July 5, 2013 — Mortgage rates managed to ease back this week, but don’t get used to them heading in that direction. A solid employment report on Friday was sufficient to stem the slight downward move in that direction which was in place for most of this week. Without some softer economic data to offset the job report, mortgage rates will likely firm up again.
The employment report was solid, but not spectacular. However, the report also included upward revisions to both April and May hiring figures, leaving the second quarter of 2013 in fairly solid shape. Even though the second quarter’s average rise was a little below the first quarter’s 207,000, the reports were uniformly solid during all three months. By contrast, the first quarter featured two pretty weak months bookending a very strong one.
By itself, does the report sufficient to put the Fed “in play” for a September start for ‘tapering’ QE3? No, but it does make it less likely that there will be much delay beyond 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 eased by seven basis points (0.07%) to 4.55%, taking back just a portion of last week’s huge jump. We expected a larger fall in the FRMI, but Friday’s market conditions largely prevented that from happening. The FRMI’s 15-year companion also managed a seven basis points (0.07%) decline 3.66% for the week. FHA-backed 30-year FRMs saw a tenth of a percentage point trimmed off last week’s average, so there was a slide to 4.20%, and the overall 5/1 Hybrid ARM added to its average just a lone one one-hundredth of a percentage point (0.01%), with the average rising to 3.35% for the week.
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The Fed has noted that it would like to see QE3 come to an end by the time the unemployment rate approaches the 7 percent mark. With June still sporting a 7.6 percent rate, there remains a ways to go before we attain that relative height. Unemployment held firm despite the rise in hiring partly as a result of a slight expansion in the nation’s workforce, which edged up to 63.5 percent of eligible workers from 63.4 in May. The figure remains near record lows, so there remain plenty of folks eligible but not actively looking for work. Regardless, more folks with jobs will tend to spend more and that in turn should goose the economy.
That’s roughly the message one might take from the increase in sales of cars and trucks in June. According to AutoData, sales of new vehicles rose to a 16 million level, up from a 15.3 million (annualized) pace in May. America’s aging fleet of cars and trucks is in a beneficial replacement cycle at the moment; the additions of millions of jobs over the past few years, coupled with the freeing up of household finances due to refinancing and mortgage modification are no doubt contributing to the continuing fortunes of the nation’s auto manufacturers and adding to the expansion.
Spending on construction projects has also contributed. While much of the gains have come from residential spending in recent years, the 0.5% rise in construction outlays in May also included a 1.8% rise in spending by governments, as state balance sheets continue to improve. Residential spending in May did rise by 1.2%, but commercial projects declined by 1.4 percent, a breather of sorts after three months of fair gains.
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A broad measure of Factory Orders rose by 2.1% in May, with durable goods orders rising by 3.7% and non-durables by 0.7%, respectively. That was a little better than forecasters called for, and so-called “core orders” which track business-related spending rose by a solid 1.5% during the month.
Of course, it’s not so much if we have growth behind us which will dictate what the Fed does, it’s more of where we will go in this new interest rate environment. Two broad measures of economic activity from the Institute for Supply Management both suggest that growth isn’t exactly accelerating at the moment.
The ISM survey which tracks manufacturing activity did note a rise of 1.9 points in June, but that was just enough to lift the indicator to a value of 50.9, just a whisker above flatline, and little different than the values notched over the last three months. In the report, sub-indicators for orders and production moved higher, but employment slipped into contracting territory. Still, the upward bump in the headline index suggests that there is at least a little strength in the manufacturing sector.
The ISM reports are “diffusion indexes”, using a value of 50 as a breakeven level. Readings above this value indicate expansion, and below, contraction in activity.
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Over in the service sector, the ISM report which covers non-manufacturing businesses decelerated, sliding 1.5 points to a 52.2 mark for June. Although still in “expanding” mode, there has been a notable downtrend since the end of 2012 and the beginning of 2013; the indicator was at a 56.0 level (moderate-to-strong expansion) as recently as February, but has cooled since then. Measures detailing new orders slowed while the employment gauge gained.
Reflecting relative strength here and weakness abroad, the nation’s imbalance of trade expanded in May to $45 billion dollars. Details in the report showed that imports rose by $4.4 billion during the month, as our economy calls for more goods and services. However, exports slipped backward by $0.5 billion, as soft economies in the Eurozone and beyond have less need for the items we bring to market. As long as many of our trading partners remain in an economic funk it will be hard for our own manufacturers, and economy in general, to gain much traction.
Announcements of mass layoffs affected 39,372 workers in June, up about 3,000 from May’s figure, according to the outplacement firm Challenger, Gray and Christmas. While the June number was up by 5 percent over last June, it remains at a pretty low level. Businesses remain pretty thinly staffed, so there are arguably fewer folks who could be let go, and the improvement in the economy means that they are less likely to be. Even with that, though, another 343,000 new applications for unemployment benefits were filed at state windows in the week ending June 9. This is a pretty typical number of late, solidly in the middle of 2013 extremes. It will be hard to make much headway in reducing the unemployment rate until this number legs down toward the 300,000 rate on a regular basis, even with hiring rates near the 200,000 level.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Among plenty of other things, having a job and money to spend are at least two keys to happiness for many. Perhaps the end of the school year, graduations, vacations and more are also contributing, but whatever the reason, the weekly Bloomberg Consumer Comfort Index climbed to a port-recession high in the week ending June 30. The minus 27.5 value for the indicator is now at levels last seen in early 2008.
Mortgage rates managed a little dip this week, as the outsized market reaction from the last Fed meeting subsided, at least though July 3. However, the firm employment report on Friday generated another strong upward move in interest rates, and that puts us on track next week to move higher again. Late Friday, the influential 10-year Treasury yield had risen by some 20 plus basis points from Wednesday, and that should be more than sufficient to wipe out this week’s dip and then some.
Failing a spate of softness in the coming data — and next week features a fairly light calendar in that regard — the feature of the week will be the minutes of the last Fed meeting, which exacerbated the rout Mr. Bernanke initiated way back in May. Unless there’s something in the minutes to suggest otherwise (unlikely) we will expect to see rates rise by 10-15 basis points next week as volatility continues.
As with last week, you might check hsh.com for daily updates next week to see how things are going.
For a 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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