June 7, 2013 — If anything, the waters became even more muddied this week as it pertains to any impending change in the Fed’s QE policies. The latest data didn’t suggest enough strength as to tilt the scale toward a hastened exit, nor was there enough weakness to swell hopes that the Fed’s process of buying mortgage-backed securities and Treasuries will continue for a longer stretch yet.
While not exactly limbo, it does make it more difficult to know what to expect. The Fed next meets to discuss policy on June 18 and 19, and will release updates to their own economic projections at that time. Until then, the markets will continue to ruminate over where we go from here, and how quickly.
This will occur in the context of the highest mortgage rates in a years’ time. Despite remaining well below historic norms and “natural” record lows (those achieved pre-Fed market manipulations of the last five years), at least a few folks have expressed concerns about rates, – especially conforming 30-year fixed rates – reaching a 4 percent level.
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 powered ahead by another nine basis points (0.09%) to 4.10%, a rise of nearly a half-percentage point in five weeks’ time. At the same tme, the FRMI’s 15-year companion bounded upward by another seven basis points (0.07%) rise to 3.28% for the week. FHA-backed 30-year FRMs added another ten basis points to jump to an average rate of 3.74%, while the most popular ARM — the 5/1 Hybrid — moved the least amount of the bunch, with just a seven hundredths of a percentage point (0.07%) upward bump to 2.77% for the week.
See this week’s Statistical Release and Mortgage Trends Graphs.
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There is a sort of balance in the latest economic data, leaving little suggestion that there is any upward trend in growth forming. In fact, there may have been sufficient deceleration of late to lean slightly more in favor of keeping QE around for a while longer yet. The Fed’s own regional survey of economic conditions covering the six weeks ending May 24 said as much; the “modest to moderate” overall review of the expansion in the latest report was a notch below the “moderate growth” reported in the prior survey to April 5.
But offsets to slowness were seen, too. For example, sales of new vehicles popped higher in May after a slip in April. The 15.3 million (annualized) units sold during the month was a return to trend, as six of the last seven months have featured a sales rate at about this level. Solid growth in autos contributes to higher durable goods orders, and helps to keep at least some factories and suppliers busy.
Some, but not all. While an auto-influenced Chicago purchasing manager’s trade group reported a surge in activity for May, a wider-ranging report from the Institute for Supply Management told a very different tale. The ISM survey covering manufacturing slipped into contracting territory in May, with the gauge shedding 1.7 points to a below-par 49.0 for the month. Production was lower, orders were down and employment held at just about a breakeven for a second straight month. The decline left the indicator at its lowest level since July 2009, and points out pretty clearly the effects of both the Federal spending sequestration and the weakness of the economies of our trading partners.
Although the broad measure of orders received at factories did post a 1 percent rise in April, that was below expectations and not much of a rebound after a 4.7% decline in March. Orders for durable goods (including things like the cars and trucks noted above) rose by 3.5%, but non-durable items slumped by a full percent, a second consecutive decline, so it’s not hard to see how some manufacturers are doing better than others.
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The nation’s imbalance of trade expanded a little in April, widening by $3.2 billion. Imports rose by $5.4B, as the domestic economy remained in moderate expansion during the month. Exports, though rose by just a meager $1.9B during the period, reflecting the soft state of affairs overseas.
The largest sector of the domestic economy is holding its own despite plenty of challenges, though. The ISM survey that covers non-manufacturing concerns revealed a slight rise for May, with a 0.6 point lift on a month-to-month basis. The absolute level of 53.7 seen in the barometer in May suggests a mild economic expansion is continuing, with orders for services rising. However, that increase in orders isn’t translating into a pickup in hiring, according to the report, as the employment sub-index, like its manufacturing counterpart, held at just a breakeven level for the period.
Workers increased their output by 0.5% in the first quarter, but the latest reading of worker productivity was revised lower by 0.2 percent from the initial report. High levels of productivity can remove the need to hire additional workers to meet goals, but also serves to drive down the cost of labor needed to produce a given item. That in turn enhances profitability and can allow workers to be paid more without any undue effect on inflation. Amid mild productivity gains, unit labor costs eased by 4.3 percent in the first quarter, so there is room for some wage growth, or would be, if the labor market wasn’t still so slack.
Layoffs have certainly diminished of late. The outplacement firm of Challenger, Gray and Christmas noted that just 36,398 job reductions were announced in May, the smallest number since December and a rate more than 40% below the same month a year ago. Given other information about labor market and hiring trends, it would appear that businesses are just as leery about letting people go as they are about hiring new ones. For example, new claims for unemployment benefits seem to have settled into the middle of recent bookends; another 346,000 new applications for benefits were filed at state windows during the week ending June 2. Over the last couple of months, we have seen weekly claims flare as high as 388,000 and as low as 327,000 but have mostly been hanging around the 350K level between those two extremes.
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For the most part, it appears that the good and poor news are balancing one another. Other elements of the economy simply seem to continue on a moderate path, failing to add weight to arguments for or against the need for continued QE efforts. Among those, and perhaps the most important of them, is the monthly employment report; for May, a new 175,000 new hires occurred, slightly above forecasts, even as reports covering prior months were backed down a little bit. The May report was the strongest of the last three, but there is no apparent acceleration in hiring trends. If anything, hiring is on balance a little slower than seen at the end of 2012 and into the early part of 2013.
The nation’s rate of unemployment ticked back up by a tenth-percentage point, to 7.6%, but that was due not to more firings, but rather to an increase in the size of the nation’s workforce, as the labor force participation rate nudged off the recession bottom of 63.3% (to all of 63.4%) for the month. More folks stating that they are actively looking for work can be a signal that they are more encouraged about their prospects for getting a job, but it could just be that their unemployment benefits have ended, and there is little choice but to look for something to do, well-suited or not.
Perhaps reflective of the balance in the economy was the weekly Bloomberg report covering Consumer Comfort, which held exactly steady a minus 29.7 during the week ending June 2.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
So here we are, with mortgage rates no longer hanging very near record lows, but instead holding in former-record-low territory. The fact is that the economic news out this week wasn’t poor enough to help rates decline, not was it strong enough to suggest that the Fed will go away quickly, or even soon. With the June Federal Open Market Committee meeting little more than a week away, there doesn’t seem anything new to suggest that they will begin the process of tapering when it concludes. At the same time, there was nothing to suggest that there is any reason to wait until late this year to begin the process, either.
The last Fed meeting of 2013 would come December 17 and 18. Consider these dates as either end of the see-saw for our purposes, and in light of the balance being expressed in the economy at the moment, the fulcrum would be the Fed’s September meeting, which seems a likely start for changes in QE, provided we continue along the present economic path.
It is unlikely that any clarity will come as a result of new data out next week, and rates seem likely to be firm with perhaps an upward bias until the Fed chimes a week from Wednesday. Regardless, we’ll be looking for clues and signals in jobless claims, retail sales, consumer sentiment and industrial production as they come out. For mortgage rates, the rise seems to have slowed, if not stopped, and we expect the FRMI to tick up by perhaps four basis by the time the week is through.
For an longer-range outlook for rates and the economy, one which will take you up until early August, have a look at our new Two-Month Forecast.
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