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May 2, 2003
The average 30-year fixed rate mortgage slipped back by a tenth of a percent to 5.79% this week amid mix-and-match economic data. The average now stands just a hairbreadth above modern record lows seen in March, when it felt like 1964 all over again, according to national mortgage pricing data collected this week by HSH Associates.
However, it wasn't the usual sloshing of money from stocks into safe-haven purchases of Treasury Bonds and mortgage-backed securities which caused the dip, but good old supply and demand for a change.
In recent weeks, despite a very favorable interest rate environment, mortgage originations have slowed appreciably, particularly for refinancing. Despite short-lived dives in rates, we've essentially been at the bottom of a long decline in interest rates since last November. The reasonably stable rate environment means that a large majority of homeowners who can profitably refinance have already done so, or are in the process of doing so. New customers are becoming scarce.
How to attract them? Trim prices. A good proxy for the direction of mortgage rates -- the ten-year Treasury Constant Maturity -- has spent the last seven weeks between 3.90% and 3.99%, but the markup over those Treasuries (the "spread") has narrowed from 204 basis points to 189 basis points (1.89%) over those weeks. It is the closest spread since July 2002; last October, that gap was 249 basis points as a crush of refinancing left lenders in the catbird seat.
While far from a desperate cry for business, it does suggest that borrowers may have more bargaining power now, as lenders become more willing to sacrifice some profit in order to make a sale. It's even more important than usual to shop around.
While February's economic numbers were weakened by fears of war, March and April numbers are believed to have been distorted by the military action in Iraq. That makes divining a trend from them a little difficult, but on balance, there was little this week to suggest that the period of sluggish economic growth was ending, and some signs that labor markets may not improve for some time yet.
Strong gains in Personal Income and Consumption spending have helped the economy to grind out of the recession; March's gains of 0.4% in both categories kept that streak going, even if the national savings rate dipped a tenth of a percent to 3.6%.
Consumer Confidence in April jumped to 81.0, well above forecasts, according to the Conference Board survey. Other surveys of consumer, investor, and business sentiment have improved markedly in the weeks which followed the beginning of the Iraq conflict. It's possible that dour attitudes, especially among business, have kept the recovery from reaching its full potential; if so, the months ahead should show improvement.
Construction Spending fell back by 1% in March. Expectations called for a 0.4% increase, but it may be that some projects were delayed into April by weather or war.
It was a little curious, though, that Factory Orders rebounded in March, climbing by 2.2%. Virtually all surveys of manufacturers, including this week's Institute of Supply Management report, have reported very difficult times for factories of all kinds. The ISM index reading of 45.4 suggests renewed decline in the sector and dashed hopes for an improved reading for April. However, the 'prices paid' sub-index which reports inflationary pressures eased somewhat.
Probably, though, no real economic improvement will come until there are more new jobs available for those who want them. However, there are at least three trends which are working to prevent new hiring at the moment: Rising benefit costs, strong Productivity growth and weak broad-based demand for goods and services here and especially abroad.
The Employment Cost Index for Q103 showed a 1.3% increase in the price of keeping an employee on the books. Rising compensation and benefit costs, especially for insurance, can cause employers to think twice before hiring a new worker and may be a factor in the decision to retain eliminate a job. This is especially true as strong productivity growth makes it possible to produce more with fewer workers. The 1.6% gain in productivity for Q103 was a little less than expected but solid nonetheless, making it easier to trim payrolls. At the moment, it is far easier to increase profits by trimming costs than by trying to pass along higher prices.
That has been widely reflected in Weekly State Unemployment Claims, which remain elevated. This week, 448,000 new applications for benefits were filed, continuing an ugly string which started in February. It also had a marked effect on the national Employment Report, which showed the official unemployment rate rising again to 6.0%, with new hires falling by some 48,000.
