just 0.1% and has climbed by a weak 1% over the past year. Although falling by 0.1% this month, food costs may soon be back on the rise, boosted by sizable increases in wheat costs related to drought in Russia.
After tremendous gains over the last five quarters, workers with jobs can produce no more in the time allotted to them. Worker productivity declined by 0.9% in the second quarter of 2010, the first decline since the fourth quarter of 2008. The decline in output per hour occurred because the number of hours worked expanded by its fastest rate since the first quarter of 2006, probably a restoration of more full-time schedules and such. In that regard, it could just be that businesses are simply expanding the workweek in order to avoid hiring new people.
However, the fact that productivity gains have slacked could be construed as a hopeful sign that the labor market may be thawing to some degree, but of course any gains would be predicated on keeping the present rate of GDP from faltering — not a sure bet at this point by any means.
In the interim, more folks are standing in unemployment lines. During the week ending August 7, another 484,000 applications for benefits were filed at state windows. Like last week, this number is far closer to the top of 2010 ranges than bottoms and simply serves to reinforce the idea of a job market which isn’t performing.
This of course has affected consumer moods, but in that regard, there was some minor improvement of late. The weekly ABC News/Washington Post poll of Consumer Comfort rose from 2010 lows by three ticks during the week ending August 8, and the preliminary August Consumer Sentiment figure from the University of Michigan managed a 1.9 point gain, too. Falling though much of July, perhaps the receipt of “extended” unemployment benefits in the last week or two has served to stabilize moods, now that some money is again coming into households.
Mortgage rates continue their slow grind down into record territory. Since mid May, the total cumulative decline now amounts to only a half-percentage point, but the decline has been more or less regular since that time. Low rates are certainly enjoyable, but come as a result of a terribly weak recovery, and we’d gladly see a half-percentage-point increase in rates (back to mid-May levels) in exchange for a one percentage point drop in the unemployment rate — or a couple hundred thousand fewer layoffs each week.
A fair pile of fresh economic news out next week, including two observations of the new home market. That will be accompanied by two regional looks at manufacturing strength, industrial production, producer prices and the more forward-looking index of Leading Economic Indicators. For our part, we’ll be most interested in the trend in credit tightening (or loosening) revealed in the coming Senior Loan Officer opinion survey from the Fed. At last count, tightening had all but stopped in the residential sector and we’ll be keen to see if we’ve yet nudged over to the easier credit side of the line. It probably did, and this would be an expression of modestly better times to come for homebuyers and refinancers.
As for rates? The summer trend of slightly softer rates seems likely to remain entrenched until something changes, like the calendar into September. That won’t occur for several weeks yet, so lower rates next week is the expectation.
Looking down the road toward September? Take a look at our latest Two-Month Forecast.
Also, if you haven’t seen the new HSH.com, why not drop by, have a look and give us your impressions?
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