October 15, 2010 — With the economy limping along a substandard rate, the Federal Reserve seems likely to embark on a bit of an unknown monetary journey. Having exhausted the value of its primary policy tool (manipulating the Federal Funds and Discount Rates) the Fed is expected to turn to Quantitative Easing (QE), a process where they purchase Treasury obligations, which drives down the yields on these instruments. Investors have been snapping up these guaranteed investments for several years, preferring safety over the ability to garner more sizable returns. By driving their prices up (and their yields down) the Fed hopes to make these investments return so little that investors will be forced to consider other opportunities, including mortgage, corporate and municipal bonds markets and such. However, there are no guarantees that this will work or produce the desired effect, or that doing so will produce no effect on future inflation trends.
Mortgage rates continue to trend to new lows, Fed action or not.
HSH’s overall mortgage monitor — our weekly Fixed-Rate Mortgage Indicator (FRMI) — saw the average rate for 30-year fixed-rate mortgages again decline by four basis points (.04%), finding fresh ground at 4.62%. FHA-backed loans are available at an average rate of 4.31%, but there isn’t much homebuying activity going on at the moment. Hybrid 5/1 ARMs shed three basis points (.03%) to close the week at 3.55% HSH.com’s public data series include rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public.
It has been reported that there is already perhaps a trillion dollars being held by firms waiting for viable opportunities to be placed. Its also true that there are billions of dollars being held by the Fed for banks in “excess reserve” accounts which are earning perhaps 0.25%, money which remains parked instead of being pushed out into the economy.
Lowering interest rates may or may not have much effect on final economic growth, since they are at or near record lows already. The price of money could be zero percent, but if there continues to be little reason to borrow to need to expand capacity or invest in additional productivity — even when individuals and firms can overcome today’s underwriting requirements — there will be little net beneficial effect.
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That said, there is little doubt the economy could use a boost, even if September’s data is on balance better than August’s was. A sign modestly improving demand could be see in the widening of the nation’s imbalance of trade. While exports were basically flat, imports grew by almost $4 billion during the month, a clue that domestic demand has firmed a little.
That could also be seen in the 0.6% expansion in Retail Sales for the month, which came in rather stronger than expectations. Excepting clothing, all categories of retailing grew during the month, and July, August and September all been fairly solid showings after weak late Spring period. That sales remained firm is remarkable given the weak job market, slow income growth for those who have jobs and a general aversion to borrowing which formed during the recession.
While discussions of deflation can still be found, a widespread outright decline in prices still seems unlikely. Goods destined for these shores did see a 0.3% dip in price in September, but that came on the heels of a 0.6% rise the month prior and is no cause for alarm. To the extent that this will drag down inflation in the months ahead is unknown, but prices at the producer level are rising somewhat. In September, a 0.4% lift in costs was seen, influenced by rising food and energy costs. Excluding them from the picture left a 0.1% rise. Overall PPI has risen by 4% over the past year.
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.
Over where consumers purchase items, a 0.1% increase in prices was also seen, and the ‘core’ rate of inflation was unchanged from August. Cooler price increases have led to just a 1.1% rise in the CPI over the past year, and at 0.8%, the ‘core’ rate of inflation over that time is the lowest in nearly four decades. Of late, though, increases in commodity and oil prices seem likely to reverse that cooling trend before too long.
A nice upward blip in activity was seen in the New York Fed’s local survey of manufacturing conditions. The 15.7 reading was well above expectations and was the highest level in several months, so perhaps there is some economic momentum yet to be seen from manufacturing as we move toward the end of 2010. Of course, this presumes that final demand will not falter, causing an unwanted expansion in inventory which would preclude the need for production increases.
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There has been a little bit of that going on. In August, overall inventory growth was 0.6%, and the ratio of goods on hand relative to sales continues to creep higher. In the recession, manufacturers, wholesalers and retailers alike drastically slashed their holdings, and even though we are in a growing pattern, are rightfully wary about adding too much to stockpiles without some sense that those goods will move fairly quickly.
Another 462,000 initial claims for unemployment assistance were filed last week, moving the needle back above the 450,000 mark again after a hopeful drift below that level over the past couple of weeks. More people looking for unemployment checks no doubt contributed to the decline in the preliminary October reading of Consumer Sentiment. The University of Michigan’s poll downshifted slightly from the end of September to 67.9 from 68.2 at the end of last month. Conversely, there was a two-tick gain in the weekly ABC News/Washington Post poll of Consumer Comfort, but the minus 45 figure is well-trodden ground this year.
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Sources: FRB, OTS, HSH Associates.
In a little over two weeks time, the Fed will meet again to discuss how best to proceed (if at all) to support the economy. We will also have elections at the same time, and both are factors which might influence mortgage rates. That said, the largest influences are the weak state of the economy and the lack of building price pressures. In this environment perhaps the only thing which might press rates upward (and mildly at that) would be a surge in demand for mortgage money. While there was a nice lift in refinancing activity over the past week, applications for home purchases continue to soften, and refi activity only comes in bursts at key interest rate levels, and only then if there are sufficient numbers of untapped homeowners who can or want to refinance (or refinance again). That group continues to shrink each week, lower rates or not.
Mortgage rates should hold pretty steady again next week, with no more than a replication of this week’s little dip at best.
P.S. If you missed it over the last few weeks, you should have a look at our plan to help responsible homeowners who are underwater. Unlike the “FHA Short Refi” idea, the concept doesn’t penalize homeowners or investors… and there might even be no cost to taxpayers, either. Curious? Read HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.
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