April 29, 2011 — The Federal Reserve ended its regularly-scheduled FOMC policy-setting meeting on Wednesday. In a new twist, Federal Reserve Chairman Ben Bernanke took to the airwaves for a 50-minute question and answer session. Little new was revealed about the Fed’s concerns and future intentions; anyone who expected the Fed to lay its cards on the table for all to see was surely misguided.
The statement which signaled the close of the meeting was released a little earlier (12:30pm instead of 2:15) but for all the new revelations it brought it could have been released before the meeting even began. “[T]he economic recovery is proceeding at a moderate pace,” noted the Fed, and while “Inflation has picked up in recent months [...] longer-term inflation expectations have remained stable.”
Mortgage rates, seemingly as unconcerned about inflation as the Fed appears to be, found new reasons to drift downward, and there may be reason to believe that we could see more of this as Summer approaches.
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 declined by three basis points (.03%) to ease to 5.06% A key component of the first-time homebuyer market, FHA-backed 30-year fixed-rate mortgages fell by just two basis points, falling to 4.72% for the week. Although there are of course future concerns, at least some borrowers should be considering hybrid 5/1 ARMs, which have an attractive initial interest rate averaging 3.66% this week, down five-hundredths of a percent from last week’s final average.
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The Fed also decided to let its program of purchasing $600 billion of Treasuries to run its course. QE2, as the program was dubbed, will come to a close sometime by the end of June. To the extent that economic activity was boosted by the program, we could very well see a falloff in growth of a like amount. Discounting future growth may be at the heart of the recent decline in interest rates. Certainly, a decline inflation wouldn’t be.
The Fed did also release their new forecast for GDP growth and inflation for the coming year and beyond. The new forecasts call for slower economic growth (centering around a 3.2% annual pace, down from about 3.7% in the January forecast). Inflation expectations were ratcheted up considerably; the Personal Consumption Expenditure (PCE) inflation (the Fed’s preferred gauge) increased from a January forecast of about 1.5% to a new 2.4% expectation. Essentially, growth is expected to be weaker and inflation somewhat higher.
The fact of the matter is that growth is already weaker and inflation rising. The initial estimate of GDP growth for the first quarter of this year came in at a subdued 1.75%, a considerable downshift from the 3.11% clip seen in the fourth quarter of 2010. PCE inflation for the quarter climbed to 3.5% from 1.7% in 4Q10, and “core” PCE moved from 0.4% to 1.5% over the same three-month period. In his press session, Mr. Bernanke took some pains to express that the Fed believes these inflation trends are “transitory”; rising food and gasoline prices may indeed foster slower growth, and such slowing would eventually serve to cool price pressures, but would carry unwanted implications for the economy as well.
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The Fed again characterized the housing sector as “depressed”. Even outstanding mortgage rates are failing to overcome poor economic conditions which are perpetuating a lack of demand. Plus, home prices are still softening in many areas, and that removes the urgency for a potential homebuyer to move quickly. Sales of new homes did move higher in March, but the 300,000 annualized rate of sale remains among the weakest on record. At the moment, there are about 7.3 months of available supply, with still 183,000 units built and ready to sell. IN the face of such soft demand, builders won’t or can’t build more “on spec” in hopes of finding future buyers.
While the economic aftershock from the earthquake/tsunami/nuclear crisis no doubt contributed to the slowing the in the first quarter, perhaps the recent rise in new jobless claims might be attributed to those troubles as well, or perhaps the late Easter this year has made seasonal adjustments more of a challenge than usual, or poor weather trends. Whatever the case, new claims for benefits had been on a gentle downward trend for most of this year, then suddenly flared back above 400,000 three weeks ago and have remained there since. During the week ending April 23, another 429,000 folks filed unemployment claims for the first time, and April stands to be the poorest month since January in this regard. The labor market is kicking off the second quarter with no momentum whatsoever.
That’s largely the case with consumer attitudes, too. The final April look at Consumer Sentiment from the University of Michigan did manage to increase a little after a sharp March downturn, rising by 2.3 points to stand at 69.8 for the month, still well below the 77.5 “high” in February, itself nothing to get excited about. As measure by the Conference Board’s monthly survey, Consumer Confidence did nudge a little higher, moving up to 65.4 in April from March’s 63.8 mark, while the weekly Bloomberg Consumer Comfort Index retreated by 2.5 points to a minus 45.1 for the week ending April 24. Conflicting trends are evident here, but both the Confidence and Sentiment indicators found inflation expectations holding at rather high levels. We’ll venturing a guess that soaring energy, food and commodities prices are likely to keep pressure on moods, most notably $4+/gallon gasoline as the “Summer driving season” approaches. Mr. Bernanke did express sympathy for the troubles higher oil prices are causing, blaming rising global demand but not mentioning that the weak dollar is at least as much to blame, if not more, for that trend.
