Monday, July 16th
Fears of subprime repercussions on the broader economy increased the possibility of a fed rate cut by year end. Consumer spending, a primary driver of economic activity, has also faltered on weaker housing markets. While no rate change is expected at the next two meetings in August and September, a slight 15% chance of a rate cut is being priced in for the October meeting up from no chance a few weeks ago.
Tuesday, July 17th
The producer price index fell 0.2% in June following an oversized 0.9% gain in May. The unexpected decrease was related to falling food and energy prices. Gasoline prices fell 3.9% last month. Excluding food and energy from the index, core producer price rose 0.3% on the month and rose 1.8% on the year, still within the Fed’s target zone for inflation.
Industrial production rose 0.5% in June on a robust 0.6% gain in manufacturing output. Utilities and mining output also gained 0.3% and 0.5% respectively. Stronger output pushed capacity utilization higher to 81.7% from 81.4% in May. These data confirm a strong second quarter rebound with tighter resource utilization.
The NAHB housing market index sank to 24 in July from a level of 28 in June. Home builders rate present single family sales and sales six months from now much lower while foot traffic through model homes decreased. Such a low level of home builder sentiment portends weaker new home construction and sales in the months ahead.
The Federal Reserve in conjunction with state authorities announced a plan today to regulate subprime mortgage lenders by conducting compliance reviews to uncover possible abuses in subprime lending practices. Regulators will analyze underwriting standards and cross reference them against consumer protection laws and take enforcement actions where necessary. The pilot program, targeting about a dozen lenders will begin in the fourth quarter of this year.
Wednesday, July 18th
The consumer price index increased 0.2% in June on a 0.5% decline in energy prices. Excluding food and energy from the index, core consumer prices rose 0.2% on the month to bring the yearly gain to 2.2%. The annual gain in the core rate is still out of the Fed’s comfort zone but it has receded somewhat in the past few months.
Housing starts increased 2.3% to 1.467 million in June. Single family starts declined 0.2% to 1.151 million while multifamily starts surged 12.9% to 281,000. Permit issuance, often used as a proxy for future building activity, fell 7.5% to 1.406 million. New construction activity is expected to decline further in coming months as the housing market continues its search for the bottom.
The MBA mortgage applications index fell 0.9% to 631.6% for the week that ended July 13. The purchase index slipped 1.6% while the refi index gained 4.9%. Application activity remains healthy but its direct correlation to actual sales and refinancing appears to be tenuous during this housing market correction.
Thursday, July 19th
Mortgage rates were little changed this week on contained inflation expectations. Both core consumer and producer price gains over the last year were moderate. Chairman Bernanke indicated in testimony this week that the Fed expects inflation to continue to moderate further from here. 30-year fixed rate mortgages averaged 6.73% this week, the same as last week according to Freddie Mac's mortgage market survey.
Jobless claims fell 8k to 301k for the week that ended July 14. The low level of claims suggests healthy labor market conditions but with a slightly weaker pace of hiring this year compared to 2006 trends.
Monday, July 23, 2007
Monday, April 16, 2007
Economic Highlights for the Week Ending April 13, 2007
Monday, April 9th
The economy created 180,000 new jobs in March according to Labor market data released last Friday. The stronger than expected gain last month followed upward revisions in the prior two months for a net job gain of 32,000. Average hourly earnings increase 0.3% on a monthly basis and are up 4.0% over the past year. The unemployment rate dropped to 4.4% from 4.5% in February. Such low joblessness could result in upward wage pressures going forward.
Tuesday, April 10th
Money magazine reported that option ARMs, no-doc and other exotic loans still have a market despite the recent subprime sector drubbing. Brokers are still finding banks willing to lend to borrowers with average credit scores who want riskier mortgages. Nearly 40% of loans made in 2006 fell into the subprime or Alt-A category.
Wednesday, April 11th
The FOMC minutes from the March 20/21 meeting provided more detail on the Fed's economic and interest rate outlook and policy stance. The Fed said that inflation remained uncomfortably high with risks biased to the upside while downside risks to growth remained because of sluggish business investment. Policymakers changed the policy statement language so as to increase policy response flexibility because of increased risks to both inflation and growth. However; in the minutes they indicated that rate increases may prove necessary.
The National Association of Realtors projects that existing home sales will fall 2.2% in 2007 to 6.34 million while new home sales will drop 14.2% to 904,000. Previous forecasts called for a 0.9% decline in existing home sales and a 10.4% decline in new home sales. Slower sales will weigh on appreciation rates. The median existing home sales prices is expected to decline 0.7% this year to $220,300 while median new home prices are expected to increase 0.4% to $246,200.
The MBA mortgage applications index fell 0.4% to 646.6% for the week that ended April 6. In a hopeful sign for the spring selling season, purchase applications increased 2.7% during the week. The refinance index tumbled 4.0% last week under higher mortgage interest rates.
Thursday, April 12th
Import prices jumped 1.7% in March due to a 9.0% surge in petroleum prices. Excluding petroleum, import prices rose just 0.3%. Over the past year import prices have increased 2.8% while petroleum prices increased 2.4%. Outside of the energy complex, imported goods inflation remains moderate.
Chain store sales surged 5.9% in March from March one year ago according to the International Council of Shopping Centers. Most retail segments posted strong results with the exception of furniture store sales which fell 13.5%. An early Easter shifted holiday sales to March; consequently, sales are expected tumble in April. Jobless claims increased 19k to 342k for the week that ended April 7.
The outsized gain last week was related to seasonal effects of the Easter holiday. Looking ahead, volatility in claims is expected to continue amid increased construction job layoffs and slower economic conditions.
Lenders raised mortgage rates last week as yields in the bond market moved higher on data showing stronger than expected payroll gains in March. 30-year fixed rate mortgages averaged 6.22% this week compared to 6.17% last week according to Freddie Mac's mortgage market survey.
Friday, April 13th
The producer price index shot up 1.0% in March led by higher food and energy costs. Food prices increased 1.4% while energy costs jumped 3.6% over the last month. Overall producer prices have increased 3.1% over the past year. Excluding food and energy prices from the index, the core PPI was unchanged in March and rose a mild 1.6% over the past year.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12612.13 12560.20 +51.93 or +0.41%
NASDAQ 2491.94 2471.34 +20.60 or +0.83%
The economy created 180,000 new jobs in March according to Labor market data released last Friday. The stronger than expected gain last month followed upward revisions in the prior two months for a net job gain of 32,000. Average hourly earnings increase 0.3% on a monthly basis and are up 4.0% over the past year. The unemployment rate dropped to 4.4% from 4.5% in February. Such low joblessness could result in upward wage pressures going forward.
Tuesday, April 10th
Money magazine reported that option ARMs, no-doc and other exotic loans still have a market despite the recent subprime sector drubbing. Brokers are still finding banks willing to lend to borrowers with average credit scores who want riskier mortgages. Nearly 40% of loans made in 2006 fell into the subprime or Alt-A category.
Wednesday, April 11th
The FOMC minutes from the March 20/21 meeting provided more detail on the Fed's economic and interest rate outlook and policy stance. The Fed said that inflation remained uncomfortably high with risks biased to the upside while downside risks to growth remained because of sluggish business investment. Policymakers changed the policy statement language so as to increase policy response flexibility because of increased risks to both inflation and growth. However; in the minutes they indicated that rate increases may prove necessary.
The National Association of Realtors projects that existing home sales will fall 2.2% in 2007 to 6.34 million while new home sales will drop 14.2% to 904,000. Previous forecasts called for a 0.9% decline in existing home sales and a 10.4% decline in new home sales. Slower sales will weigh on appreciation rates. The median existing home sales prices is expected to decline 0.7% this year to $220,300 while median new home prices are expected to increase 0.4% to $246,200.
The MBA mortgage applications index fell 0.4% to 646.6% for the week that ended April 6. In a hopeful sign for the spring selling season, purchase applications increased 2.7% during the week. The refinance index tumbled 4.0% last week under higher mortgage interest rates.
Thursday, April 12th
Import prices jumped 1.7% in March due to a 9.0% surge in petroleum prices. Excluding petroleum, import prices rose just 0.3%. Over the past year import prices have increased 2.8% while petroleum prices increased 2.4%. Outside of the energy complex, imported goods inflation remains moderate.
Chain store sales surged 5.9% in March from March one year ago according to the International Council of Shopping Centers. Most retail segments posted strong results with the exception of furniture store sales which fell 13.5%. An early Easter shifted holiday sales to March; consequently, sales are expected tumble in April. Jobless claims increased 19k to 342k for the week that ended April 7.
The outsized gain last week was related to seasonal effects of the Easter holiday. Looking ahead, volatility in claims is expected to continue amid increased construction job layoffs and slower economic conditions.
Lenders raised mortgage rates last week as yields in the bond market moved higher on data showing stronger than expected payroll gains in March. 30-year fixed rate mortgages averaged 6.22% this week compared to 6.17% last week according to Freddie Mac's mortgage market survey.
Friday, April 13th
The producer price index shot up 1.0% in March led by higher food and energy costs. Food prices increased 1.4% while energy costs jumped 3.6% over the last month. Overall producer prices have increased 3.1% over the past year. Excluding food and energy prices from the index, the core PPI was unchanged in March and rose a mild 1.6% over the past year.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12612.13 12560.20 +51.93 or +0.41%
NASDAQ 2491.94 2471.34 +20.60 or +0.83%
Monday, April 09, 2007
Economic Highlights for the Week Ending April 6, 2007
Monday, April 2nd
The ISM manufacturing index fell to 50.9% in March from 52.3% in February. The level of the index portrays sluggish activity as manufacturers continue to work through an inventory correction cycle.
The economic data ran the gamut last week from weaker new home sales to stronger incomes and spending to robust, regional manufacturing activity. Also the Fed Chairman reiterated the need for vigilance against inflation and flexibility in monetary policy response. Interest rate expectations were little changed amid mixed economic data and Bernanke's remarks last week. Fed funds futures traders are expecting no change in the fed funds rate for the next three meetings in May, June and August. Traders have priced in roughly a 60% chance of a rate cut in September and fully priced in a cut at the October meeting.
Tuesday, April 3rd
The NAR reported that its pending home sales index rose to 109.3% in February from 108.5% in January. The index represents the number of signed contracts in February and is considered a leading indicator of existing home sales. The unexpected gain in the index should result in fairly stable demand for exiting homes in the next month or two.
Motor vehicle sales fell to a seasonally adjusted annual pace of 16.3 million units in March, down from a pace of 16.6 million in February. Weak fleet sales weighed on domestic auto manufacturers sales results last month while Toyota's sales increased 12%. Also, car sales rose modestly while truck sales declined as consumers shopped for more fuel efficient models.
Wednesday, April 4th
The ISM non-manufacturing index fell to 52.4% in March from 54.3% in February. Expectations were for a mild gain. Business activity in the service sector has slowed sharply in the last year or so but continues to expand modestly. This is in part related to the housing market correction. Weakness is expected in service sector growth going forward as the overall economy continues to slow.
Factory orders rose 1.0% in February after a 5.7% decline in January. A downward revision to durable goods orders led to the slower than expected increase in factory activity in February. The factory sector continues to pare down inventories under weakened demand. Manufacturing weakness will continue to detract from economic growth in Q1, possibly more so than in Q4.
The MBA mortgage applications index fell 3.2% to 649.5% for the week that ended March 30. Both purchase and refinancing activity decreased on the week but refinancing activity was up 27.9% from year ago levels. The purchase index was 8.1% below its year ago level. The decline in mortgage application activity indicates weaker housing fundamentals. The housing market is expected to weaken further this year before mounting any significant rebound.