And round we go, in a form of the usual chicken-or-the-egg conundrum. Businesses won't hire until sales pick up, sales won't pick up until more people have jobs, more jobs won't happen until demand picks up... and investment into new plants and equipment won't happen until now-idle units need to be replaced, which would create jobs and demand, but won't happen until they're used, which depends on jobs, again.
The Federal Reserve Open Market Committee meets next week to ponder these things and to decide whether or not to lower short term interest rates again. Cheaper money probably isn't needed at the moment, and small savers would probably have to pay banks to take their deposits if rates went any lower. Watch for an easing "bias," though, in an acknowledgement of the current weak climate.
Next week, mortgage rates probably drift a little sideways. We continue to tread water, and may have to do so for a while yet.
April 26, 2003
As the economy goes, so go mortgage rates -- and with growth stuck in a lower gear, mortgage rates are simply treading water. The average overall 30-year fixed rate mortgage slid by all of four basis points, landing at 5.89%, according to national mortgage pricing data collected this week by HSH Associates.
There was little exciting news to push the market around this week, and although some of the data were unexpectedly strong, the one element which seemed to have the most effect was the advance report on Gross Domestic Product for Q103. Expectations were all over the board -- forecasts ranged from about 0.7% to about 2.5% -- but when the report showed middling growth of 1.6%, stocks sold off and held there. It's unclear why investors were so disappointed with the report; while weak, there is at least some growth to applaud, and even a meager increase from the previous quarter's 1.4% mark.
With notable exceptions, there were some signs of increased growth in the reports this week. The Fed's own "beige book" report of regional economic conditions reported "lackluster" growth in March and early April, but noted some hopeful signs in a few industries and regions as well as a few indicators that labor markets may be closer to improving. However, the index of Leading Economic Indicators registered a decline of 0.2% in March, suggesting that slow growth is in the offing for the period ahead as well. However, it's possible that there may have been a war-related distortion to the report.
Consumer attitudes have improved markedly in the last several weeks. The University of Michigan survey of Consumer Sentiment rose sharply to 86.0 from March's nine-year low 77.6; while still subdued, it was the best showing since December. A weekly survey from ABC News and Money Magazine also ramped up. We think that it's interesting that business and consumer surveys are treated as though they are two separate sets of people; in reality, at least some of those "consumers" own their own firms (or make planning and purchasing decisions for the firms which employ them). Therefore, if consumer sentiment and/or confidence is on the rise, enthusiasm may begin to spread into businesses sooner rather than later.
The notoriously fickle series which is the report on Durable Goods orders rose in March by a flat 2%, a nice reversal from February's 1.5% slump. Hopefully, this will start to translate into some increase in manufacturing activity.
Home sales were a bit of 'Jeckyl & Hyde' in March, as well. Existing Home Sales slumped by about 6% to a 5.53m annualized rate of sale. On the other hand, New Home Sales climbed by over 7% to a 1.012m sales pace. Housing remains quite strong, even with the slide in sales of previously-owned homes, and the decline there was blamed on bad weather and war worries.
Refuting the beige book's note of labor improvements in some districts was weekly State Unemployment Claims, which have not seen the good side of 400,000 since mid-February. This week, some 455,000 new applications for benefits were filed. Worse, the Conference Boards index which tracks "help wanted" advertising reported its lowest reading for the cycle, indicating that prospects of new jobs for those folks are slim as well.
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Things may be getting better, but it's still hard to tell that they are. Until we see a clear foothold for growth -- solid numbers all around for more than one report cycle -- investors will continue to treat those reports like the boy who cried wolf was treated, and will put no faith in their truthfulness. That implies stability in rates for at least the moment, so we think there will be little change again next week.
April 19, 2003
The average interest rate for 30-year and 15-year fixed rate mortgages failed to move this week, and one-year ARMs could only manage a one-basis point move as well. After several months of reasonable volatility, that's a watershed event, according to the nation's best editorial survey of mortgage prices.
