March 8, 2013 — For a brief moment, nervousness about Eurozone finances and the spending sequester and impending debt ceiling were pushing money out of stocks and into bonds, driving mortgage rates back down. That came to an end this week when fairly solid economic news re-ignited stock markets, with the Dow Jones Industrial Average returning to record high territory. The shift in investor fancy caused a rise in the influential 10-year Treasury, which moved strongly upward as the week progressed.
A long time ago now, a former Federal Reserve Chairman pondered equity prices and wondered if they were a result of “irrational exuberance.” With the economy being propped up by unprecedented monetary policy (and unconventional means being employed abroad, too), record federal debts and deficits, unemployment rates still at very high levels and a myriad list of other fiscal and economic troubles, it might be fair to again wonder about that.
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 did slip by a single basis point (0.01%) to 3.79%, its best showing since late January. The FRMI’s 15-year companion also slid a lone basis point (.01%) to drop back to 3.04% for the week. FHA-backed 30-year FRMs doubled the FRMI decline with a two basis point fall, landing at a average rate of 3.37%. Meanwhile, the overall average rate for 5/1 Hybrid ARMs fell by another two hundredths of a percentage point, enough to wander further into record low territory with an average of 2.65%.
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Important observations about the health of the economy became available this week. The Institute of Supply Management survey of service-business activity produced a surprise to the upside, ringing in a solid 56.0 for February, a gain of 0.8 where a small decline was expected, and the highest value for the indicator since March 2012. It is good news if the largest component of the economy is holding its own despite consumers being challenged by both bigger tax bites and high gasoline costs, and this appears to be the case at the moment. The measure of new orders contained in the report rose, and the employment indicator remained pretty firm at a reading of 57 for the month. In the ISM series, 50 represents a breakeven level, with values above it denoting expansion.
Weekly claims for new unemployment benefits for the week ending March 2 slid back to 340,000, making it three weeks of the last four it has held in the 340K-350K range. These are some of the lowest levels since 2008, when the effects of the forming recession were driving claims sharply higher on a regular basis. That job losses are abating is a sign of a solidifying economy, but we will need to see continued declines for a while before we again attain any sort of full employment.
That said, some progress was made in that regard in February. The Labor Department reported on Friday that 236,000 new hires took place in February, well above most estimates, including ours of perhaps 175,000. January estimates of job growth were trimmed by 38,000 hires, but December’s were increased by 23,000 so three of the last four months have now featured hiring over 200K. Good news was also seen in the nation’s unemployment rate, which shed 0.2% for the month, landing at 7.7%, the best reading of the recovery so far. However, some of that improvement was simply due to people giving up searching for work, and the labor force participation rate returned to 63.5%, matching last August’s dismal level and those last seen in 1981.
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.
In the MarketTrends last week, we wondered if improving consumer moods might be reflective of an improving job market, and this seems to be the case. The latest weekly Bloomberg Consumer Comfort Index moved upward for a fifth consecutive week during the week ending March 3, landing at a 2013 high of minus 32.4 and just a point away from post-recession highs.
Workers already on books at companies turned out less production in the final quarter of 2012. Worker productivity eased by 1.9% during the period, and the cost of labor for each unit produced rose by 4.6%. Rising productivity is healthy for the economy, since more output per person per hour means greater profits and in turn can help wages to rise without any inflation concern. Inversely, though, lower productivity can lead to troubles meeting production goals, necessitating additional hiring. At this stage of the recovery, more hiring is arguably a better outcome, and the decline in output in the last quarter of 2012 may have set the stage for some of the hiring we are seeing now.
The Federal Reserve’s latest survey of regional economic conditions also added some cheer this week. The Beige Book (so named for the color of its cover) found that “economic activity generally expanded at a modest to moderate pace” in the six week period which ended on February 22. Manufacturing, consumer spending, residential real estate markets and labor markets all sported some improvement, if in a mixed fashion. The recovery does seem to be firming and mostly expanding and gives the Fed additional material to justify that its unconventional monetary policy tools are working as intended and should continue for a while.
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How long a period is constituted in “a while” a matter of speculation. The Fed has some stated goals — 6.5% unemployment, 2.5% inflation — which, once attained, would signal that the economy might be able to stand higher short-term interest rates. However, it is a more pressing and valid concern for markets that the extraordinary programs of buying up Treasury and mortgage bonds will be trimmed or eliminated long before those are reached. These programs affect long-term interest rates in general and mortgage rates specifically, and some speculation exists that these programs may be dialed back as early as mid-year. From our perspective, this is of course a possibility, but there is a lot of economic ground to cover in just a few months’ time for that to occur.
Consumers continue to borrow money, at least for cars and education. The Federal Reserve noted a $16.2 billion increase in debt incurred by consumers in January, driven there solely by installment borrowing. This continues a pattern seen since the recovery began, with revolving balances largely declining over that span. Cars wear out and need to be replaced, and the good credit and subprime auto lending markets have generally been functioning for some time now. Education loans are 100 percent a government-sponsored market, and with protracted job loss a feature of the recession and recovery, it’s little wonder that folks are headed back to school to retrain or simply keep current in their disciplines.
The nation’s imbalance of traded widened again in January, expanding by $6.3 billion dollars, almost all of it from pricier petroleum products. Exports eased during the month while imports grew, which is to be expected, since the U.S. economy is generally healthier than many of our trading counterparts.
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|Current Adjustable Rate Mortgage (ARM) Indexes
The broadest measure of factory orders slipped by a full 2% in February, lending perhaps a note of concern about government spending cuts. All of the decline was due to a slump in durable goods orders, largely from aircraft, ships and the like; of course, military spending for such items is commonplace and holding back on those could affect certain industries considerably. That said, “core” business-related orders rose by a fat 7.2% for the month, joining solid gains seen in October and November (December saw a 0.8% decline, probably a result of “fiscal cliff” concerns, so it appears that there is some momentum outside of government concerns.
However, we do wonder a little about the 1.2% build in wholesale inventories in January. Is this a case of increasing supplies in advance of demand, or is the expansion of stockpiles during the month the result of a 0.8% decline in sales? The slippage in sales in January could also be related to a cliff-led interruption in stock flow, as both durable and non-durable goods built up. Over the last few months, sales were strong enough to post a 2.2% gain in November, then fall flat in December and now have retreated, leaving the ratio of goods on hand relative to sales at 1.21 months, a four-month high. This may be enough as to eliminate the need to place new orders at factories until demand picks up again, and that might temper economic growth a little.
To be honest, there’s not much to quibble about in the data discussed above as it is pretty good overall. It does occur to us, just as at times over the past couple of years when “all news was bad news”, that reports of any forward progress these days (no matter how incremental) are being treated like a leap forward, whether they deserve to be or not. There still remain many challenges to overcome and many places for stumbling to occur, especially given the bitter stalemate in Washington over spending cuts, tax reform and even the impending debt ceiling.
So far, investors seem unconcerned about these, and the stock market rally (and corresponding rout in bonds) remains in play. A ten-year Treasury which ran from a yield of 1.88% on Monday to 2.05% at the close on Friday presages a leap in mortgage rates next week of a tenth-percentage point, if not more. We’ll return to the highest rates of 2013 — and probably the last six months — by early next week.
If goes without saying that with every firmer economic report that a return to the 60-plus year lows of early December are becoming increasingly unlikely.
For an longer-range outlook for rates and the economy, one which will take you up until late March, have a look at our new Two-Month Forecast.