Thursday, April 5th
Mortgage rates edged higher last week but gains were limited as the financial markets weighed the most recent economic data. The data remains mixed and the outlook for interest rates, the housing market and the economy is unclear. 30-year fixed rate mortgages averaged 6.17% this week compared to 6.16% last week according to Freddie Mac's mortgage market survey.
Jobless claims increased 11,000 to 321,000 for the week that ended March 31. Despite the gain, the four week moving average which smoothes out weekly volatility, continues to trend lower. Higher claims suggest additional layoffs last week however, the level of jobless claims remains relatively low indicating still tight labor market conditions.
Friday, April 6th
GOOD FRIDAY
Equity Markets Closed
The ISM manufacturing index fell to 50.9% in March from 52.3% in February. The level of the index portrays sluggish activity as manufacturers continue to work through an inventory correction cycle.
The economic data ran the gamut last week from weaker new home sales to stronger incomes and spending to robust, regional manufacturing activity. Also the Fed Chairman reiterated the need for vigilance against inflation and flexibility in monetary policy response. Interest rate expectations were little changed amid mixed economic data and Bernanke's remarks last week. Fed funds futures traders are expecting no change in the fed funds rate for the next three meetings in May, June and August. Traders have priced in roughly a 60% chance of a rate cut in September and fully priced in a cut at the October meeting.
Tuesday, April 3rd
The NAR reported that its pending home sales index rose to 109.3% in February from 108.5% in January. The index represents the number of signed contracts in February and is considered a leading indicator of existing home sales. The unexpected gain in the index should result in fairly stable demand for exiting homes in the next month or two.
Motor vehicle sales fell to a seasonally adjusted annual pace of 16.3 million units in March, down from a pace of 16.6 million in February. Weak fleet sales weighed on domestic auto manufacturers sales results last month while Toyota's sales increased 12%. Also, car sales rose modestly while truck sales declined as consumers shopped for more fuel efficient models.
Wednesday, April 4th
The ISM non-manufacturing index fell to 52.4% in March from 54.3% in February. Expectations were for a mild gain. Business activity in the service sector has slowed sharply in the last year or so but continues to expand modestly. This is in part related to the housing market correction. Weakness is expected in service sector growth going forward as the overall economy continues to slow.
Factory orders rose 1.0% in February after a 5.7% decline in January. A downward revision to durable goods orders led to the slower than expected increase in factory activity in February. The factory sector continues to pare down inventories under weakened demand. Manufacturing weakness will continue to detract from economic growth in Q1, possibly more so than in Q4.
The MBA mortgage applications index fell 3.2% to 649.5% for the week that ended March 30. Both purchase and refinancing activity decreased on the week but refinancing activity was up 27.9% from year ago levels. The purchase index was 8.1% below its year ago level. The decline in mortgage application activity indicates weaker housing fundamentals. The housing market is expected to weaken further this year before mounting any significant rebound.
Thursday, April 5th
Mortgage rates edged higher last week but gains were limited as the financial markets weighed the most recent economic data. The data remains mixed and the outlook for interest rates, the housing market and the economy is unclear. 30-year fixed rate mortgages averaged 6.17% this week compared to 6.16% last week according to Freddie Mac's mortgage market survey.
Jobless claims increased 11,000 to 321,000 for the week that ended March 31. Despite the gain, the four week moving average which smoothes out weekly volatility, continues to trend lower. Higher claims suggest additional layoffs last week however, the level of jobless claims remains relatively low indicating still tight labor market conditions.
Friday, April 6th
GOOD FRIDAY
Equity Markets Closed
Wednesday, April 04, 2007
Economic Highlights for the Week Ending March 30, 2007
Monday, March 26th
New home sales fell 3.9% in February to an annual rate of 848,000 after plunging 15.8% in January. Weaker sales and rising inventories indicate that the housing market remains mired in its correction. Looking forward, expect continued weakness as builders sell off excess inventories amid slower demand and tighter credit standards.
Tuesday, March 27th
The leading measure of U.S. home prices showed year over year declines for the first time in 11 years. The S&P Case/Shiller (CSI) house price index covering 10 metro areas fell 0.7% in January from a year earlier while the index of 20 major metros was down 0.2%. The growth rate of the 10 metro composite index is at its lowest level since 1994.
The consumer confidence index fell to 107.2% in March from 111.2% in February. Waning consumer optimism was related to the recent jump in gas prices. Consumers indicated their confidence in current conditions but downgraded their expectations for the future.
Wednesday, March 28th
In testimony to the Joint Economic Committee today Fed Chairman Ben Bernanke said that the Fed continues to see higher inflation as the predominate risk to the economy but that downside risks to growth have increased on housing market weakness and softer business spending. The Chairman indicated the change of language in the last policy statement reflected these uncertainties and injected more flexibility into policy decisions. Bernanke believes the subprime situation will remain contained and that for now, steady monetary policy is the correct path to take for the economy.
The MBA mortgage applications index slipped 0.2% to 671.0% for the week that ended March 23. Purchase activity increased marginally last week while refinancing activity decreased. Nevertheless, refinancing applications were 41.0% above their year ago level.
Thursday, March 29th
Growth was slightly stronger in the fourth quarter compared to previous estimates. GDP grew at an annualized pace of 2.5% in Q4, up from 2.2% in the preliminary estimate. Inventory investment was not as weak as estimated and net exports were stronger. Even with the upward adjustment, growth remains slow mainly due to the housing market correction which shaved a full percentage point from growth during the period.
Mortgage rates were little changed again this week as slower growth indicators offset higher inflation readings. 30-year fixed rate mortgages averaged 6.16% this week, the same as last week according to Freddie Mac's mortgage market survey.
Jobless claims fell 10k to 308k for the week that ended March 24. Lower jobless claims over the last several weeks indicate improvement in labor market conditions. However, improvements may be short lived as auto manufacturing and residential construction weakness will lead to more layoffs down the road.
Friday, March 30th
Personal income increased 0.6% in February while consumer spending expanded 0.6%. Both income and spending gains were higher than expected last month. Inflation accelerated in February. The core rate of inflation tracked in this data series grew 0.3% in February and was up 2.4% over the last year, still above the Fed’s comfort zone of 2.0%.
Construction spending increased 0.3% in February compared to expectations for a 0.5% decline. Strength in nonresidential and public construction spending led the gain in February but was not enough to offset residential construction weakness. Looking ahead, residential construction will continue to be a drag on quarterly economic growth through the first half of this year.
New home sales fell 3.9% in February to an annual rate of 848,000 after plunging 15.8% in January. Weaker sales and rising inventories indicate that the housing market remains mired in its correction. Looking forward, expect continued weakness as builders sell off excess inventories amid slower demand and tighter credit standards.
Tuesday, March 27th
The leading measure of U.S. home prices showed year over year declines for the first time in 11 years. The S&P Case/Shiller (CSI) house price index covering 10 metro areas fell 0.7% in January from a year earlier while the index of 20 major metros was down 0.2%. The growth rate of the 10 metro composite index is at its lowest level since 1994.
The consumer confidence index fell to 107.2% in March from 111.2% in February. Waning consumer optimism was related to the recent jump in gas prices. Consumers indicated their confidence in current conditions but downgraded their expectations for the future.
Wednesday, March 28th
In testimony to the Joint Economic Committee today Fed Chairman Ben Bernanke said that the Fed continues to see higher inflation as the predominate risk to the economy but that downside risks to growth have increased on housing market weakness and softer business spending. The Chairman indicated the change of language in the last policy statement reflected these uncertainties and injected more flexibility into policy decisions. Bernanke believes the subprime situation will remain contained and that for now, steady monetary policy is the correct path to take for the economy.
The MBA mortgage applications index slipped 0.2% to 671.0% for the week that ended March 23. Purchase activity increased marginally last week while refinancing activity decreased. Nevertheless, refinancing applications were 41.0% above their year ago level.
Thursday, March 29th
Growth was slightly stronger in the fourth quarter compared to previous estimates. GDP grew at an annualized pace of 2.5% in Q4, up from 2.2% in the preliminary estimate. Inventory investment was not as weak as estimated and net exports were stronger. Even with the upward adjustment, growth remains slow mainly due to the housing market correction which shaved a full percentage point from growth during the period.
Mortgage rates were little changed again this week as slower growth indicators offset higher inflation readings. 30-year fixed rate mortgages averaged 6.16% this week, the same as last week according to Freddie Mac's mortgage market survey.
Jobless claims fell 10k to 308k for the week that ended March 24. Lower jobless claims over the last several weeks indicate improvement in labor market conditions. However, improvements may be short lived as auto manufacturing and residential construction weakness will lead to more layoffs down the road.
Friday, March 30th
Personal income increased 0.6% in February while consumer spending expanded 0.6%. Both income and spending gains were higher than expected last month. Inflation accelerated in February. The core rate of inflation tracked in this data series grew 0.3% in February and was up 2.4% over the last year, still above the Fed’s comfort zone of 2.0%.
Construction spending increased 0.3% in February compared to expectations for a 0.5% decline. Strength in nonresidential and public construction spending led the gain in February but was not enough to offset residential construction weakness. Looking ahead, residential construction will continue to be a drag on quarterly economic growth through the first half of this year.
Friday, December 15, 2006
Monday, December 11th
Stronger than expected payroll gains in November prompted the financial markets to pullback on rate cut expectations for next year. Fed funds futures traders are pricing in a very slim chance of a rate cut following the FOMC meeting at the end of January and odds of just 24% for an easing in March, down from about 70% earlier last week.
Tuesday, December 12th
The FOMC opted to hold monetary policy steady today, as widely expected, leaving the target for the fed funds rate unchanged at 5.25%. This is the fourth straight meeting the Fed has remained on hold. In the policy statement the committee acknowledged that recent economic data have been mixed and that the correction in the housing market has been substantial. Policymakers believe though, that the economy will continue to expand at a moderate pace going forward. The Fed said they still see elevated core inflationary pressures but that reduced energy prices, low inflation expectations, and previous tightening should help to contain inflation over time. As risks do remain, the FOMC stated that they would raise rates again if incoming data deemed it necessary.
Wednesday, December 13th
Retail sales surged 1.0% in November led by strong demand for electronics and appliances, building materials, gasoline and autos. Excluding the large and often volatile auto and gas segments, retail sales still gained 0.9%. A strong start to the holiday shopping season should provide a lift to Q4 economic growth as well.
The MBA mortgage applications index jumped 11.4% to 721.2% for the week that ended December 8. Purchase activity was up 8.7% on the week while refinancing application volumes soared 15.8%. Purchase apps remain 3.0% below their year ago levels but refinancing applications are up an astounding 59.8% primarily due to homeowners converting their adjustable rate mortgages and locking in fixed rates.
Refinancing activity is up but surprisingly not all ARM holders want to convert into a fixed rate mortgage. According to CNN Money, some people are considering interest only and payment option loans instead because they may not be able to afford a higher, fixed rate. While those types of financing may be good in some circumstances, mortgage professionals say there is a window of opportunity now because of a recent dip in average fixed rates. One-year ARMs currently average 5.43% while 30-year fixed rates are averaging just 6.11% according to Freddie Mac's mortgage market survey.
Thursday, December 14th
Import prices rose 0.2% in November despite another drop in petroleum prices, which fell 1.6% on the month. Crude oil prices have risen since the data was collected and will result in higher import prices in December.
Mortgage rates edged slightly higher this week on recent economic reports for November showing stronger job creation and retail sales. 30-year fixed rate mortgages averaged 6.12% this week compared to 6.11% last week according to Freddie Mac's mortgage market survey. Historically low mortgage rates last week pushed mortgage application volumes to their highest levels this year.