It was a short trading week in the markets, which closed early on Thursday and all day Friday, and the middle of the month brings mostly "second tier" economic reports. If any quiet period could be expected, this would have been it. Tuesday's tax filing deadline may also have played a role.
As focus (or at least the 24/7 media coverage) fades from Iraq, investor eyes should again return to the domestic economy. At the moment, the picture there isn't even as pretty as it was before the military buildup began, but it may be that some degree of hope has returned.
A mild business inventory buildup, back in February, was more probably due to tepid sales than to an anticipation of new demand for goods. The 0.6% increase in inventories may have been worked off in March, but the lag in reporting means it'll be several more weeks until we know.
What we do know now is that the manufacturing sector is collectively hurting. Industrial Production slipped by 0.5% in March after a decline in February, and Factory Capacity Utilization fell to 74.8%. The markets hoped for a milder decline, but if goods are backing up on business shelves, that decline may not be over; regional reports from several Fed districts lent little optimism about prospects for resurgent growth.
Housing Starts tumbled in February but mostly rebounded in March, posting a 1.78m (annualized) rate. Building Permits, a signal of confidence about prospects for additional starts in the months ahead, fared less well, falling to a 1.64m (annualized) pace. Also, the National Association of Home Builders index remained at 52 for March after reaching as high as 64 in January; traffic levels at builder offices are now about one-third lower than January. Low mortgage rates are still a powerful draw, but high prices and a smaller pool of potential homebuyers seem to be damping enthusiasm among builders.
If employment doesn't start picking up soon, the teetering economy could again dip into recession. For the ninth consecutive week, State Unemployment Claims were above 400,000 new applications, suggesting that businessed continue to cut costs to help remain profitable. For the week of April 11, some 442,000 formerly employed persons filed for benefits.
At least there's little inflation, outside of energy and food prices. Too bad that so many of us use those each day. The Consumer Price Index rose by 0.3%, a little less than expected, and the "core" rate of inflation, which excludes those popular items, was unchanged in March. Year over year, the CPI has increased by 3%, and the core rate was 1.7% over that time.
None of this would seem to be a backdrop for an improvement in optimism, but the weekly Money Magazine/ABC News Consumer Comfort index posted a large increase for the week; the increase put the index at -17, a four month high. Broader surveys of sentiment and confidence has also recently shown some improvement.
Next week, the data due out have a little more heft, but we think that the current range-bound pattern will leave rates little changed, on balance. We continue to wait for signs of a ramping up in economic activity, but we'll settle for a little more Spring, in the meanwhile
April 12, 2003
With a successful military campaign in Iraq progressing, investors found at least some reasons for optimism this week. Fixed mortgage rates moved little, with the average 30-year fixed rate mortgage rising by just one basis point, according to the nation's most exhaustive first mortgage pricing survey.
This week, reports on March's economic behavior hinted that the late February/early March nosedive may have eased, suggesting, if not some economic improvement, at least no significant worsening toward the end of the month.
Consumers enjoyed a mini-borrowing binge in January, when they drew $12.3 billion in new credit. In February, though, they barely borrowed at all, adding only $1.5 billion to the "accounts payable" side of the ledger. With massive refinancing waves adding cash to millions of pockets in the last two years, large increases in borrowing may not happen on a regular basis for a while.
While it's too soon to start pushing the "inflation" panic button, you may have noticed how little discussion can be found about deflation. That's because prices are now increasing, with Import Prices rising by 0.5% in March. Our weaker dollar may be helping to increase costs for consumers, but also helps domestic goods to better compete in overseas markets. Prices for exported goods rose 0.3%, and even those small increases may help manufacturers get back on their feet.
The Producer Price Index warrants at least a little concern, though. After increasing by 1% in February, the PPI rose by another 1.5% in February, nearly four times forecasts. Even removing always unpredictable food and energy costs, the report showed a still-discomforting bump of 0.7%. If "input prices" are really rising that fast, goods sold with already razor-thin profit margins will need to have their prices increased, and we'll start to see a pickup in inflation at the Consumer Price level. That report is due next week.
