October 2, 2009 — With September now behind us, stock markets started October in a fashion similar to other Octobers: they sold off to some degree. After a pretty good third quarter’s profits were booked, at least some of those gains from equity sales have been stashed back into Treasuries, driving yields down. This is turn is pressuring mortgage rates down to the lows of earlier this year.
Of course, that the available economic news wasn’t all that strong also helped investors see the value in low-yielding (but 100% guaranteed) securities, too.
The overall average for 30-year FRMs declined by almost a tenth-percent this week, and HSH’s FRMI closed Friday with five-day average of 5.40%. Five-one hybrid ARMs also eased back, shedding eight basis points to close the national survey at 4.74%. At 5.07%, conforming 30-year FRMs sported their lowest average rate since the late March to late May period gave us nine consecutive weeks just over (and under) the 5% mark.
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Analysts, observers and just regular folks who have been hoping to see some kind of continual improvement in the economy were disappointed this week, as the improvement continues to be sporadic or irregular at best. The final estimate for Gross Domestic Product (GDP) for the second quarter was a sorta-kinda bright spot: the dip for the period was much more shallow than was expected. At a decline of 0.74% for the period, the economy was still in the red — but considerably less so than the minus-6.43% seen in the first quarter of the year. Still, even though a waning recession will give way to growth this quarter (some expect the next GDP report to show perhaps 3% growth), the recovery seems likely to be only a “technical” one, with any positive number produced by replenishment of inventories and one-off affairs like the “Cash-for-Clunkers” program.
When it was running, that program goosed auto sales in July and especially in August, when the annualized sales rate ran up to 14 million units. However, the cold reality of the automakers’ post-$4500 government rebates saw sales crash back to pre-CARS levels of just 9.2 million annualized. That “return to lousy” makes us wonder what other markets will do when federal or taxpayer supports are removed.
With inventory rebuilding already underway in August, there was little additional momentum to boost gains further in September. The Institute for Supply Management survey had a second consecutive month in positive territory with September’s reading of 52.6, the first back-to-back above-breakeven figures since September-October 2007. While the reading was a little below August’s figure, and did run counter to expectations for an increase, it was pretty solid overall. With overall factory orders for August declining by 0.8% due to a decline in transportation orders (orders were +0.4% excluding them) there does seem to be little continual momentum here.
Looking broadly across the economy, the Chicago Federal Reserve produces a National Activity Index each month comprised of some 85 economic figures. While generally improving over the last six months, the indicator suffered a little setback in August when it dipped to minus-0.90 from the previous minus-0.56 level. The NAI reflects how much below (or above) trend the economy is growing, and has featured an unbroken string of negative readings since the last positive figure in December of 2006. Still, figures close to zero mean the economy is getting generally better, even if at an uneven pace.
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The mix-and-match nature of this early recovery could also be seen in two purchasing managers trade group reports of activity for September. A Chicago group reported contracting levels of activity, while a New York-based association reported that a rebound to levels last seen in January.
No rebound is occurring in consumer moods. The Conference Board’s survey of Consumer Confidence stepped back in September to 53.1 where forecasts had hoped to see it rise to 57.0 or thereabouts. While considerably above historic lows of earlier this year, confidence has largely been treading water at best. That’s also the case on a higher-frequency level, where the weekly ABC News/Washington Post poll of Consumer Comfort remained unchanged at minus-46 during the week ending September 27, wandering aimlessly in the middle of its recent range. It’s hard to muster up much enthusiasm when there are still so many economic problems confronting people each and every day.
Chief among those issues are poor prospects for employment. Weekly unemployment claims ticked back upwards again during the week of September 26, climbing by 17,000 to land at 551,000 for the week. Despite the rise, claims only landed in very familiar territory but continue to point to the difficulty businesses have in affording all their employees amid a very soft sales climate.
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With weekly claims holding in a pretty tight range in August and again in September, we wondered how some forecasts for the monthly employment report for September could have been so optimistic. Instead of declining, job losses during the month accelerated from a revised 201,000 in August to 263,000 in September, and the nation’s unemployment rate moved one tick higher to 9.8%. The report also noted that over a half-million job-seekers gave up even looking for work during the month, and there was nothing to suggest that measurable improvement should be expected soon. Productivity figures have been on the rise — meaning that firms are meeting their output needs without having to hire more people — and that trend seems likely to persist for a while yet.
Boosted by “cash-for-clunkers” and back-to-school needs, personal consumption expenditures rose by 1.3% in August, but since personal incomes only rose by 0.2% for the month, the nation’s savings rate took a hit, sliding to a rate of just 3%, the lowest such figure this year. Despite the slight income improvement, aggregate wage levels are still more than 5% below last year, and with credit conditions tight, significant increases in consumer spending to power the recovery just don’t seem to be forming as of yet.
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One bright spot was that Construction Spending rose by 0.8%, its second positive reading of the year. More impressive was the 4.7% rise in spending for residential projects, which was more than enough to offset drags from the troubled commercial sector (-0.1%) and the 1.1% drop in the public sector. Stimulus money isn’t making it out to lower-level projects all that quickly, and cash-strapped states and counties are simply putting projects on indefinite hold.
Low mortgage rates continue to provide support for housing markets, and the gains in residential construction spending could be one of the keys to getting a firmer recovery underway. However, credit conditions remain tight, and while home prices have begun to firm to some degree, it may be a long time until most underwater homeowners will be able to take advantage of those low rates to recast their balance sheets.
Broadly speaking, one could say that things may be better than they have been, even while acknowledging that they remain a long, long way from fine. We’ve noted a number of times over the last several months that we have simply graduated to ‘a better grade of lousy,’ nothing more, and until the technical recovery bleeds into other areas of the economy we won’t generate much heat. That’s great news for mortgage seekers who have the credentials to take advantage of the market, but their numbers are finite.
Does October continue to live up to its reputation as a wicked month for stocks? To the degree that it does, mortgage rates should benefit. Spring lows ignited a fair bit of refi activity, but building lasting refi waves requires low (if not continually declining) interest rates for a period of weeks, even months. We’ll continue to have low rates, but significant declines are unlikely. If you’re considering refinancing, don’t hesitate too long or a fickle October market may catch you napping.
Treasury yields dipped at week’s end, so mortgage rates should start next week on a softer note.
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