Jobless claims tumbled 20k to 304k for the week that ended December 9. Initial claims have regained their previous low level which suggests relatively tight labor market conditions with moderate monthly payroll gains. Jobless claims have averaged 312k a week this year compared to 332k a week in 2005.
Friday, December 15th
Consumer prices were unchanged in November, less than estimates for a 0.2% gain. A 0.2% decline in energy costs helped to stabilize overall prices last month. The CPI has gained 2.0% over the past year. Excluding food and energy from the index core consumer inflation was also unchanged in November. Over the past year, the core rate has run at a 2.6% pace. Certainly with inflation well contained the Fed will not be compelled to raise rates, as alluded to in the last policy statement.
Industrial production increased 0.2% in November, slightly better than expected. Gains in manufacturing output offset declines in mining and utilities. Capacity utilization rates remained unchanged last month at 81.8%. Despite the gain last month, industrial activity continues to slow along with usage rates. Slower resource utilization will help to ease pricing pressures going forward.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12445.52 12307.49 +138.03 or +1.12%
NASDAQ 2457.20 2437.36 +19.84 or +0.81%
WEEK IN ADVANCE
The inflation outlook is improving as we head into 2007 which potentially means continued low interest rates. This week's economic calendar provides more data on the inflation front as well as home building, manufacturing and consumer attitudes.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Stronger than expected payroll gains in November prompted the financial markets to pullback on rate cut expectations for next year. Fed funds futures traders are pricing in a very slim chance of a rate cut following the FOMC meeting at the end of January and odds of just 24% for an easing in March, down from about 70% earlier last week.
Tuesday, December 12th
The FOMC opted to hold monetary policy steady today, as widely expected, leaving the target for the fed funds rate unchanged at 5.25%. This is the fourth straight meeting the Fed has remained on hold. In the policy statement the committee acknowledged that recent economic data have been mixed and that the correction in the housing market has been substantial. Policymakers believe though, that the economy will continue to expand at a moderate pace going forward. The Fed said they still see elevated core inflationary pressures but that reduced energy prices, low inflation expectations, and previous tightening should help to contain inflation over time. As risks do remain, the FOMC stated that they would raise rates again if incoming data deemed it necessary.
Wednesday, December 13th
Retail sales surged 1.0% in November led by strong demand for electronics and appliances, building materials, gasoline and autos. Excluding the large and often volatile auto and gas segments, retail sales still gained 0.9%. A strong start to the holiday shopping season should provide a lift to Q4 economic growth as well.
The MBA mortgage applications index jumped 11.4% to 721.2% for the week that ended December 8. Purchase activity was up 8.7% on the week while refinancing application volumes soared 15.8%. Purchase apps remain 3.0% below their year ago levels but refinancing applications are up an astounding 59.8% primarily due to homeowners converting their adjustable rate mortgages and locking in fixed rates.
Refinancing activity is up but surprisingly not all ARM holders want to convert into a fixed rate mortgage. According to CNN Money, some people are considering interest only and payment option loans instead because they may not be able to afford a higher, fixed rate. While those types of financing may be good in some circumstances, mortgage professionals say there is a window of opportunity now because of a recent dip in average fixed rates. One-year ARMs currently average 5.43% while 30-year fixed rates are averaging just 6.11% according to Freddie Mac's mortgage market survey.
Thursday, December 14th
Import prices rose 0.2% in November despite another drop in petroleum prices, which fell 1.6% on the month. Crude oil prices have risen since the data was collected and will result in higher import prices in December.
Mortgage rates edged slightly higher this week on recent economic reports for November showing stronger job creation and retail sales. 30-year fixed rate mortgages averaged 6.12% this week compared to 6.11% last week according to Freddie Mac's mortgage market survey. Historically low mortgage rates last week pushed mortgage application volumes to their highest levels this year.
Jobless claims tumbled 20k to 304k for the week that ended December 9. Initial claims have regained their previous low level which suggests relatively tight labor market conditions with moderate monthly payroll gains. Jobless claims have averaged 312k a week this year compared to 332k a week in 2005.
Friday, December 15th
Consumer prices were unchanged in November, less than estimates for a 0.2% gain. A 0.2% decline in energy costs helped to stabilize overall prices last month. The CPI has gained 2.0% over the past year. Excluding food and energy from the index core consumer inflation was also unchanged in November. Over the past year, the core rate has run at a 2.6% pace. Certainly with inflation well contained the Fed will not be compelled to raise rates, as alluded to in the last policy statement.
Industrial production increased 0.2% in November, slightly better than expected. Gains in manufacturing output offset declines in mining and utilities. Capacity utilization rates remained unchanged last month at 81.8%. Despite the gain last month, industrial activity continues to slow along with usage rates. Slower resource utilization will help to ease pricing pressures going forward.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12445.52 12307.49 +138.03 or +1.12%
NASDAQ 2457.20 2437.36 +19.84 or +0.81%
WEEK IN ADVANCE
The inflation outlook is improving as we head into 2007 which potentially means continued low interest rates. This week's economic calendar provides more data on the inflation front as well as home building, manufacturing and consumer attitudes.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Monday, December 11, 2006
Economic Highlights for the Week Ending December 8, 2006
Monday, December 4th
The NAR's pending home sales index fell 1.7% in October after a 1.1% drop in September. The index measures the number of signed contracts and is considered a leading indicator of existing home sales. Recent index declines suggest that after rebounding in October, existing home sales will be softer in November and December.
Weaker than expected economic conditions heading into the fourth quarter combined with other signals such as a weaker dollar and reduction in the yield curve inversion have increased rate cut expectations. While the Fed is expected to remain on hold when they meet next week chances have increased to 25% for a rate cut at the end of January with fed funds futures traders pricing in roughly a 70% chance of easing following the conclusion of the March meeting.
Tuesday, December 5th
The ISM non-manufacturing index increased to 58.9% in November from 57.1% in October. Expectations were for a small decline to a reading of 56.0%. The level of the index suggests that the service producing sectors of the economy are expanding nicely and are expected to extend gains through the holiday season. Some deceleration in activity is expected post-holidays.
Productivity was upwardly revised to show a 0.2% rate of growth in the third quarter rather than a flat reading in the preliminary estimate. Even with the revision, growth in productivity was slower than expected. Also, longer term growth is down as well with productivity gaining just 1.4% over the past year compared to an average yearly gain of 3.1% since 2000. Inflation news was good as unit labor costs were downwardly revised to 2.3% in Q3 vs. 3.8% originally.
Wednesday, December 6th
The MBA mortgage applications index jumped 8.1% to 647.6% for the week that ended December 1. The purchase index was up 4.9% on the week while the refinance index surged 13.9%. The gain in the purchase index reflects more stable home buying activity while the gain in the refinance index is mostly attributable to homeowners converting their adjustable rate mortgages and locking in fixed rates.
Thursday, December 7th
Consumer credit declined $1.2 billion in October and is growing at a 4.2% rate over the past year. The decline was led by the non-revolving credit category which fell by $4.2 billion due to softer vehicle sales during the month. Revolving credit outstanding increased $2.9 billion in October. Cash out refinancing activity has limited consumer credit growth. Strong refinancing activity has been driven lately by homeowners, facing resets on their adjustable rate mortgages are looking to lock in fixed rates.
Jobless claims tumbled 34k to 324k for the week that ended December 2. This week's decline almost totally reverses last week's gain. Claims data tends to be volatile during the holidays and severe winter weather. Nevertheless, the level of claims is consistent with fairly tight labor market conditions and modest monthly payroll gains.
Mortgage rates slipped again this week on continued signs of slowing in the housing market and weakness in the manufacturing sector. 30-year fixed rate mortgages averaged 6.11% this week compared to 6.14% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac project that the correction in the housing market is about two-thirds of the way through and with conditions stabilizing around mid-2007.
Friday, December 8th
The economy created 132,000 new jobs in November, higher than expectations for a gain of 110,000. Moreover, revisions in the prior two months resulted in a net 42,000 more jobs. Average hourly earnings rose 0.2% on the month, less than expected, while the average workweek remained unchanged at 33.9 hours. The unemployment rate climbed 0.1% to 4.5% of the workforce. Labor market strength was apparent but not so robust as to rekindle rate hike fears.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12307.49 12194.13 +113.36 or +0.93%
NASDAQ 2437.36 2413.21 +24.15 or +1.00%
WEEK IN ADVANCE
Unanimous expectations for steady monetary policy at the FOMC meeting Tuesday will put most of the attention on the statement following the meeting, as usual. Other data this week including retail sales, the consumer price index and industrial production will garner their share of attention as well and help to refine the economic and interest rate outlook going forward.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Sunday, December 03, 2006
Economic Highlights for the Week Ending December 1, 2006
Monday, November 27th
The economic calendar yields a ton of data this week with housing sales figures and manufacturing performance highlighting.
Tuesday, November 28th
New orders for durable goods plunged 8.3% in October, after gaining 8.7% in September. The outsized decline was led by a huge drop in orders for civilian aircraft, though other categories of durable manufacturing were also weaker.
Consumer confidence fell to 102.9% in November from 105.1% in October. Slippage in attitudes and risks to confidence going forward are related to gasoline price movements and tight labor market conditions.
Existing home sales increased 0.5% in October to an annual rate of 6.24 million, better than an expected rate of 6.14 million. Despite the modest bounce last month home re-sales have been trending lower since peaking in summer of 2005 than a year ago and 14.2% below the record high set in June of last year.
Wednesday, November 29th
GDP grew at a 2.2% rate in Q3, up from 1.6% in the advance estimate. Stronger business and government spending and higher net exports led to the upward revision however, consumer spending and residential investment were weaker than first thought. Economy-wide inflation remained unchanged at an annualized rate of 1.8%.
New home sales tumbled in October as builders try to correct large inventories by slowing new construction. Sales of new homes fell 3.1% last month to an annual rate of 1.00 million units. Over the past year new home sales have declined 25.4%.
The MBA mortgage applications index fell 3.9% to 599.0% for the week that ended November 24. The purchase index rose 1.3% and has been over the 400% level for the past four weeks, suggesting some stabilization in home purchase activity. The refinance index plunged 9.6% on the week but remains 17.9% higher than a year ago indicating still strong refi activity related to homeowners locking in fixed rates.
The Fed's beige book, compiled in preparation for the December 13 FOMC meeting was surprisingly upbeat today with signs of softness reported in just housing and auto manufacturing. Other than those sectors, economic conditions were largely positive during the October to mid-November period. Based on this report and other data the Fed is widely expected to hold rates steady when they meet this month.
Thursday, November 30th
Personal income rose 0.4% in October, led by a 0.6% increase in wages and salaries. Consumer spending remained weak, up 0.2% on the month and just 5.0% on the year. A closely watched inflation gauge in this data series, the core PCE deflator gained 0.2% in October and 2.4% over the past year. The annual gain has receded recently but still remains somewhat elevated.
Mortgage rates dropped for the fifth time as 30-year fixed rates fell to 6.14% this week compared to 6.18% last week according to Freddie Mac's mortgage market survey. The 30-year fixed averaged 6.12% as of January 26 and was 6.26% one year ago. Economists at Freddie Mac note that lower rates combined with some softening in home prices should keep home purchase activity healthy going forward.
Friday, December 1st
The ISM manufacturing index fell to 49.5% in November from a reading of 51.2% in October. New orders, production, and employment were all below 50%. Also, the price index rose on higher energy costs. An index reading below 50% indicates contraction in the manufacturing sector and the economy. Historically, when the ISM index dips below the key 50% level, the Fed starts to cut interest rates.