Weekly State Unemployment Claims continue to paint a troubling picture, with 405,000 applications filed last week, the eighth straight week of 400k+ claimants. Optimism alone cannot create new jobs.
After a harsh environment in February, Retail Sales rebounded with a smart gain of 2.1% for March. Perhaps there was some truth to the accounts that dreary winter weather kept folks from buying new spring merchandise, but March was a warmer, drier month for much of the country (the northeast/mid-Atlantic region excluded). Excluding big-ticket auto and light truck sales, gains were still a solid 1.1% for the month.
Warmer weather and military success added 5.6 points to the University of Michigan Index of Consumer Sentiment, which climbed off nine-year lows to post a reading of 83.2 in the April preliminary survey. It was the best mark in several months.
At the moment, increases in optimism have helped to roughly return us to levels seen earlier this year; financial markets have improved, as well. While military success in Iraq seems assured, there is much yet left to do, and the transition to a more democratic government in Iraq is likely to be more difficult than a well-planned and executed military campaign. Liberty will bring its own form of chaos to an Iraq which has never known it.
There's little that military success can do except lift our spirits and the spirits of the Iraqi people. Economically, a wide range of problems here and abroad still exist, so the road ahead will be bumpy, at best.
So we've come back around to a degree. Rates are back at mid-February levels, where they were before the war-related plummet. At that time, we were still "range bound" in a nine-week pattern of hovering slightly above to slightly below 6%, awaiting clear economic signs that recovery was coming soon.
Welcome back. Our guess is that next week, we'll still be waiting, and mortgage rates hold just about steady, barring any surprises in Iraq.
April 5, 2003
Mortgage rates fell slightly this week, as the average 30-year fixed rate mortgage slipped by eight basis points to an average of 5.92%, according to the nation's broadest survey of mortgage pricing. That average rate would likely be lower if the Iraq situation was not distracting the markets from bleak economic news.
The remaining economic reports with February data continue to paint a dreary picture, and the March reports, now starting to come out, are equally uninspiring. Construction Spending in February declined by 0.2%; while this headline number was a little better than expected, there were indications that government-backed projects were declining as states face difficult times.
Factory Orders for February dove by 1.5%, virtually wiping out January's gain. Manufacturing conditions remain poor. Worse, the Institute for Supply Management (ISM) March report of the health of the nation's factories showed declining growth across the board. With a reading of 46.2, the index stands well below the 50.0 breakeven point. Stir in rising benefit costs, and higher prices for energy and raw materials, and it's a recipe for continued trouble in manufacturing.
Service industries are also being affected, according to the ISM; the index which covers non-manufacturing firms posted a very pronounced slump from 53.9 to 47.9, but this may be due more to the start of military action in Iraq than to any long-term structural issues.
Nonetheless, all of these firms rely on customers with jobs and incomes sufficient to purchase their goods and services, and that environment is deteriorating considerably. While the nation's Unemployment Rate held steady in March at 5.8%, businesses shed another 108,000 jobs last month after eliminating 357,000 in February. Prospects for increases in hiring keep getting pushed further into the future.
Any impending improvement would first show up in State Unemployment Applications. For the week ended March 29th, some 445,000 new claims were filed, the seventh consecutive week of more than 400,000 filings. That 400k level is believed to be a balancing point for jobs; above that number means rising unemployment, while a reading below it indicates fewer employed people.
It's also cold comfort that only about 85,000 job cuts were announced in March, according to a monthly mass layoff survey by the personnel firm Challenger; the aggregate of announced layoffs for 1Q03 was 335,000, about 26% below 1Q02.
Investors have become transfixed by the military coalition's successes in Iraq. There is a belief that the war is holding back more powerful economic growth, and there is likely some truth to that. Growth should pick up once the outcome is more certain, but at the moment it appears that growth will be starting from not only a lower level than even the end of last year, but that it will require extra effort to slow and reverse the current slide. This is a tall enough order; however, even if success comes sooner than many expect, investors refocusing on economic matters area may find that the little growth they saw has disappeared since their last glance.
