May 17, 2013 — As the economy oscillates, so go mortgage rates. A spate of poor economic news pushes them down; optimism about the economy lifts them again. The Fed even remotely considering expanding or extending QE3 presses them lower while remarks and expectations that the program will end sooner kicks them higher. Modest moves upward and downward happen with a regular frequency with little discernable direction or trend to be seen.
So round and round we go. All we know for sure is that we remain fairly distant from the Fed’s goals of 6.5% unemployment in a context of stable prices at or around the Fed’s goal of 2 percent inflation.
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 eight basis points (0.08%) to 3.76%; meanwhile, the FRMI’s 15-year companion managed a seven basis point lift (0.07%) to 2.98% for the week. FHA-backed 30-year FRMs followed along with another five basis point increase of their own, climbing to an average rate of 3.36%, while the most popular ARM — the 5/1 Hybrid — remained closest to its all-time record lows with just another two hundredths of a percentage point (0.02%) upward bump to 2.61% for the week.
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There was precious little good economic news to be seen this week, but interest rates firmed anyway, as stock markets continue to find reasons to push higher.
Aside from trying to prop up the economy, the Fed embarked several years ago on a path of unusual monetary policies to combat deflation. Since then, we’ve had run-ups in prices of various commodities (oil, gasoline, gold and other metals) and inflation perked up from very low levels. That is, until more recently, when the world economy began to slacken and demand for these items diminished. That seems to be where we are at the moment, with prices again starting to soften up somewhat. Of course, a lack of inflation gives the Fed as much leeway as it wants in continuing or even expanding QE policies.
Prices of goods coming into the US eased by 0.6% in April; most of the decline was due to lower energy costs, but a 0.1% decline was seen even leaving them out of the equation. Goods headed elsewhere from here saw a 0.7% decline in value, so cost pressures all around are being tempered by weak economic activity. Over the past year, import prices have declined by 2.6%; exports, by 0.9%, and both are generally declining over the last six months or so.
Those falling costs were no doubt reflected in the Producer Price index for April, as well. The PPI slipped by 0.7% during the month, fast on the heels of a 0.6% decline in March. Eliminating food and energy costs left a “core” PPI of just 0.1%, the smallest increase since last November and a continuation of a very muted trend, overall. Over the past year, Producer Prices are now rising at just a 0.7% clip; as recently as last October, the rate was more than three times that pace, and core PPI has diminished to just a 1.7% annual rate as well.
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Consumer prices are starting to tell the same story, too. The headline CPI declined by 0.4% in April, a second consecutive month of falling prices, dragged down by another decline in energy costs. Core CPI, among the Fed’s preferred measurements of inflation, expanded by the barest amount of just 0.1%. With the two-month slippage, the headline CPI is now at an annual rate of just 1.1% (the lowest since 2010) with a core CPI of just 1.7 percent. Both measures had been running close to the Fed’s goals at times over the last six months of so, fostering some speculation that inflation might be becoming more of a concern and that QE programs would need to be dialed back more quickly. The reality of the situation is that with a Eurozone in recession and slow growth here, in China and elsewhere, inflation will continue having a hard time getting a toehold for some time yet.
That slower global growth is evident in some of the other data out this week. Regional reviews of manufacturing activity in New York State and the Philadelphia Federal Reserve’s district reflected poor conditions in May as a result of both federal spending sequestration and troubled trading partners. The NY Fed’s Empire State Manufacturing activity indicator turned negative in May, posting a 1.4% decline; a string of negative readings leading up the fiscal cliff in January was followed by a nice outburst of activity, but unfortunately, that has petered out since a 10.0 reading was notched in February.
There was no good news out of Philly, either. The Philly Fed’s general business conditions gauge revealed a minus 5.2 for May. Three of the five months of 2013 have been in the red, and the other two barely made it above the no-growth mark of zero. Both the NY and Philly reports showed a slump in new orders and a decline in employment indicators. Tightening Federal purse strings as the year progresses are likely to continue to produce drag, even if consumer spending or exports begin to rise.