Construction spending fell 1.0% in October, weaker than an expected decline of 0.4%. Weakness was concentrated in the private sector, more specifically the residential component. Declines in residential construction spending have been accelerating recently and will continue to subtract heavily from fourth quarter GDP.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12194.13 12342.56 -148.43 or -1.20%
NASDAQ 2413.21 2445.86 -32.65 or -1.33%
WEEK IN ADVANCE
The employment report Friday is the most important indicator on an otherwise light economic calendar this week. Payrolls take on added significance given recent, weaker data readings. While the Fed is widely expected to remain on hold this month, rate cut expectations are increasing for the first quarter of next year.
Friday, November 17, 2006
Economic Highlights for the Week Ending November 17, 2006
Monday, November 13th
Rate cut expectations have been tabled until later next year. A busy economic calendar will help refine the outlook this week starting with the producer price index and retail sales data tomorrow.
Tuesday, November 14th
Retail sales fell 0.2% in October better than an expected 0.4% decline. September sales were downwardly revised to show a decline of 0.8%. Weakness was led by a 6.0% drop in gasoline sales attributable to price declines in the past two months. The slowing housing market is also weighing on retail sales with declines in the categories of furniture/home furnishings and building materials/garden supplies.
The producer price index fell 1.6% in October, much more than expected as energy costs tumbled 5.0%. Excluding food and energy prices, the core PPI fell 0.9%, its steepest drop in more than 13 years, because of a sharp plunge in motor vehicle prices. Wholesale inflation has fallen 1.5% over the past year while the core rate gained just 0.7%, well within the range the Fed deems acceptable.
The NAR predicts the housing slowdown to continue into next year. NAR chief economist David Lereah forecasts a 12% drop in housing starts to a rate of 1.63 million for 2007. Housing starts will likely fall 11% this year. New home sales are expected to fall 8.7% next year to 975,000 after dropping 17% this year. Existing home sales will probably fall 0.6% to 6.43 million next year after falling 8.6% this year. Median prices for existing homes are projected to rise 1.7% in 2007 while new home prices are expected to gain 1.3%.
Wednesday, November 15th
The MBA mortgage applications index rose 4.3% to 647.5% for the week that ended November 10. The purchase index rose 2.7% last week while the refinance index jumped 6.5%. Refinancing volume is 18.8% above its year ago level mainly due to homeowners converting their adjustable rate mortgages and locking in relatively low, fixed rates.
Thursday, November 16th
Consumer inflation fell for the second straight month because of energy price declines. The consumer price index fell 0.5% in October, deeper than an expected decline of 0.3% as energy prices tumbled 7.0%. The CPI has gained a modest 1.3% over the past year while energy prices fell 11.2%. Excluding food and energy from the index, the core CPI gained 0.1% on the month and 2.7% in the last year, improved somewhat but still elevated.
The NAHB housing market index increased 2 points in November to a level of 33. Its second straight monthly increase follows eight months of sharp declines. Homebuilders are feeling a bit better and rated present sales and sales six month from now higher while the traffic through model home increased. Nevertheless the level of the index remains low buts its improvement could point to more stable housing market conditions in coming months.
Mortgage rates fell this past week in tandem with a strong bond market rally that lowered yields significantly. Bond market gains were made on signs of slower economic growth containing inflation. 30-year fixed rate mortgages averaged 6.24% this week compared to 6.33% last week according to Freddie Mac's mortgage market survey. The decline in mortgage rates combined with slightly improved homebuilder sentiment and strong mortgage application activity all point to an upcoming moderation in housing market slowdown.
Friday, November 17th
New residential construction starts in October fell to their lowest level since July of 2000 despite tentative signs of stabilizing housing market conditions. Housing starts plunged 14.6% last month to a rate of 1.49 million. Expectations were centered on a more modest decline to a rate of 1.68 million. The steep decline in housing starts last month will likely detract from third quarter and possibly fourth quarter economic growth. Near term downside risks aside, the abrupt slowing in new starts will help to reduce large inventories of new homes more rapidly resulting in a rebound in residential investment sooner rather than later.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12342.56 12108.43 +234.13 or +1.93%
NASDAQ 2445.86 2389.72 +56.14 or +2.35%
WEEK IN ADVANCE
A quiet holiday shortened week will provide little fodder to digest with regards to the interest rate and economic outlook. Data releases pick up in the post holiday week with one more FOMC meeting left in mid-December, as the financial markets head into year's end.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Monday, November 13, 2006
Economic Highlights for the Week Ending November 10, 2006
Monday, November 6th
The interest rate outlook ran the gamut last week with weak data at the start increasing rate cut expectations substantially and the employment report Friday replacing that with an on hold scenario through the first quarter of 2007. Fed funds futures traders are fully pricing in a stable fed fund target rate of 5.25% through January and less than 20% odds of a rate cut at the March FOMC meeting.
Tuesday, November 7th
Two major homebuilders, Toll Brothers and Beazer Homes reported order declines of more than 50% in their latest fiscal quarters. Both builders continued to struggle with high inventories, slower demand for new homes, sharply higher cancellation rates and steep discounting. More evidence of slowing housing market conditions and its impact on the broader economy will continue to place downward pressure on rates.
Consumer credit outstanding fell $1.2 billion in September driven primarily by a $4.1 billion decline in non-revolving credit, which is comprised mostly of car loans. Revolving credit or credit cards increased $2.9 billion during the month. Cash-out refinancing boosted by a drop in rates over the summer, continues to limit consumer credit balances. As the housing market slows in coming months, consumers may again turn to revolving credit usage to support spending.
Wednesday, November 8th
The MBA mortgage applications index jumped 8.8% to 620.9% for the week that ended November 3. The purchase index surged 7.1% on a recent drop in mortgage interest rates. The refinance index surged 11.0% as homeowners moved to lock in fixed mortgage rates. Purchase application volumes remain 13.6% below year ago levels but refinancing activity is actually up 5.5% over last year.
Thursday, November 9th
Import prices tumbled 2.0% for the second straight month in October, more than double estimates. The outsized decline last month was again led by falling petroleum prices which were down 8.3% in October after a 9.7% decrease in September. Excluding petroleum, import prices still fell 0.6% on the month. Import price declines bode well for upcoming consumer and producer price reports.
The international trade deficit on goods and services fell 6.8% in September to $64.3 billion from a record high of $68.96 billion in August. The improvement in the trade gap was due to less expensive crude and lower import oil volumes during the month. Lower energy prices should help limit the growth in the trade deficit in coming months. A narrower than expected trade gap in September will likely result in an upward revision to third quarter GDP growth.
Consumer sentiment fell 1.3 points to 92.3% in its preliminary reading for November. The slight drop in sentiment followed sharp gains in the prior two months which arrested the downward trend in sentiment that had been in place over the last two years. It appears that as gasoline prices have stabilized so have consumer attitudes. The final reading for November sentiment will be released in two weeks.
Jobless claims fell 20k to 308k for the week ending November 4. Lower than expected unemployment filings last week indicate relatively tight labor market conditions and stable, if moderate pace of hiring.
Mortgage rates drifted higher this week on evidence of underlying strength in recently released economic data. 30-year fixed rate mortgages averaged 6.33% this week compared to 6.31% last week according to Freddie Mac’s mortgage market survey. Slow economic growth in the current quarter has kept a lid on interest rate gains. Economists at Freddie Mac expect fourth quarter growth to rebound moderately although the increase is expected to come from sectors of the economy other than housing.
Friday, November 10th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12108.43 11986.04 +122.39 or +1.02%
NASDAQ 2389.72 2330.79 +58.93 or +2.53%
WEEK IN ADVANCE
A full economic calendar next week yields the latest data on inflation, consumer spending, manufacturing and new home construction starts. Data results will be weighed against current outlook for economic slowing and possible rate cuts next year.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
The interest rate outlook ran the gamut last week with weak data at the start increasing rate cut expectations substantially and the employment report Friday replacing that with an on hold scenario through the first quarter of 2007. Fed funds futures traders are fully pricing in a stable fed fund target rate of 5.25% through January and less than 20% odds of a rate cut at the March FOMC meeting.
Tuesday, November 7th
Two major homebuilders, Toll Brothers and Beazer Homes reported order declines of more than 50% in their latest fiscal quarters. Both builders continued to struggle with high inventories, slower demand for new homes, sharply higher cancellation rates and steep discounting. More evidence of slowing housing market conditions and its impact on the broader economy will continue to place downward pressure on rates.
Consumer credit outstanding fell $1.2 billion in September driven primarily by a $4.1 billion decline in non-revolving credit, which is comprised mostly of car loans. Revolving credit or credit cards increased $2.9 billion during the month. Cash-out refinancing boosted by a drop in rates over the summer, continues to limit consumer credit balances. As the housing market slows in coming months, consumers may again turn to revolving credit usage to support spending.
Wednesday, November 8th
The MBA mortgage applications index jumped 8.8% to 620.9% for the week that ended November 3. The purchase index surged 7.1% on a recent drop in mortgage interest rates. The refinance index surged 11.0% as homeowners moved to lock in fixed mortgage rates. Purchase application volumes remain 13.6% below year ago levels but refinancing activity is actually up 5.5% over last year.
Thursday, November 9th
Import prices tumbled 2.0% for the second straight month in October, more than double estimates. The outsized decline last month was again led by falling petroleum prices which were down 8.3% in October after a 9.7% decrease in September. Excluding petroleum, import prices still fell 0.6% on the month. Import price declines bode well for upcoming consumer and producer price reports.
The international trade deficit on goods and services fell 6.8% in September to $64.3 billion from a record high of $68.96 billion in August. The improvement in the trade gap was due to less expensive crude and lower import oil volumes during the month. Lower energy prices should help limit the growth in the trade deficit in coming months. A narrower than expected trade gap in September will likely result in an upward revision to third quarter GDP growth.
Consumer sentiment fell 1.3 points to 92.3% in its preliminary reading for November. The slight drop in sentiment followed sharp gains in the prior two months which arrested the downward trend in sentiment that had been in place over the last two years. It appears that as gasoline prices have stabilized so have consumer attitudes. The final reading for November sentiment will be released in two weeks.
Jobless claims fell 20k to 308k for the week ending November 4. Lower than expected unemployment filings last week indicate relatively tight labor market conditions and stable, if moderate pace of hiring.
Mortgage rates drifted higher this week on evidence of underlying strength in recently released economic data. 30-year fixed rate mortgages averaged 6.33% this week compared to 6.31% last week according to Freddie Mac’s mortgage market survey. Slow economic growth in the current quarter has kept a lid on interest rate gains. Economists at Freddie Mac expect fourth quarter growth to rebound moderately although the increase is expected to come from sectors of the economy other than housing.
Friday, November 10th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12108.43 11986.04 +122.39 or +1.02%
NASDAQ 2389.72 2330.79 +58.93 or +2.53%
WEEK IN ADVANCE
A full economic calendar next week yields the latest data on inflation, consumer spending, manufacturing and new home construction starts. Data results will be weighed against current outlook for economic slowing and possible rate cuts next year.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Sunday, November 05, 2006
Economic Highlights for the Week Ending November 3, 2006
Monday, October 30th
Personal income rose 0.5% in September, better than expected, led by a healthy 0.5% gain in wages and salaries. Personal consumption increased just 0.1% last month but gained 5.5% year-over-year which is in line with longer term averages. A closely watched inflation gauge contained in this data series the core PCE deflator gained 0.2% on the month and 2.4% on the year, which is higher than the 1-2% range the Fed would like to see.
Tuesday, October 31st
Consumer confidence fell a half a point to 105.4% in October from a revised reading of 105.9% in September. The weaker than expected reading was due to lower ratings of current conditions and the job market. Consumer expectations gained modestly. Confidence levels are expected to remain range bound in the near term with downside risk associated with slower job growth and housing market declines.