If their gaze falls on the market now, it would likely provoke a fair slide in rates. Prepare to have a lock-in agreement handy, or, as we mentioned last week, inquire about a float-down option for any lock-in agreement. Even coalition successes cannot turn around an economy which is stumbling anew, and we think mortgage rates will drift a little lower again next week.
March 28, 2003
In a week where over-enthusiasm was tempered by stark reality, bond yields and mortgage rates settled back into a mid-February pattern, with the average overall 30-year fixed finishing the week at a flat 6%, according to the nation's leading mortgage pricing survey. Hopes for a quick, relatively bloodless end to the military action in Iraq have given way to the realization that while victory may be expected, the conviction necessary to achieve it will be more strenuously tested in the coming days.
As a result, holders of stocks had at least some second thoughts about the sharp rally of last week which assumed that with war begun, the end would soon come and, with it, a return to stronger economic growth. Since it no longer appears that way, however, traders have shed some stock holdings, taken any profits, and plowed them back into bonds.
Most of the economic news released this week was for February, which is now seen as a fairly bleak month. One bright spot was the continued gains in Personal Income, which rose by 0.3%, rather more than expected. Most of that money apparently went into savings, though Personal Consumption remained at the same level as January and December.
For the past year or two, Home Sales have been about the only place where any sort of regular growth could be found. However, while it's too soon to make any judgment, some cracks may have appeared in that foundation. In February, Existing Home Sales slumped by 4.3% to a 5.74 million (annualized) rate of sale, down from January's record. New Home Sales suffered a bit more, sliding by 8% to just a 854k sales clip. At least some of the decline was blamed on tough winter weather. While still strong, it's starting to look as though, absent any renewed decline in mortgage rates, we may have seen the peak of home sales in the past few months.
The nation's factories continue to suffer setbacks. February's report on Durable Goods Orders fell by 1.2%, and the decline would have been greater if not for defense-related spending. January's 2.9% increase was revised to a gain of just 1.9%, so February's decline just about wiped out any increase over the last two months. It doesn't seem likely that March will show much improvement.
February's drabness left us feeling pretty poorly in March, too. With a difficult economy and a rising potential for war, surveys of Consumer Sentiment from the U. of Michigan, as well as those of Consumer Confidence from the Conference Board, both printed nine-to-ten year lows; UMich fell by 2.3 to a reading of 77.6 (less of a fall than expected), while the Conference Board mark dipped by 3.3 to a 62.5 level. There was some indication in the report, however, that sentiment rose once military action got underway.
The Final revision to Q402 GDP was unchanged at 1.4%, not much of a starting point for this year. For all of 2002, growth registered 2.4%; not bad, but nothing to get excited about.
If jobs were more plentiful, the economy would improve more quickly. Unfortunately, it's a chicken-or-the-egg puzzle; business won't hire until they believe that there will be enough sales to cover the costs of carrying a new employee, preferring instead to squeeze more out of the same or fewer workers -- and consumers who don't have a job can't increase their spending enough to help those sales occur. That situation continued this week, with Weekly State Unemployment Claims at 402,000 new applications, slightly better than the last few weeks. However, the level of help-wanted advertising remains at about the same levels as seen in the past 6 months or so -- which is to say, dismal.
Mortgage rates are revisiting the "4 and 6" pattern familiar to us from December, January and February. As the ten-year US Treasury hangs around 4%, the average 30-year fixed should hang around 6%. Borrowers disappointed with missing the bottom a few weeks ago might consider asking about a float-down option for their lock-in, if it's not too late to do so. A poor spell of data, or especially poor reports from Iraq, could bring a brief visit to those lows.
Next week, though, we'll bet that this week's 6% turns into next week's 5.90% or so, as money continues to creep out of stocks and into bonds.
