April 15, 2011 — Given the evidence, there’s little doubt that inflation is returning to some degree. Rising prices in the economy tend to foster higher mortgage interest rates, which would be most unwelcome in light of today’s pathetic housing market.
These developing price pressures — even worries about widespread inflation — aren’t yet sufficient to cause an economy-wide rise in prices. There is still plenty of “resource lack” in the form of un- and under-employed people, and factories are hardly operating at levels which would produce an inflation-creating bottleneck in production.
Still, we do have inflation. The question is, is the nature of the inflation we are experiencing more likely to expand to other areas of the economy and further lifting interest rates, or rather such as to cause an economic slowdown… which would tend to see interest rates ease? It is a question that the markets seem to be pondering right now, and at least mortgage interest rates are in a holding pattern as a result.
HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages rose by just a single basis point (.01%) to 5.18% A key component of the first-time homebuyer market FHA-insured 30-year fixed-rate mortgages eased back by rose by two basis points to land at 4.83%. ARMs are starting regain at least some favor in the market, and Hybrid 5/1 ARMs, arguably the most preferred alternative to the traditional 30-year FRM (particularly for jumbo buyers) also sliped back by two one-hundredths of a percentage point (.02%) to finish the week at 3.83%
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Loose monetary policy both here and abroad may have pulled us back from the edge of perhaps a global depression, but some of the effect of that still-flowing stimulus has been a surge in the price of basic commodities, metals, food and energy. At the same time, a good spate of increasing worker productivity allowed companies to absorb at least some of these rising input costs. Lately, though there seems to be a bit more price pressure being passed on through to consumers; coupled with budget-straining rises in food and fuel costs, these may serve to sap the strength of the expansion from already only moderate levels.
Forecasts for GDP have mostly been moved downward over the past couple of weeks. That markdown of the potential for growth — a slowing of demand — may ultimately serve to temper inflation to some degree, or at least tend to flatten out its trajectory somewhat. These become the questions, then: Will slower growth keep inflation low for a continuing period, keeping the Federal Reserve from changing policies very quickly? Alternately, will inflation start to become more ingrained, dislodging inflation expectations and forcing the Fed to move faster, possibly raising rates at a time when the economy may not handle them very well?
At the moment, it would appear that the nature of the inflation we do have is one which absorbs available dollars, keeping them from being spread around the economy in beneficial fashion. The economy may still continue to grow, but at a lackluster pace.
Retail sales are one spot you might expect to see slowness being expressed. During March, sales expanded by 0.4% overall, not all that good, but this figure was improved with the exclusion of auto and gasoline sales, when it registered a 0.6% gain. Job growth has been better over the last couple of months and is providing support for sales, as well as a forming replacement cycle after a long period of retrenchment by consumers.
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.
Some of the increase in outlays might be related to firming prices. Prices of goods coming onto these shores rose a stout 2.7% in March, driven higher by food and especially petroleum costs. Without the influence of more costly oil, a 0.3% rise was noted, a downshift from recent trends. Headline items eat consumer dollars just as efficiently as “core” items do, even if the effects of the former might be more transitory. Over the past year, inbound items are 9.7% higher, so the cumulative effect isn’t to be ignored. Of course, we are exporting a little price inflation, too, with outbound goods carrying prices 1.5% higher than last month and 9.5% higher over the past year.
Of course, import prices can be way upstream of the consumer. Closer to them are Producer Prices and right in the wallet are Consumer Prices. At least some price pressures are seen in the latest reports covering the PPI and CPI. At the manufacturer level, prices increased by 0.7% during March, spurred on by fuel and food costs. Excluding them still left a 0.3% rise, among the largest bumps in prices over the past 12 months. Over the last 12 months, “headline” producer prices have climbed by 5.7% and “core” by a flat 2%, and both are on firming trends.