More weak economic readings today increased rate cut expectations for March of next year. While fed funds futures traders expect no change in rates through the FOMC meeting in late January, odds of a rate cut in the fed funds target to 5.0% at the March meeting are currently being priced in at 73%.
Wednesday, November 1st
The ISM manufacturing index fell to 51.2% in October from 52.9% in September. Manufacturing activity has slowed considerably over the past six months or so. New orders and production fell which does not bode well for future activity. Prices dropped off during the month alleviating inflation concerns. It looks as though the Fed's forecasts of slowing economic conditions containing inflation are on the mark and will open up the possibility of a rate cut sooner rather than later.
Motor vehicle sales fell 2.8% in October to an annual rate of 16.2 million, roughly in line with expectations. The pace of vehicle sales remains anemic. Production schedules will be cut again in Q4 as automakers contend with rising inventories and weak earnings. Weak auto sales and production are likely to detract from Q4 GDP growth.
Construction spending fell 0.3% in September, lower than expected. The decline was led by a 1.1% drop in residential construction. Total construction expenditures are 2.9% higher than a year ago while residential construction is down 6.9% during the same period.
The MBA mortgage applications index fell 3.0% to 570.8% for the week that ended October 27. The purchase index was down 1.8% on the week while refinancing applications declined 4.5%. After falling sharply between mid 2005 and mid 2006, application activity appears to have stabilized in the last three months, suggesting the sharp downturn in housing activity could subside in the months ahead.
The pending home sales index fell 1.1% in September after increasing 4.7% in August. The index tracks signed sales contracts and is considered a leading indicator of existing home sales. Despite recent volatility, the index has improved in the last two months due to lower rates and softer home prices. Improved fundamentals will continue to support home turnover at current levels in the coming months.
Thursday, November 2nd
Productivity was flat in the third quarter compared to expectations for a 1.2% gain. Over the past year, productivity has increased just 1.3% decelerating sharply in recent quarters. Unit labor costs increased 3.8% on the quarter, higher than expected but downshifted from 5.4% growth in the second quarter.
Friday, November 3rd
Payrolls increased by just 92k in October, missing estimates for a 130k gain. However, upward revisions in the previous two months resulted in a net increase of 139k additional jobs. Even with the revisions, job growth is trending lower in the past year. Hourly earning rose 0.4% on the month, higher than expected. The yearly gain of 3.9% in hourly earnings is also on the high side. The unemployment rate dropped to 4.4% of the workforce which indicates fairly tight labor market conditions.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11986.04 12090.26 -104.22 or -0.86%
NASDAQ 2330.79 2350.62 -19.83 or -0.84%
WEEK IN ADVANCE
Rate cuts are off the table based on data showing underlying economic strength with increasing inflationary pressures. The financial markets will likely adopt a 'wait and see' mode in the coming
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Personal income rose 0.5% in September, better than expected, led by a healthy 0.5% gain in wages and salaries. Personal consumption increased just 0.1% last month but gained 5.5% year-over-year which is in line with longer term averages. A closely watched inflation gauge contained in this data series the core PCE deflator gained 0.2% on the month and 2.4% on the year, which is higher than the 1-2% range the Fed would like to see.
Tuesday, October 31st
Consumer confidence fell a half a point to 105.4% in October from a revised reading of 105.9% in September. The weaker than expected reading was due to lower ratings of current conditions and the job market. Consumer expectations gained modestly. Confidence levels are expected to remain range bound in the near term with downside risk associated with slower job growth and housing market declines.
More weak economic readings today increased rate cut expectations for March of next year. While fed funds futures traders expect no change in rates through the FOMC meeting in late January, odds of a rate cut in the fed funds target to 5.0% at the March meeting are currently being priced in at 73%.
Wednesday, November 1st
The ISM manufacturing index fell to 51.2% in October from 52.9% in September. Manufacturing activity has slowed considerably over the past six months or so. New orders and production fell which does not bode well for future activity. Prices dropped off during the month alleviating inflation concerns. It looks as though the Fed's forecasts of slowing economic conditions containing inflation are on the mark and will open up the possibility of a rate cut sooner rather than later.
Motor vehicle sales fell 2.8% in October to an annual rate of 16.2 million, roughly in line with expectations. The pace of vehicle sales remains anemic. Production schedules will be cut again in Q4 as automakers contend with rising inventories and weak earnings. Weak auto sales and production are likely to detract from Q4 GDP growth.
Construction spending fell 0.3% in September, lower than expected. The decline was led by a 1.1% drop in residential construction. Total construction expenditures are 2.9% higher than a year ago while residential construction is down 6.9% during the same period.
The MBA mortgage applications index fell 3.0% to 570.8% for the week that ended October 27. The purchase index was down 1.8% on the week while refinancing applications declined 4.5%. After falling sharply between mid 2005 and mid 2006, application activity appears to have stabilized in the last three months, suggesting the sharp downturn in housing activity could subside in the months ahead.
The pending home sales index fell 1.1% in September after increasing 4.7% in August. The index tracks signed sales contracts and is considered a leading indicator of existing home sales. Despite recent volatility, the index has improved in the last two months due to lower rates and softer home prices. Improved fundamentals will continue to support home turnover at current levels in the coming months.
Thursday, November 2nd
Productivity was flat in the third quarter compared to expectations for a 1.2% gain. Over the past year, productivity has increased just 1.3% decelerating sharply in recent quarters. Unit labor costs increased 3.8% on the quarter, higher than expected but downshifted from 5.4% growth in the second quarter.
Friday, November 3rd
Payrolls increased by just 92k in October, missing estimates for a 130k gain. However, upward revisions in the previous two months resulted in a net increase of 139k additional jobs. Even with the revisions, job growth is trending lower in the past year. Hourly earning rose 0.4% on the month, higher than expected. The yearly gain of 3.9% in hourly earnings is also on the high side. The unemployment rate dropped to 4.4% of the workforce which indicates fairly tight labor market conditions.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11986.04 12090.26 -104.22 or -0.86%
NASDAQ 2330.79 2350.62 -19.83 or -0.84%
WEEK IN ADVANCE
Rate cuts are off the table based on data showing underlying economic strength with increasing inflationary pressures. The financial markets will likely adopt a 'wait and see' mode in the coming
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Saturday, October 28, 2006
Economic Highlights for the Week Ending October 27, 2006
Monday, October 23rd
Financial markets are speculating the Fed could sound an inflation alarm that could require further rate increases. After pricing in, at the highpoint September 25, a 46% chance of a rate cut for early next year, fed fund futures traders are now pricing in 18% odds of a rate hike.
Tuesday, October 24th
A $20 billion, 2-year note auction was met with strong demand today. The notes were awarded a high yield of 4.894% and received a 2.91 bid-to-cover ratio compared to 2.77 last month. Indirect bidders which include foreign central banks accounted for 31% of the accepted bids today. Treasuries drifted slightly higher in trading Tuesday as the bond market awaited additional Fed guidance tomorrow. In late trading the 10-year note was up 3/32 to 100-13/32 to yield 4.82%.
Wednesday, October 25th
Existing home sales, which includes single-family, town homes, condominiums and co-ops fell 1.9% in September to an annual rate of 6.18 million. Consensus estimates were for a smaller decline to a rate of 6.26 million. Over the last year, home re-sales have declined 14.2%. While it looks as though the market has bottomed, the risks to the outlook remain to the downside. Affordability issues, overcome in the past by low interest rates and creative financing, as well as spent-up demand may continue to impede home sales going forward.
The MBA mortgage applications index rose 0.5% to 588.6% for the week that ended October 20. Purchase application activity slipped 0.6% while refinancing volume rose 1.8%. Mortgage rates have climbed higher in the past few weeks and are slowing the pace of application activity. However, the current level of the MBA index suggests some stabilization in housing market conditions.
The FOMC kept the target for the fed funds rate stable at 5.25% as widely expected today. This was the third straight meeting policy makers remained on hold to further evaluate the impact of the previous 17 rate hikes and other factors influencing the economic outlook. The much anticipated policy statement showed a few minor changes in the language. The Fed first acknowledged the slowing pace of economic growth this year, attributable in part to cooling in housing sector. The economy is expected to continue expanding at a moderate pace. Inflation risks do remain, but seem likely to moderate over time on lower energy prices and previous policy adjustments. The Committee left the door open for additional firming if necessary based on the evolution of economic data on growth and inflation. Economists and analysts agree that from all indications the Fed will remain on hold for an extended period of time.
Thursday, October 26th
New home sales jumped 5.3% in September to an annual rate of 1.075 million. This was the second month in a row that new home sales increased, however both were related to sharp downward revisions in previous months. Even with the increases, new home sales are trending lower and remain 14.2% below sales levels seen last year.
Durable goods orders surged 7.8% in September compared to an expected increase of 1.4%. Demand for big ticket items was led by orders for civilian aircraft last month. Excluding the transportation component, durable goods gained 0.1%. Despite the volatility and some softness in the third quarter, manufacturing activity is poised to pick up in the fourth quarter based on the strength of new orders.
Friday, October 27th
Economic growth in the third quarter fell to its slowest pace in three years weakened primarily by a sharp decline in residential investment. 3Q GDP grew at a 1.6% annual pace compared to 2.6% growth in Q2. Residential investment plunged 17.4% during the quarter which shaved 1.1 points off of total GDP growth. Net exports and inventories also detracted from growth. Positive contributors were consumer spending and business investment. The price index contained in this data series fell to 1.8% in Q3 from 3.3% in Q2.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12090.26 12002.37 +87.89 or +0.73%
NASDAQ 2350.62 2342.30 +8.32 or +0.35%
WEEK IN ADVANCE
The economic calendar is jam-packed next week with indicators from all corners of the economy. So far the Fed's projections of slowing economic growth due to a cooling housing sector helping to control inflationary pressures, are playing out and data in the coming week will be weighed against that scenario.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 7.75% 6.75%
Fed Discount 6.25% 5.75% 4.75%
Fed Funds 5.25% 4.74% 3.76%
11th District COF 4.277% 3.604% 2.870%
10-Year Note 4.67% 5.07% 4.55%
30-Year Treasury Bond 4.79% 5.15% 4.77%
30-Yr Fixed (FHLMC) 6.40% 6.58% 6.15%
15-Yr Fixed (FHLMC) 6.10% 6.21% 5.69%
1-Yr Adj (FHLMC) 5.60% 5.68% 4.91%
6-Mo Libor (FNMA) 5.3704% 5.1196% 4.2154%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Wednesday, October 25, 2006
Real Estate Outlook: Buyers Take Note
One of the country's top housing economists has come out with a new forecast and timeline for the market over the coming months - and it's got some great insights for anybody interested in real estate.
Dr. David Seiders, chief economist for the National Association of Home Builders, says that housing starts are now down by about 20 percent from levels a year ago - but that should be no surprise.
After all, he says, after years of record housing production, the market had to cool off, "We are in the midst of an inevitable adjustment following boom years when housing market activity soared to unsustainable levels. The market that emerges from the current correction will display good balance between supply and demand, and move to a sustainable trend based on solid underlying fundamentals."
How soon might the turnaround begin? Well, nobody can answer that for certain, but based on his research, Dr. Seiders believes that the end of the down cycle may only be a matter of months away - sometime next spring is a real possibility in many areas.
In the meantime, Dr. Seiders sees an upside for consumers: If you've done your homework on your local market - and you know what's sitting unsold at what price and on what size lot - this may be a very opportune time to get off the sidelines and start making offers.
One important reason why: Dr. Seiders points out that the vast majority of local markets around the country have solid underlying economic fundamentals: Housing may be soft, but - jobs are growing. Household incomes are moving up - and inflation is under control.