Industrial Production showed its own decline. For April, a 0.5% easing in total output of the nation’s manufacturing, mining and utilities was recorded. Although most of the decline was due to a fall in utility output related to a return to better weather during the month, manufacturing showed a decline, leaving only a rise in mining output to temper the decline for the month. Also, the percentage of factory floors in active use fell in April, too, with a half-percentage point trim to 77.8% for the month. Inflation-producing production bottlenecks can occur at several percentage points above these levels, but we don’t seem to be in any danger of that happening anytime soon.
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Inflation can’t really get underway without a tight labor market, and we remain a long ways away from that, what with a 7.5% unemployment rate and weak income growth. The labor market was a little better in April than expected (and much of the cause of the stock market’s recent rally); even the last couple of reports on claims for unemployment benefits have been very encouraging, at least until the latest one. During the week ending May 11, some 360,000 new applications for benefits were filed. That was not only a 32,000 jump from the prior week, but was also the largest number since late March. It may be that the April optimism seen in hiring is giving way to a more cautious May.
Cautious might be a good word to describe consumer spending, too. Retail Sales managed just a 0.1% rise in April, not much of a turnaround from a 0.5 percent decline in March. Lower gas prices did bring down the headline number, though, and taking them out of the total revealed a 0.6% rise in sales. With only a small gain, the annualized rate of sales could manage to rise to only 3.7%, putting us on a pace last seen in 2009. Such as the situation is, the Retail Sales report counted as one of the positive reports out this week.
Another modestly positive report concerned housing. In May, the National Association of Homebuilders index of member sentiment rose two points to 44. However, that’s only as good as we saw in March and continues to remain below the 50 point level which is a breakeven reading. Sub-indicators for single-family sales rose (to 48 from 44); hopes for the next six months moved up a tick to 53, but traffic levels are still very slow even with a three-point gain to 33.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
If the index of Leading Economic Indicators report can be trusted, we may see some increase in activity as we move closer to summer. The Conference Board’s tool showed a 0.6% rise in April, its strongest monthly gain in more than a year’s time. April was no doubt a better month than was March (minus 0.2) but the few May numbers we’ve seen so far haven’t suggested that any acceleration in growth is happening.
Consumer moods seem confused. The preliminary reading for the University of Michigan survey bounced 7.3 points higher to 83.7, the indicator’s highest level in about six years, as assessments of both current and expected conditions rose sharply. That said, there was a modest deterioration noted in the weekly Bloomberg Consumer Comfort Index, which shed 0.7 points to ease to minus 30.2 for the week ending May 12. Even with the decline, the CCI indicator is handing around recovery highs, but shows no signs of bounding higher as the UMich indicator did.
Collectively, what do we have? Low and falling inflation. A soft and perhaps weakening manufacturing sector. A labor market which seems to be having as many setbacks as advances, and a housing market which is better than a few years ago but a long way still from full health. We have a Fed which is committed to keeping its foot on the throttle, at least for a while yet, and an economy which is grinding its way slowly forward. How equity markets can be so cheerful in such an environment is puzzling, but it is worth noting that the US is the best (perhaps only) investment game in town at the moment, as there are few places to put cash that will produce any kind of return.
As long as enthusiasm for stocks persists, we are likely to continue to see mortgage rates holding above record or even recent lows. However, until there are clear signs that the economy is accelerating, unemployment is steadily falling or prices are regularly rising there is little reason to expect that the Fed will change course anytime soon. Collectively, this should keep us tethered at very low levels even as we experience fits and starts of good and bad news driving rates up and down. We had a run up in mortgage rates in the mid and late winter and a mostly downward run since then. For the moment, we are headed back upward, but this upcycle may not even reach the 2013 highs of March.
That said, we do expect another 3-4 basis point rise in rates next week.
For an longer-range outlook for rates and the economy, one which will take you up until late May, have a look at our new Two-Month Forecast.
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