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The weak dollar, while increasing the costs of imported goods, is serving to help foster growth in the manufacturing sector as it helps make our goods less expensive in foreign currencies, prompting trading partners to buy more. Factories have been the driver of the recovery so far, but there has been a faltering in the pattern of late. Local indicators of manufacturing strength in the Richmond and Kansas City Federal Reserve districts both fell by about half in April when compared to March, remaining on the positive side of the ledger, if less so, for the period. Local surveys of purchasing manager groups in the New York and Chicago regions also noted a cooling of activity, with the New York group’s tool rising by the smallest amount in a year, and Chicago stepping back from multi-year highs during the month. This slowing suggest that while the economy remains positive, early indications are that the second quarter might even be slower than the first was.
Still, there are some bright spots. Orders for durable goods rose more than expected in March, notching a 2.5% gain in the face of a 2% expectation, and business-related spending roared back during the month, gaining by 3.7% after a weak 0.5% rise the month before. These orders should keep factory activity on the upswing in the period just ahead, contributing to growth. Also, the Chicago Federal Reserve’s amalgam of 85 economic indicators, called the National Activity Index, put in a fourth consecutive month in positive territory with a reading of 0.26 for March. The NAI measures whether the economy is growing above or below its natural trend, thought to be about a 2.8% GDP (which would bring a neutral rating of zero) so there is some hope for upward revisions to the first quarter and some perhaps some additional momentum for the second.
It was somewhat more expensive to keep an employee on the books in the first quarter of 2011. The Employment Cost Index rose by 0.6% for the period, up from 0.4%, driven upward by rising costs of benefits. Wages rose by 0.4% for the quarter. Over the past year, wages showed a 1.5% gain, while benefits increased by twice that pace. With that soft ware growth, the kind of rising out-of-pocket costs such as those noted above make it very hard to have spare cash to spread around the economy. Personal Income growth, which includes all manner of local, state and federal supports, investment income and other gains in its calculation, rose by 0.5% in March, up from 0.4% in February. Wage growth was just 0.3%, with the rest of the gain coming from investment, transfer (government support) and dividend income. Personal consumption expenditures rose by 0.6% for the month, and with outgo higher than income, the nation’s rate of savings eased to 5.5% for the period. Overall, incomes are up 5.3% over the past 12 months, and spending 4.6%, and rising savings obviate the need for consumers to borrow money to buy more goods and services.
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All this said, the economy isn’t really firing on all cylinders and seems unlikely to do so anytime soon. If nascent price pressures do prove to be transient, the economy will probably have a little more traction as we move deeper into 2011. However, price increases are usually quick to come and slow to go (mortgage rates tell much the same tale) and since they are still seem to be on an upward swing it’s way too soon to expect that they will diminish in a fashion which doesn’t upset the economy any further.
While the popular belief is that the Federal Reserve started their program to spur economic growth, we have been of the mind that the QE2 program was more intended to act as a sponge, keeping interest rates from rising rather than trying to influence the downward to any great degree. This would act as a tempering tool to keep rates from flying upwards as the inflation the Fed hoped to foster (to ward off potential deflation) began to take hold. Rates did rise, but have since settled back somewhat as the markets have become more accustomed to an environment of firming (rather than falling) inflation. For a time, perhaps too long a time, investors were eschewing almost all investments but ultra-safe Treasuries, and the Fed’s goal was to de-concentrate those assets from safe-haven holdings to that they could and would be put to more productive use elsewhere. To some extent, this has worked; stock markets are producing solid gains as money flows into them, businesses are starting to re-invest and so forth. But a world still awash in dollars has seen plenty of them moved out of those safe havens, and into precious metals, basic commodities, oil and other staples, frothing up those markets… at least until the Fed (and other central banks to a lesser degree) begin to mop up those funds.
To the extent that the Fed’s move propped up or added to GDP growth is the amount of pullback to be expected when the program comes to a close in June. If we are still feeling the effects of higher prices (and it is very likely that we will) it is very possible that mortgage interest rates could find more reasons to decline than to increase as growth slows, must as they have found reasons to decline in recent weeks as the economic news has turned more gray than rosy. That’s still a bit off in the future, and of course, growth may turn higher between now and then.
Next week’s a busy week in terms of data. ISM surveys, car sales, productivity and the all-important employment report. Mortgage rates have leveled off over the last couple of days, holding pretty steady. With the economic news becoming increasingly muddy, we would expect that mortgage rates hold at about these levels next week. They are pretty close to the low points of the year, for what it’s worth.
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.