Unlike some earlier cyclical downturns, such as the early 1990s recession years, the correction this time around is likely to be relatively brief and not so deep - as long as mortgage rates stay where they are, about a point above historic lows. Corrections could be deeper and longer in those markets where prices got most out of sync with local incomes, but even the majority of those metropolitan areas on the West and East coasts have relatively strong employment bases this time around.
Which raises a very basic question in my mind: When just about every economist in the country is telling us that - we're in a buyer's market, but that the down cycle may not last all that long - isn't this a smart time to be actively involved in real estate, searching for deals?
Written by Kenneth Harney
Dr. David Seiders, chief economist for the National Association of Home Builders, says that housing starts are now down by about 20 percent from levels a year ago - but that should be no surprise.
After all, he says, after years of record housing production, the market had to cool off, "We are in the midst of an inevitable adjustment following boom years when housing market activity soared to unsustainable levels. The market that emerges from the current correction will display good balance between supply and demand, and move to a sustainable trend based on solid underlying fundamentals."
How soon might the turnaround begin? Well, nobody can answer that for certain, but based on his research, Dr. Seiders believes that the end of the down cycle may only be a matter of months away - sometime next spring is a real possibility in many areas.
In the meantime, Dr. Seiders sees an upside for consumers: If you've done your homework on your local market - and you know what's sitting unsold at what price and on what size lot - this may be a very opportune time to get off the sidelines and start making offers.
One important reason why: Dr. Seiders points out that the vast majority of local markets around the country have solid underlying economic fundamentals: Housing may be soft, but - jobs are growing. Household incomes are moving up - and inflation is under control.
Unlike some earlier cyclical downturns, such as the early 1990s recession years, the correction this time around is likely to be relatively brief and not so deep - as long as mortgage rates stay where they are, about a point above historic lows. Corrections could be deeper and longer in those markets where prices got most out of sync with local incomes, but even the majority of those metropolitan areas on the West and East coasts have relatively strong employment bases this time around.
Which raises a very basic question in my mind: When just about every economist in the country is telling us that - we're in a buyer's market, but that the down cycle may not last all that long - isn't this a smart time to be actively involved in real estate, searching for deals?
Written by Kenneth Harney
Real Estate Outlook: Buyers Take Note
One of the country's top housing economists has come out with a new forecast and timeline for the market over the coming months - and it's got some great insights for anybody interested in real estate.
Dr. David Seiders, chief economist for the National Association of Home Builders, says that housing starts are now down by about 20 percent from levels a year ago - but that should be no surprise.
After all, he says, after years of record housing production, the market had to cool off, "We are in the midst of an inevitable adjustment following boom years when housing market activity soared to unsustainable levels. The market that emerges from the current correction will display good balance between supply and demand, and move to a sustainable trend based on solid underlying fundamentals."
How soon might the turnaround begin? Well, nobody can answer that for certain, but based on his research, Dr. Seiders believes that the end of the down cycle may only be a matter of months away - sometime next spring is a real possibility in many areas.
In the meantime, Dr. Seiders sees an upside for consumers: If you've done your homework on your local market - and you know what's sitting unsold at what price and on what size lot - this may be a very opportune time to get off the sidelines and start making offers.
One important reason why: Dr. Seiders points out that the vast majority of local markets around the country have solid underlying economic fundamentals: Housing may be soft, but - jobs are growing. Household incomes are moving up - and inflation is under control.
Unlike some earlier cyclical downturns, such as the early 1990s recession years, the correction this time around is likely to be relatively brief and not so deep - as long as mortgage rates stay where they are, about a point above historic lows. Corrections could be deeper and longer in those markets where prices got most out of sync with local incomes, but even the majority of those metropolitan areas on the West and East coasts have relatively strong employment bases this time around.
Which raises a very basic question in my mind: When just about every economist in the country is telling us that - we're in a buyer's market, but that the down cycle may not last all that long - isn't this a smart time to be actively involved in real estate, searching for deals?
Written by Kenneth Harney
Dr. David Seiders, chief economist for the National Association of Home Builders, says that housing starts are now down by about 20 percent from levels a year ago - but that should be no surprise.
After all, he says, after years of record housing production, the market had to cool off, "We are in the midst of an inevitable adjustment following boom years when housing market activity soared to unsustainable levels. The market that emerges from the current correction will display good balance between supply and demand, and move to a sustainable trend based on solid underlying fundamentals."
How soon might the turnaround begin? Well, nobody can answer that for certain, but based on his research, Dr. Seiders believes that the end of the down cycle may only be a matter of months away - sometime next spring is a real possibility in many areas.
In the meantime, Dr. Seiders sees an upside for consumers: If you've done your homework on your local market - and you know what's sitting unsold at what price and on what size lot - this may be a very opportune time to get off the sidelines and start making offers.
One important reason why: Dr. Seiders points out that the vast majority of local markets around the country have solid underlying economic fundamentals: Housing may be soft, but - jobs are growing. Household incomes are moving up - and inflation is under control.
Unlike some earlier cyclical downturns, such as the early 1990s recession years, the correction this time around is likely to be relatively brief and not so deep - as long as mortgage rates stay where they are, about a point above historic lows. Corrections could be deeper and longer in those markets where prices got most out of sync with local incomes, but even the majority of those metropolitan areas on the West and East coasts have relatively strong employment bases this time around.
Which raises a very basic question in my mind: When just about every economist in the country is telling us that - we're in a buyer's market, but that the down cycle may not last all that long - isn't this a smart time to be actively involved in real estate, searching for deals?
Written by Kenneth Harney
Monday, October 23, 2006
Economic Highlights for the Week Ending October 20, 2006
Monday, October 16th
The slowing in the housing market will be watched closely in coming weeks for its broader impact on the economy. The biggest impact could come from the lessening of the wealth effect whereby consumer spending increases along with strong price appreciation and equity extraction. Also, housing related job losses for the most part have yet to show up in labor statistics. Economists expect the housing slowdown to subtract up to 1.0% from GDP in the last half of this year.
Tuesday, October 17th
Producer prices fell 1.3% in September, steeper than an expected 0.7% decline. The drop was predicated on an 8.4% tumble in energy prices during the month. Excluding food and energy from the index core producer prices rose 0.6% based primarily on higher vehicle prices. Over the past year, core producer prices increased at a modest 1.3%, about half of the core rate seen just one year ago.
Industrial production fell 0.6% in September compared to expectations for a 0.1% decline. Weakness was concentrated in utilities output which plunged 4.4% on the month. Manufacturing output fell just 0.3% while mining production gained 0.7%. Capacity utilization fell to 81.9% last month from 82.5% in August which helps to alleviate tight resource usage and possible inflationary pressures.
The NAHB housing market index gained a point to 31 in October in its first increase in a year. Nevertheless, the level of the index remains quite low signaling poor assessments of the housing market by major homebuilders. New home construction is expected to continue slowing until housing affordability improves.
Wednesday, October 18th
The consumer price index fell 0.5% in September based on a 7.2% drop in energy prices. Energy prices have now declined 4.5% over the past year which has dropped the yearly gain in consumer prices to 2.1%. Excluding food and energy, core consumer prices rose 0.2% on the month and are now up 2.9% on the year which is higher than the Fed's comfort zone. Even so, the Fed will hold rates steady when they meet next week. Slower economic conditions will work to ease inflationary pressures going forward.
New residential construction starts rebounded in September. Housing starts jumped 5.9% last month to a seasonally adjusted annual rate of 1.772 million units. Expectations were centered on a mild decline and a rate of 1.64 million. Even with recent gains, housing starts are 21.8% lower than their peak reached in January.
The MBA mortgage applications index fell 2.2% to 585.8% for the week that ended October 13. Rates moved higher last week resulting in a 5.3% drop in refinancing applications. Purchase apps edged 0.4% higher on the week. Mortgage demand appears to be leveling off as mortgage rates stabilize in the mid-6% range.
Thursday, October 19th
Mortgage rates were little changed this week ahead of the FOMC meeting next week where the Fed is largely expected to hold rates steady. The policy statement following the meeting could help to clarify the economic and interest rate outlook. 30-year fixed rate mortgages averaged 6.36% this week compared to 6.37% last week according to Freddie Mac’s mortgage market survey.
Jobless claims fell 10k to 299k for the week that ended October 14. The unexpected and sizable drop in the number applying for unemployment insurance suggests resiliency in labor market conditions. The level of claims suggests payroll gains for October could be stronger than in recent months.
Friday, October 20th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12002.37 11960.51 +41.86 or +0.35%
NASDAQ 2342.30 2357.29 -14.99 or -0.64%
WEEK IN ADVANCE
A rate cut is essentially off the table with the Fed expected to sit on its hands at least through the first quarter of 2007 based on recent economic data that shows underlying economic strength and still elevated levels of core inflation. Data watch continues though with new and existing home sales highlighting on the economic calendar in the coming week. Also, we will get the first print on third quarter economic growth with the advance estimate of GDP data Friday.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 7.75% 6.75%
Fed Discount 6.25% 5.75% 4.75%
Fed Funds 5.25% 4.77% 3.76%
11th District COF 4.277% 3.604% 2.870%
10-Year Note 4.78% 5.02% 4.46%
30-Year Treasury Bond 4.90% 5.10% 4.65%
30-Yr Fixed (FHLMC) 6.36% 6.53% 6.10%
15-Yr Fixed (FHLMC) 6.06% 6.17% 5.65%
1-Yr Adj (FHLMC) 5.57% 5.63% 4.89%
6-Mo Libor (FNMA) 5.3704% 5.1196% 5.2154%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Thursday, October 19, 2006
Real Estate Market Downturn Nearing End
When will the housing market reverse gears and start moving upward again? That question is on everyone's mind, from nervous sellers to wary buyers, from anxious realty professionals to eager builders and developers.
No one knows for sure, of course. But Irvine, Calif., real estate consultant John Burns suggests the turnaround may come sooner rather than later, at least in some high-profile markets. In fact, the economist says some places could see a reversal of fortune by next year.
Burns sees a stable housing market as three-legged stool, he told his clients in a recent newsletter. One leg is demand, represented by the number of would-be buyers. Another is supply, or the number of active sellers. And the third is investment, which he defines as a mixture of affordability, consumer confidence and speculative activity.
Currently, he pointed out, the demand leg is the only one of the three that is on solid footing. Indeed, the underlying demographics "support healthy demand for many years to come," he wrote, explaining there is a real need for some two million new units alone each and every year for the next ten.
"Demand is our primary hope for avoiding a crash landing," Burns says.
While some naysayers argue that housing prices are free-falling towards a crash landing, Burns isn't in that camp. Prices may be falling, he points out, but at least most consumers aren't worried about losing their jobs. Indeed, the number of new jobs continues to rise every month, albeit at a slower pace, and the unemployment rate remains exceptionally low.
The supply leg, meanwhile, will probably take a while to correct itself, but certainly within the next 12 to 48 months, depending on the market, according to Burns.
Currently, the number of unsold homes under construction is at an all-time high, as is the number of unsold existing homes. And Burns says the situation will need time to correct itself over time -- less time in submarkets close to job centers and more in outlying areas where most people commute long distances.
The increase in unsold listings was this cycle's early warning indicator, the economist points out. And a decline will be the sign that the market is rebalancing itself. "The supply problem will be resolved when the market returns to 2.5 months of supply in the resale market, and only a few standing units of inventory in a typical new home subdivision," he says.
As Burns sees it, the correction "could take years" in outlying areas. In built-out markets such as San Diego, over-supply is "likely to correct earlier" than in sprawling markets like Phoenix. But economic growth will "play a huge role as well," and help many markets recover sooner.