As mentioned above, not all input costs are passed along… but at least some are. The Consumer Price Index for March moved upward by 0.5%, fast on the heels of a 0.5% rise in February. As with the PPI, food and fuel costs are largely to blame, and the “core” CPI rose by just 0.1% for the month. It would seem that if food and gas are eating up incomes that price increases for other items might have a tougher time getting pushed through, at least for the moment. Still, a 2.7% rise in headline inflation over the past year isn’t all that subdued, even as the “core” rate of CPI is up by just 1.2% over the same period. Since, the annualized rate of both headline and core CPI have doubled in the past four months, a firming trend is evident here as well, erasing concerns about deflation which existed not all that long ago.
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The nation’s imbalance of trade narrowed just a little during February, slipping to $45.8 billion from $47.0 billion in January. Both imports and exports declined during the month, and indication of a little bit of economic slowing amongst our trading partners during the period. Imports moved down a little more than did exports. Whether there was a quickening in activity in March remains to be seen, but there was a nice pickup in Industrial Production, which gained by 0.8% for the period. Manufacturing, mining and utility output all rose, and the percentage of the nation’s productive capacity in active use continues to tick higher, reaching 77.4% last month, its highest figure of the recovery to date.
Manufacturing may continue to power the recovery forward, if at least one localized report can be said to be a proxy for the nation as a whole. The Empire State Manufacturing index bounced higher last month, with order and employment indicators in the report sporting strong gains, moving the gauge to its highest level in a year. The increase continues an upward climb which began last November, when the indicator stood a minus 10.4, a far distance from the 21.7 it enjoyed in April.
Although new claims for unemployment benefits bounced over the 400,000 mark during the week ending April 9, landing at 412,000 for the week, the overall trend has been a mildly positive one for a while now, and so this lone number can probably be disregarded as the beginning of any new trend. Nonetheless, it is the highest single weekly figure since mid-February and should impart some caution to any optimism about the state of the labor market or how quickly it is improving. That said, in the Fed’s latest survey of regional economic conditions (called the “beige book” for the color of its cover) the Fed noted that “most Districts reported that labor market conditions were generally stronger than in their last reports” but it goes without saying that job growth in this recovery has been weak and uneven at best.
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In the document, which covered the period up to April 4, the Fed did say that “economic activity generally continued to improve since the last report.” While generally modest in nature, “most Districts stated that gains were widespread across sectors” with manufacturing leading the way upward.
After last month’s downturn, probably due to the shock of the earthquake/tsunami/nuclear tragedy in Japan, consumer moods have begun to improve just a tad. The weekly Bloomberg Consumer Comfort Index moved a little higher during the week ending April 10, rising 1.5 points to land as minus 43 for the period. Also, the interim value of the University of Michigan’s Consumer Sentiment index nudged 2.1 points higher to stand at 69.6 for the first half of April. This suggests a full-month recovery of at least some of the 10-point from which happened in March.
The economy continues to grow, but at what looks to be a somewhat weakened pace. Inflation continues to grow, at what seems to be a quickening pace. The nature of these selective price increases is likely (at least so far) to produce a tempering effect on economic growth… and interest rates remain pretty stable as a result. At this moment, it isn’t clear if the underlying economic trend is strong enough just yet to produce the kind of growth needed to allow price concerns to spread, not is it clear that prices have or will rise so quickly as to overwhelm the positive forward momentum which has come only with extraordinary effort. For the moment, at least, we’ll bet on the side of the equation which says $4/gallon gasoline and food prices which continue to step higher month after month are sufficient to trim a fair bit from the economic sales as we move toward summer. We saw some of this inflationary movie just a couple of years ago, where oil end energy prices became infused into the economy for a time, contributing in its own way to the severe recession which followed. This is a milder case, at least for the moment.
So which trend will win? Inflation, faster growth and higher interest rates? Inflation, slower growth and softer interest rates? We won’t know until it gets here, but absent another economic catastrophe, don’t count on significantly lower mortgage rates, even if they may dip from time to time. Next week, it seems likely we’ll take back a few basis points of the last couple of weeks increase.
For an outlook which will take you though May, check out our latest Two-Month Forecast.
There’s a lot going on in mortgage markets this spring and beyond. If you missed it, we wrote an outline to get you up to speed. Take a minute and read HSH’s 2011 Mortgage Market Swirl.
One way to keep refinancing activity moving forward is to help underwater borrowers refinance. How? Have a look at our idea — read about HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.
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