June 17, 2011 — The official start of Summer comes next week, bringing with it warm, lazy days and thoughts of vacation. That is, unless you’re the Federal Reserve, who meets next week to ponder what comes of the economy as its QE2 program of purchasing $600 billion in Treasury bonds comes to fruition.
There’s plenty of evidence that we’re entering the summer months on a slow note. The expiration of whatever additional stimulus QE2 added to the economic climate will certainly soften growth a little bit more. At the same time, there is reason to expect that growth move higher later in the year.
For their part, mortgage rates spent a good part of the spring on following the economy down but do seem to be leveling off as we step into Summer.
HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages rose by two basis points this week, landing at an average of 4.77%. FHA-backed 30-year fixed-rate mortgages are arguably driving whatever sales of homes to first-time homebuyers are occurring, and also give low-equity refinancers an option to pursue. Rates for these products moved four basis points higher to close the week at 4.44%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs; whose five-year fixed periods now average just 3.39%, up just three hundredths of a percentage point from last week. Certainly, there are savings to be had for borrowers willing to accept some future interest-rate risk.
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Certainly, there is a lot for the Fed to consider. Although the economy has slowed, the hangover effects from strong oil prices continue to press inflation a bit higher. There are concerns and unknown effects from a potential Greek (and possibly other) government-debt default. Given an ocean of red ink, there is little likelihood that new forms of fiscal stimulus will make their way out of Congress (and even if they were so inclined, the effects of any such moves would be months away at best).
For the most part, the kind of inflation we have endured is what the Fed would consider “transient”, given that it has occurred largely food, energy and commodity prices. While some of those increases do pass down into more durable price pressure, for the most part they simply rob the economy of marginal consumer spending, which in turn causes a slowdown. The Producer Price Index moved 0.2% higher in May, but that was a considerable improvement over the 0.8% rise in April. So-called “core” PPI rose by a like amount and was also a little lower than last month. While prices measured here are 7% and 2.1% (core) higher than last year at this time, things may start to level now that oil has fallen below $100/bbl.
Prices at the consumer level told much the same tale. “Headline” CPI rose by 0.2% in May, half as much as April’s increase, but some earlier cost inputs have made their way into “core” prices which exclude food an energy costs. The gain of 0.3% for the month was a tenth-percent higher than April. While not much on its own, it is the difference between a 2.4% annual rate and a 3.6% one over time; however, that’s a forward projection, and when we consider annual inflation we look at actual figures, which show a 3.4% increase in prices (1.5% at the core). To be fair, all of these are still mild readings, but no one can claim they aren’t on an overall rising path compared to where they have been in the past few years.
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.
Rising prices for food and gasoline eat disposable dollars, leaving less to be spread around the economy. Retail Sales declined by 0.2% during May, which was actually a smaller fall than was expected. For a change, falling gasoline prices and weak auto sales dragged the figure backward, but even removing them from consideration left only a 0.3% gain for the month, a second such lackluster month in a row. It has been noted that the spike in gasoline prices during the late winter and spring ate up every dollar (perhaps more) of the 2011 payroll tax reduction, so it’s little wonder that sales are soft.
At least one effect of the slowdown in sales is a bit of a bloat in inventory levels. The broad measure of business inventories rose by 0.8% in April, a smaller increase than that seen in April. The overall increase in goods on hand caused a slight rise in the inventory-to-sales ratio; cautious manufacturers, wholesalers and retailers are wary of accumulating too many unsold goods amid uncertain final demand, leading to smaller and less frequent orders for more.
While the disruptions in the supply chain caused by the Japan earthquake, tsunami and nuclear disaster are probably at least partly to blame, there has been a hard downshift in manufacturing activity in at least two Fed districts. The New York Fed noted that their gauge of activity in the Empire State slumped to negative 7.9 in June from a positive 11.9 in May. It was the first negative reading since November of last year and a lousy bookend for what was a pretty strong six-month period. Much the same was seen in the Philadelphia Fed’s localized report, which turned decidedly negative in June, sliding to minus 7.7 from a mildly-positive 3.9 in May. This leave little doubt that the slowdown has crept into the sector of the economy which has been most reliable when it comes to driving the recovery forward.
Industrial Production did manage a 0.1% gain in May, and was pushed there by increases in manufacturing and mining output. Utilities produced 2.8% less for the month, as cooler weather meant less call for air conditioning during the month. Overall, the percentage of production floors in active use remained at 76.7 for the second straight month and the data above suggest that June might not move the needle much higher, either.
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If the present isn’t all that rosy, perhaps it’s better to focus on the future. The index of Leading Economic Indicators purports to do so, and sported a 0.8% increase in the May reading. While it may be that the LEI better reflects the economic climate from the period in which it is assembled, the rise from just a 0.2% gain in April may provide some momentum and perhaps lend some optimism about the outlook for the months just ahead.
Optimism certainly is fairly short supply. The initial June reading of the University of Michigan’s Consumer Sentiment index found a setback. The indicator eased back to a 71.8 level from May’s final mark of 74.3, and we remain below the peak for the economic recovery so far, let alone reaching any levels which might be considered normal or optimistic. It’s quite hard to be an optimist when so many troubles are so evident each and every day, and jobs so scarce. The weekly Bloomberg Consumer Comfort Index nudged higher to minus 44 during the week ending June 12, but remains solidly rangebound in dark territory.
New unemployment claims are drifting sideways, but perhaps with a slight tilt toward improving. During the week ending June 11, another 414,000 first-time applications for benefits were filed at state windows, a tad lower than that seen in recent weeks and the best figure since a month ago. This figure needs to diminish if we hope to develop the kind of enthusiasm needed to instill the confidence required to take on risks and expensive new obligations, like cars and homes. These broad expressions of confidence continue to be missing from the economic recovery, which will continue to founder without them.
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Homebuilders know this perhaps better than anyone. The sentiment index from the National Association of Homebuilders declined by a full three points in June, slumping closer to recession lows and shrinking from recovery “highs”. The level the index remains at — 13 in June — is consistent with a deep and on-going recession in homebuilding. The challenges of cheap and plentiful foreclosed properties enticing clients away will continue to batter the industry for the foreseeable future. That said, it is expected that some opportunities may form in the building new residences to serve the rental market. Indeed, Housing Starts did move up a little in May, to an annualized rate of 560,000 units. That was a pickup of some 19,000 units over April; single family homes, though still very weak, managed to put in their best showing since January, and multi-family construction chipped in, too. Looking down the road, permits for new building climbed by 8.7% to a 612,000 annualized pace, the highest level seen since last December.
So the Fed must take all of this into consideration and context as they ponder how best — and when — to start to remove all of the extraordinary “policy accommodation” added over the past couple of years to try to steer the economy away from depression and recession. Minutes of the last Fed meeting suggested that there was a lot of conversation to this regard, but the outlook has changed over the last six weeks, and not for the better. It is likely that this meeting will feature more concrete planning on how the Fed will extricate itself — agreeing in principle on which levers to pull and in what sequence — but the timing of any actions will be left for future consideration.
With optimism flagging and economic expectations being ratcheted down to a great degree, mortgage rates have probably fallen about as far as they can at the moment. Given present levels for rates, and if they hold, entering the summer doldrums might give some folks a chance to refinance or even buy a home before heading to the beach. Aside from the Fed, there is a very light calendar of economic data on tap. On balance, that means less bad news in the headlines, and mortgage rates may firm up by a couple of basis points.
For an outlook which will take you up until early August, have a look at our new 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.