Burns also notes that home builders have already corrected for their share of the over-supply. During the boom years, builders overbuilt the market on a national basis by about 15 percent, he wrote. Last year's construction pace was at about 2.3 million units, but the rate has already slowed to 1.8 million, which is less than the 1.9 million to 2.1 million units a year that are needed to satisfy the demographics of the housing market.
The housing economist told his clients to worry more about the location and price of the oversupply than the overall number itself. The Nation's Capital is one example where location and price matter more. In the Washington metro area, a healthy ratio of 2.2 jobs were created for every new housing start. Unfortunately, most of the development is occurring outside the market's main employment centers.
And D.C. is not alone. In Phoenix, the largest number of resale houses on the market are on the outskirts of town, which is exactly where home builders are most active. And construction in Tampa, Orlando and Sacramento, to name just a few places, is most active far away from where the jobs are.
According to Burns, the investment leg of the stool is the wild card. Demand is strong, just not at current prices, he says. "Affordability is an issue in the major markets, but not everywhere."
On the other hand, consumer confidence is strong. In fact, it hasn't been an issue, at least not like it has been in previous down cycles, largely because most folks are secure in their jobs, the housing consultant says.
But speculators remain a bugaboo. At the height of the market, Burns says, "an unprecedented level of investors created 40 percent more sales activity" than should normally have been created. Now, we have to wait and see how they will react. Will they hold until the market turns more favorable, or will they panic and sell at any price just to be over and done with it?
As in politics, all housing markets are local. But if you are watching the national numbers, Burns concludes that 5.6 million total sales -- both new and used -- is indicative of a normal level of demand.
In June 2005, the annual rate reached 8.5 million. But it has already slowed to 7.3 million. Unfortunately, he believes the market will need to over-correct to below the 5.6 million benchmark because of affordability problems and the huge number of investors before it can right itself and begin heading north again. Written by Lew Sichelman
No one knows for sure, of course. But Irvine, Calif., real estate consultant John Burns suggests the turnaround may come sooner rather than later, at least in some high-profile markets. In fact, the economist says some places could see a reversal of fortune by next year.
Burns sees a stable housing market as three-legged stool, he told his clients in a recent newsletter. One leg is demand, represented by the number of would-be buyers. Another is supply, or the number of active sellers. And the third is investment, which he defines as a mixture of affordability, consumer confidence and speculative activity.
Currently, he pointed out, the demand leg is the only one of the three that is on solid footing. Indeed, the underlying demographics "support healthy demand for many years to come," he wrote, explaining there is a real need for some two million new units alone each and every year for the next ten.
"Demand is our primary hope for avoiding a crash landing," Burns says.
While some naysayers argue that housing prices are free-falling towards a crash landing, Burns isn't in that camp. Prices may be falling, he points out, but at least most consumers aren't worried about losing their jobs. Indeed, the number of new jobs continues to rise every month, albeit at a slower pace, and the unemployment rate remains exceptionally low.
The supply leg, meanwhile, will probably take a while to correct itself, but certainly within the next 12 to 48 months, depending on the market, according to Burns.
Currently, the number of unsold homes under construction is at an all-time high, as is the number of unsold existing homes. And Burns says the situation will need time to correct itself over time -- less time in submarkets close to job centers and more in outlying areas where most people commute long distances.
The increase in unsold listings was this cycle's early warning indicator, the economist points out. And a decline will be the sign that the market is rebalancing itself. "The supply problem will be resolved when the market returns to 2.5 months of supply in the resale market, and only a few standing units of inventory in a typical new home subdivision," he says.
As Burns sees it, the correction "could take years" in outlying areas. In built-out markets such as San Diego, over-supply is "likely to correct earlier" than in sprawling markets like Phoenix. But economic growth will "play a huge role as well," and help many markets recover sooner.
Burns also notes that home builders have already corrected for their share of the over-supply. During the boom years, builders overbuilt the market on a national basis by about 15 percent, he wrote. Last year's construction pace was at about 2.3 million units, but the rate has already slowed to 1.8 million, which is less than the 1.9 million to 2.1 million units a year that are needed to satisfy the demographics of the housing market.
The housing economist told his clients to worry more about the location and price of the oversupply than the overall number itself. The Nation's Capital is one example where location and price matter more. In the Washington metro area, a healthy ratio of 2.2 jobs were created for every new housing start. Unfortunately, most of the development is occurring outside the market's main employment centers.
And D.C. is not alone. In Phoenix, the largest number of resale houses on the market are on the outskirts of town, which is exactly where home builders are most active. And construction in Tampa, Orlando and Sacramento, to name just a few places, is most active far away from where the jobs are.
According to Burns, the investment leg of the stool is the wild card. Demand is strong, just not at current prices, he says. "Affordability is an issue in the major markets, but not everywhere."
On the other hand, consumer confidence is strong. In fact, it hasn't been an issue, at least not like it has been in previous down cycles, largely because most folks are secure in their jobs, the housing consultant says.
But speculators remain a bugaboo. At the height of the market, Burns says, "an unprecedented level of investors created 40 percent more sales activity" than should normally have been created. Now, we have to wait and see how they will react. Will they hold until the market turns more favorable, or will they panic and sell at any price just to be over and done with it?
As in politics, all housing markets are local. But if you are watching the national numbers, Burns concludes that 5.6 million total sales -- both new and used -- is indicative of a normal level of demand.
In June 2005, the annual rate reached 8.5 million. But it has already slowed to 7.3 million. Unfortunately, he believes the market will need to over-correct to below the 5.6 million benchmark because of affordability problems and the huge number of investors before it can right itself and begin heading north again. Written by Lew Sichelman
Monday, October 16, 2006
Economists Beginning to Challenge Media's Negative Drumbeat on Housing
Is it a housing bust or a media-driven panic? Mike Moran, chief economist for Wall Street's Daiwa Securities America, Inc., says he's surprised that virtually nobody has challenged the constant drumbeat of negative headlines and TV news warnings of imminent crashes and home price meltdowns.
"It's really been way out of line with reality," says Moran, whose firm specializes in the bond market. When a 1.7 percent decline in the median home price nationwide sparks headlines about the "housing bust," that is "just pure sensationalism about what is going on here," he said in an interview.
The housing market "is going through a correction that's badly needed" after five years of record sales and price appreciation. "The key issue is whether it is orderly or disorderly" -- and it's clearly the former. Yet the financial press and TV news programs are "portraying it as a catastrophe."
Moran got indirect support for that view from other economists, including the Mortgage Bankers Association of America's chief economist, Doug Duncan, who said "the rhetoric is just way overwrought" -- the sky is not falling in the real estate and mortgage sectors.
To the contrary, even the Federal Reserve's vice chairman believes the current correction will not be dramatic or even that long-lived, and that the housing slowdown will not have dire side effects on other parts of the economy.
In a speech that went virtually unreported by major media, vice chairman Donald L. Kohn told New York analysts that the "rebalancing" of prices to better fit current demand that is underway in many metropolitan markets is a normal, cyclical event -- not an incipient disaster. In fact, it may even be a healthy and necessary part of the cycle: "The reported declines in new home prices in a number of areas should help facilitate the rebalancing of supply and demand" -- ie, lower prices should help gradually expand the number of serious buyers looking for houses.
Thanks to strong underlying demographic factors -- new household formations and population growth -- the current down phase may be relatively short-lived, Kohn suggested. New housing "starts may be closer to their (low point) than to their peak." If one takes mid-summer 2005 as the peak of the multi-year housing boom, Kohn appeared to suggest that the low point of the cycle -- and the beginning of the eventual turnaround -- could be just over the horizon.
The latest pending home sale index from the National Association of Realtors, which showed a surprising 4.3 percent jump in the number of sales in the contract stage, but not yet closed, supports that conclusion.
Kohn also noted that other economic conditions today do not point to a deep housing price recession or bust. For example, long-term mortgage interest rates are about a point above their historic lows, the Fed itself has stopped raising short-term rates, gas prices are falling, and the unemployment rate just dropped to 4.6 percent.
The current "situation stands in sharp contrast to some past downturns in the housing market" -- in the early 1980s especially -- "that followed actions b the Federal Reserve to tighten credit conditions significantly."
"Continuing growth in real incomes should underpin the demand for housing," said Kohn, "and as home prices stop rising, help to erode affordability constraints."
How come you're reading about the Fed vice chairman's moderately upbeat speech in Realty Times rather than watching it on the evening news or reading about it in your newspaper?
Good question.
Written by Kenneth R. Harney
Economic Highlights for the Week Ending October 13, 2006
Monday, October 9th
COLUMBUS DAYBanking Holiday
Tuesday, October 10th
Rate cut expectations moved lower after the release of the employment report. Upward revisions to job gains and a decrease in the unemployment rate overshadowed what was a weak looking headline figure. Yesterday, fed funds futures traders were pricing in just a 20% chance the Fed would ease rates at the end of January, which means there is a strong likelihood the Fed will remain on hold through this year and in January, pushing a potential rate cut to second quarter or later.
Wednesday, October 11th
September 20 FOMC meeting minutes indicated that the Fed remained quite concerned about inflation but believed that slower economic conditions and previous rate hikes would work to keep it contained, lessening the risk of holding the target for the fed funds rate steady at 5.25%. Most of the economic slowing was attributed cooling in the housing market which is expected to abate sometime next year.
The MBA mortgage applications index fell 5.5% to 599.1% for the week that ended October 6. Purchase applications decreased 5.3% on the week while refinancing volume fell 5.8%. Declines this week follow sizable gains last week. Mortgage application volumes are leveling off as mortgage rates stabilize.
Thursday, October 12th
Jobless claims rose 4k to 308k for the week that ended October 7. The low level of claims suggests a subdued pace of layoffs and a relatively tight labor market. Job gains however should remain modest.
The international trade deficit increased $1.9 billion in August to a record $69.9 billion, compared to expectations for a small decline. The deficit widened on high oil prices and strong domestic demand for foreign made goods and services. After remaining fairly stable the first half of the year the trade gap has deteriorated sharply in the last two months due to expensive oil imports. Recent oil price declines should stem some of the deterioration in the trade deficit in coming months.
The Fed's beige book showed that the economy continued to grow in late August and September despite widespread cooling in the housing market. The latest survey of the Fed's twelve banking districts was compiled in preparation for the October 24-25 FOMC meeting. Economic expansion in most areas was moderate or mixed but housing slowed in all areas resulting in slower sales, rising inventories and softer prices. Pricing pressures did not accelerate. The survey is consistent with near potential economic growth, contained inflation and steady monetary policy. The Fed is expected to remain on hold through the remainder of this year and possibly through the first half of next year.
Lenders raised mortgage rates this week on higher bond yields generated by the minutes of the last FOMC meeting where policy makers expressed concern over inflation. 30-year fixed rate mortgages averaged 6.37% this week compared to 6.30% last week according to Freddie Mac's mortgage market survey.
Friday, October 13th
Retail sales fell 0.4% in September less than an expected gain of 0.2%. Weakness stemmed from a 9.3% plunge in gasoline sales related to lower prices at the pump. Excluding gasoline, retail sales rose 0.6% reflecting generally healthy spending in most other categories. Apart from the volatility in gasoline sales, consumer spending remains strong and will contribute positively to third quarter GDP growth.
