July 13, 2012 — The Federal Reserve seems to have no imminent plans to again try to rescue the economy. Even if they were to move immediately, any beneficial effect would take time to be fully realized. Low interest rates are of course already in place, and it is believed than any Fed move would come in the form of additional quantitative easing, where the Fed buys up debt in order to lower interest rates. There is at present no indication that any such action will come, so we slog along in an economic mire. This alone is enough to keep mortgage rates on a easing path, Fed action or not.
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 declined by another five basis points (.05%), easing to a new record low of 3.91%. The FRMI’s 15-year companion also managed a decline of five basis points, landing at 3.20%, moving into new record territory by four basis points. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages shed another six basis points to slide to an incredible 3.52%, while the overall average rate for 5/1 Hybrid ARMs finished at 2.86%, a decline of a just 0.02% but enough to set a new low for this product.
See this week’s Statistical Release and Trend Graphs.
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Minutes of the Fed’s last meeting were released this week. No change to policy came as a result of the June get-together, although Operation Twist was extended to the end of 2012. It would appear that economic conditions have deteriorated since then, and should this pattern persist, the Fed might be forced to make a move. That said, it is unclear if even lower interest rates than those in place today will be sufficient to goose the economy. At this point, it may be more a case of access to money than the price of it.
It’s not as though consumers aren’t borrowing. The latest report on consumer credit for May showed a $17.1 billion rise in outstanding balances. While there has been an upward trend of late, it has been pushed there by installment-type lending such as the kind used for student and auto loans. However, almost half of May’s rise in borrowing was of the revolving kind — credit cards — and the $8B rise seen here was the largest one-month pop since 2007. At present, it is hard to know if the expansion in revolving balances is an expression of confidence about one’s ability to manage commitments against future income or one of desperation, where cash simply isn’t available to cover needed purchases, with use of plastic the only means available. Only time will tell.
Some good but less-than-clear news was seen in the unemployment claims data for the week ending July 7. Just 350,000 new applications for benefits were filed during that period, the lowest figure in months. While this came during a holiday week at a time of year when seasonal adjustments can skew the number, the prior week was 376,000 claims after revision, and that too was lower than the recent pattern. It is a hopeful if untrustworthy sign that the springtime deterioration in labor market may have come to an end. The next few weekly reports will bear this out or refute it.
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.
The nation’s imbalance of trade contracted a bit in May. The $48.7 billion differential was about $1.4B smaller than April, as exports eked out a $0.4B gain while imports shrank by $1.5B. Of course, some of the shrinkage was due to lower prices for petroleum products and the like, which spent the month on a downward trajectory. That exports gained at all is encouraging, since the economies of many of our trading partners continue to struggle.
That trade balance will no doubt affected when the June report comes by the continued decline in fuel and other costs. Import prices slumped by 2.7% during the month, fast on the heels of a 1.2% decline in May. Excluding the influence of petroleum products, a 0.3% decline was still seen, so the story isn’t all about sliding oil prices. Goods leaving these shores cost less, too, as prices for those eased by 1.7% for the month; it was a second decline for outbound items as well. Compared with last year, imports are 2.6% cheaper and exports are 2.1% less. The slump in Europe and cooler growth in China is exerting deflationary pressure at the moment.
That downward pressure will need to be in place for a while in order to reach the consumer. At the Producer level, headline prices rose by 0.1% in June where expectations called for a decline. The “headline” PPI has climbed by a mild 0.8% over the past year. However, that’s less the case when you look at core measures of PPI, which exclude volatile components such as food and energy costs. Core PPI rose by 0.2% for the month, a fourth consecutive 0.2% figure; as you might surmise, Core PPI is holding pretty steady, and is now running at a 2.6% annual clip. The Consumer Price Index is due out next week, and will probably say much the same; headline easing, but core steady at a level above the Fed’s 2% speed limit.
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Additional Fed easing might spark some inflation concerns, especially if it appears the Fed is ignoring its own target for core CPI. However, the Fed would probably tolerate a little additional inflation if more expansive monetary policy could foster some more economic growth. Gross Domestic Product was a meager 1.9% in the first quarter of this year, and we will be lucky if the second quarter only sees that figure trimmed by a half percentage point.
Inventory levels at the nation’s wholesaling firms expanded by just 0.3% during May. Although sales slumped by 0.8% for the month, the smaller rise in stockpiles served to keep the ratio of goods on hand relative to sales at a steady 1.2 months. Given the tenuous state of the economy, caution in placing new orders is no doubt fully in play. Manufacturing activity downshifted as the Spring came to a close, and is already less of a support to the economy than it has been for several years.
Troubles in the headlines and a rough political climate are trimming consumer moods. The University of Michigan’s initial July poll of Consumer Sentiment slipped by 1.2 points. Should it hold the 72.0 valie for the full month, it would be the lowest reading of 2102. Less dark but by no means ebullient was the weekly Bloomberg Consumer Comfort Index, which held steady at a reading of minus 37.5 for the week ending July 8. That value is closer to post-recession highs than lows, but is still far from bright and shiny.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Some of the slippage in mortgage rates may be coming from easing demand. Combined mortgage applications for both purchase and refinance have been sliding for the past four weeks, with refinance applications surprisingly lower despite record-low rates. There is probably some seasonal variation to blame, as school let out and vacations beckoned; a homeowner’s mortgage will still be there when they return… and rates may be even more favorable, to boot.
Odds do favor that this will be the case again next week. None of the news from June seems likely to be much better than that seen in May. However, two reports about housing — the NAHB index and Housing Starts — will probably show a mild upward trend in the new home market. Existing Home Sales will probably have nudged up too, as persistently low interest rates continue to have beneficial effect. There is a fair bit of other data out too, from Industrial Production to the Fed’s own regional survey of economic conditions and a couple of local looks at manufacturing. At this point, negatives probably outweigh the positives, and mortgage rates trickle lower again.
For an longer-range outlook for rates and the economy, one which will take you up until late August, have a look at our new Two-Month Forecast.