Import prices plummeted 2.1% in September based on a 10.3% drop in petroleum prices. Crude oil prices have retracted most of the gains seen in the last year. Over the last twelve months, imported petroleum prices are up just 2.9% compared to 30 and 40 percent gains in 2004 and 2005. Recent decline in oil prices are expected to produce more tame inflation reading next week when the CPI and PPI are released.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11960.51 11850.21 +110.30 or +0.93%
NASDAQ 2357.29 2299.99 +57.30 or +2.49%
WEEK IN ADVANCE
Financial markets may have been getting ahead of themselves in anticipation of imminent easing. Indeed, Fed speak and FOMC meeting minutes from last week quashed rate cut possibilities and instead focused on inflation. Consumer and producer price data in the coming week will clarify inflation against the backdrop of lower oil prices.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 7.75% 6.75%
Fed Discount 6.25% 5.75% .75%
Fed Funds 5.25% 4.76% 3.68%
11th District COF 4.277% 3.604% 2.870%
10-Year Note 4.81% 4.98% 4.45%
30-Year Treasury Bond 4.94% 5.05% 4.48%
30-Yr Fixed (FHLMC) 6.37% 6.49% 6.03%
15-Yr Fixed (FHLMC) 6.06% 6.14% 5.62%
1-Yr Adj (FHLMC) 5.56% 5.61% 4.85%
6-Mo Libor (FNMA) 5.3704% 5.1196% 4.2154%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Saturday, October 07, 2006
Economic Highlights for the Week Ending October 6, 2006
Monday, October 2nd
Financial markets are not expecting any adjustments, either up or down, in monetary policy for the remainder of the year. Fed funds futures traders fully expect the Fed to remain on hold through this year. Currently, traders are pricing in about a 25% chance the Fed could lower rates at the FOMC meeting at the end of January 2007 but time and the data will tell.
The ISM manufacturing index fell to 52.9% in September from a reading of 54.5% in August. The bigger than expected drop in the index shows slowing in national manufacturing conditions with employment and price declines on the month. New orders remained steady which indicates stability in the sector with solid production in coming months.
The NAR's pending home sales index rebounded in August, gaining 4.3% to 110.1 from a level of 105.6 in July. The jump in the index bodes well for existing homes sales. Home buyers are likely responding to falling mortgage rates and somewhat softer home prices. Hence, we should see existing home sales stabilize at current solid levels.
Construction spending increased 0.3% in August, better than expected. Strength was derived from a 3.4% jump non-residential expenditures while residential investment fell 1.5% on the month.
Tuesday, October 3rd
Motor vehicle sales rose 3.5% in September to an annual rate of 16.6 million units. Lower gasoline prices probably stimulated auto purchases. While the rebound in September will boost monthly retail sales, a flat trend in vehicle sales has created excess inventories which will detract from next quarter production levels, reducing Q4 GDP growth.
Wednesday, October 4th
The ISM non-manufacturing index tumbled 4.1 points to 52.9% in September. Last month's reading was much lower than expected but is still consistent with expansion in the service sector albeit at a much slower pace. Despite the weak headline number, index components were generally stronger with gains in new orders, order backlogs and employment suggesting a pick up in activity next month.
The MBA mortgage applications index jumped 11.9% to 633.9% for the week that ended September 29. Lower mortgage rates over the past two months brought the volume of both purchase and refi application up significantly this week. The purchase index gained 7.6% while refinancing activity soared 17.5% as borrowers converted from adjustable to fixed rate mortgages.
Thursday, October 5th
Jobless claims fell 17k to 302k for the week that ended September 30. The drop in claims is unexpected and inconsistent with other data that suggests slower job growth. Expectations are for the level of claims to climb higher on housing related job losses.
Mortgage rates were lower but little changed this week on expectations the Fed will remain on hold for the remainder of this year. 30-year fixed rate mortgages averaged 6.30% this week compared to 6.31% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac note that lower rates recently are providing an opportunity for homeowners to refinance their ARMs before they reset to higher rates in the future.
Friday, October 6th
Payroll employment increased just 51k in September much less than an expected gain of 120k. However, the prior two months were upwardly revised for a net increase of 62k jobs. September weakness was offset by higher job gains in the preceding months to keep payrolls in line with the current trend of modest growth. Average hourly earnings increased 0.2% for a year over year gain of 4.0% while the unemployment rate fell to 4.6% of the workforce.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11850.21 11679.07 +171.14 or +1.46%
NASDAQ 2299.99 2258.43 +41.56 or +1.84%
WEEK IN ADVANCE
Mixed employment data today did little to set a clear course for the economy and interest rates. Data watch will intensify as financial markets decipher the outlook. In the coming week, retail sales, due out on Friday, highlight. Also, the Fed minutes from September will be of interest as will the beige book compiled in preparation for the October 24 FOMC meeting.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 7.75% 6.75%
Fed Discount 6.25% 5.75% 4.75%
Fed Funds 5.25% 4.88% 3.85%
11th District COF 4.277% 3.604% 2.870%
10-Year Note 4.69% 4.89% 4.37%
30-Year Treasury Bond 4.84% 4.94% 4.56%
30-Yr Fixed (FHLMC) 6.30% 6.43% 5.98%
15-Yr Fixed (FHLMC) 5.98% 6.10% 5.54%
1-Yr Adj (FHLMC) 5.46% 5.57% 4.77%
6-Mo Libor (FNMA) 5.3704% 5.1196% 4.2154%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Saturday, September 30, 2006
Economic Highlights for the Week Ending September 29, 2006
Monday, September 25th
Existing home sales fell last month but not as quickly as economists and analysts expected. True, home sales have declined in 10 of the last 12 months however they remain quite strong with this year projected to land somewhere near the third highest on record. For August, existing home sales fell 0.5% to an annualized pace of 6.30 million.
The Fed's work may be done, that is work related to tightening monetary policy. Fed funds futures traders are actually pricing in small odds of a rate cut perhaps as early as next year.
Tuesday, September 26th
Consumers are feeling a little bit better this month probably due to falling gas prices. The consumer confidence index gained 4.3 points in September to 104.5%, better than expected. Consumers rated both the present situation and expectations for the future higher. Going forward, economists anticipate confidence levels to remain range bound with the weakening housing market the primary downside risk.
Wednesday, September 27th
New orders for durable goods defined as big ticket items meant to last three years or more fell 0.5% in August, compared to expectations for a 0.5% increase. Moreover the previous month's decline was revised sharply lower. August weakness was led by a large drop in civilian aircraft, computers and electronic equipment. Excluding the volatile transportation sector however, durable goods orders continue to trend modestly higher.
New home sales rebounded in August gaining 4.1% to an annual rate of 1.050 million, in line with estimates. The bounce was related to sharp downward revisions in the previous three months making August sales tallies seem stronger. New home sales peaked in July of last year and have been trending lower since. Over the past year new home sales have declined 17.4%.
The MBA mortgage applications index fell 4.9% to 566.5% for the week that ended September 22. Both purchase and refinancing activity declined last week. Mortgage activity is expected to stabilize in coming weeks related to steadier rates.
Thursday, September 28th
Second quarter GDP was downwardly revised to a 2.6% annual rate from the 2.9% in the preliminary estimate. This was the final revision for GDP and the weaker pace of growth is consistent with higher interest rates. Economy wide inflation remained unchanged in the final revision at 3.3%.
Jobless claims fell 6k to 316k for the week that ended September 23. Claims have been range bound in the last year and remain at a level that is consistent with fewer layoffs but not much hiring. Payroll growth for September is expected to be moderate again when data is released a week from Friday.
Mortgage rates fell again this week as rate cut expectations increased on incoming economic data. 30-year fixed rate mortgages averaged 6.31% this week compared to 6.40% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac note that lower mortgage rates and moderate house price declines should lead to greater housing affordability.
Friday, September 29th
Personal income rose 0.3% in August, matching expectations. Incomes growth gained 9.4% over the past year boosted by a strong 7.7% annual gain in wages and salaries. Consumer spending gained just 0.1% last month due to retreating auto sales. Spending is 6.0% higher year over year. A closely watched inflation gauge the core PCE deflator was up 0.2% on the month and 2.5% on the year.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11679.07 11508.10 +170.97 or +1.48%
NASDAQ 2258.43 2218.93 +39.50 or +1.78%
WEEK IN ADVANCE
Rate cut expectations increased significantly this week. Incoming data need to be on the weak side for rate cuts to materialize early next year. Friday's employment report figures prominently on the calendar.
Friday, September 22, 2006
Economic Highlights for the Week Ending September 22, 2006
Monday, September 18th
The NAHB housing market index fell to 30 in September from 33 in August. The index is 53% below year ago levels and has dropped to its lowest point since early 1991. All three components of the index, current sales of single family homes, sales six months from now and foot traffic through model homes continued to decline. Homebuilders' outlook has decidedly turned pessimistic which will continue to impact residential investment and new construction starts going forward.
Tuesday, September 19th
The producer price index rose just 0.1% in August compared to an expected gain of 0.2%. Slower energy price growth led to the smaller gain in wholesale prices. Over the past year energy prices have increased 13.1% adding 1.1 percentage points to an annual 3.6% gain in the PPI. Excluding food and energy, core consumer prices fell 0.4% led by tumbling auto prices. Computer prices also fell. Core producer prices are up 0.9% in the last twelve months.
New residential construction activity tumbled last month as widely telegraphed by a bevy of other housing market indicators. Housing starts fell 6.0% in August to a seasonally adjusted annual rate of 1.665 million, less than the anticipated rate of 1.75 million. Moreover, July starts were revised lower to 1.77 million. Total housing starts are off 20% from their year ago pace and declines appear to be accelerating.
Wednesday, September 20th
The FOMC opted not to raise key short term interest rates again today, leaving the target for the fed funds rate at 5.25%. It was widely expected that the Fed would hold rates steady. The Fed paused in their tightening campaign that began in June 2004 for the first time at the last policy setting meeting in August. The post-meeting policy statement was quite similar to the one released in August. In it, policy makers did acknowledge that "some inflation risks remain" but that a continued moderation in economic growth and cooling in the housing market should help ease inflationary pressures over time. The Fed also cited the recent drop in energy prices and previous rate hikes as factors helping to contain inflationary pressures. The FOMC left the door open for additional firming of monetary policy if incoming data and the evolution of the outlook for both inflation and growth deem it necessary.
The MBA mortgage application index rose 2.0% to 595.8% for the week that ended September 15. Retreating mortgage rates in the last eight weeks has boosted interim application activity. Refinancing applications surged 9.5% on the week as many homeowners moved to convert their adjustable rate mortgages to fixed rates. The purchase index slid 3.0% which corroborates continued slowing in housing market conditions.
Thursday, September 21st
Jobless claims rose 7k to 318k for the week that ended September 16. The level of claims was higher than expected last week however, the four week moving average which smoothes out weekly fluctuations was unchanged at 315,000. The current level of jobless claims indicates a relatively low number of layoffs and moderate hiring.
The Philadelphia Fed survey fell 18.9 points in September to a level of -0.4%. The negative index reading signals worse conditions in the Mid Atlantic manufacturing sector this month compared to last month. Other regional manufacturing surveys for this month have shown continued expansion. Based on these surveys, the ISM index of national manufacturing activity is expected to solid growth but at a slower pace.
Mortgage rates slid again for the eighth time in nine weeks on economic data that shows slowing economic and housing market conditions and alleviation of sharp price gains. 30-year fixed rate mortgages averaged 6.40% this week compared to 6.43% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac expect mortgage rates to remain low going forward as a slower economy keeps inflation in check.
Friday, September 22nd
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11508.10 11560.77 -52.67 or -0.45%
NASDAQ 2218.93 2235.59 -16.66 or -0.74%
WEEK IN ADVANCE
This week wraps up a busy month on the economic and interest rate fronts. While the outlook has come into clearer view the extent to which the economy is slowing and how that will effect policy going forward remains to be seen. The cooling housing market plays a central role in the outlook which places emphasis upcoming home sales data.
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