March 21, 2003
Last week, long-term mortgage rates briefly ran down to fresh lows, remained there for all of a few hours, then stumbled higher as the week progressed. The cumulative increase over the past two weeks is now almost a quarter-percentage point, with the promise of more to come, according to the nation's leading mortgage pricing survey.
Daily numbers help to describe the run-up: on Tuesday the 11th, the overall average for the 30-year fixed rate stood at 5.71%; by Friday the 14th, it was 5.86%. Today's daily national average is 6.04%.
This significant rout in bond markets has been caused by a significant rally in stock markets. Why there has been a rally in stocks is more than a curiosity, as the conditions which typically produce them aren't present at the moment.
It's a little disingenuous to call these widespread gains in stock prices a 'relief rally', but investors are apparently relieved that at least the start of war is no longer uncertain, even if there's no greater clarity about what's to come. How investors and speculators have come to see this as a buying opportunity is anyone's guess, but might be caused by a little over-enthusiasm about the prospects for the economy down the road and about a quick resolution to the Iraq conflict.
Even the Fed declined to hazard a guess about where we're headed after the close of its policy-setting meeting this week, saying that the Committee "does not believe that it can usefully characterize the risks [to the economy]", since "unusually large uncertainties" both economic and especially geopolitical remain.
Then there was the economic data this week. Precious little good news was among it, to be sure.
Monday, the National Association of Home Builders said that sentiment about the current business environment turned pessimistic in March, despite record low mortgage rates and solid sales. As home sales and building have been about the only source of economic strength for an extended period of time, any slowdown would quickly produce negative economic effects for a wide range of industries.
Perhaps they have reason to be gloomy, since Housing Starts in February slumped by 11% to a 1.622 million (annualized) pace. While still healthy, the number was well below expectations, although Building Permits held pretty firm at 1.786m units. Tough weather may have played a role in the slump, but there may be more to it than that.
Stocks stormed higher throughout the week, steaming right through a 0.4% drop in the Index of Leading Economic Indicators, its first decline since September 2002 and a smart reversal from January's 0.2% rise. Equities powered right past the news that weekly state jobless claims hit 421,000, the fifth consecutive week well above the 'breakeven' 400,000 mark; that's a pretty strong signal that labor markets are again weakening.
Stocks even rallied when the Consumer Price Index rose by more than expected, climbing 0.6% in February. "Headline" inflation is now 3% over the last 12 months. The 'core' CPI (exclusive of food and energy costs) rose a minor 0.1%, and is up by 1.7% over the past year.
At least one reason for optimism was sharply falling oil prices, which may add some spendable cash into consumer pockets as the spring unfolds (if prices hold their declines long enough to work their way to the retail level).
Our last two-month forecast expected the average 30-year fixed rate mortgage to slide to about 5.80%, but the considerable flight-to-quality and "any yield is better than none" purchases of Treasuries and mortgage-backed securities went a good deal father than that. We don't see any economic reason why rates would go even lower, and at the moment, there's little economic reason why they should continue to rise. But as the market is being run on fumes and rather unfounded optimism, they likely will for a least a little longer, probably most of next week.
Volatility is the order of the day. If a bit of profit-taking takes hold in stocks, which is very likely, and if things in Iraq bog down, which could happen, the rise will stop and we might even see a drop.
We should see an average of 6.10% by mid-next week. After that -- well, it's wise to remember that interest rates rise much more quickly than they fall.
March 14, 2003
Mortgage rates posted a hard-but-fleeting dip this week, with the final weekly average for the 30-year fixed ending at 5.74%, a decline of just six basis points, according to the nation's most reliable survey of mortgage data. It was the lowest level since a string of 5.80% rates were reported in FHA and FHLBB surveys conducted in 1964 and 1965.
At one point during the week, conforming 30-year loans averaged an amazing 5.58%. The mark was reached as a result of weeks and weeks of impossible-to-escape news of terror risks, plans for war, less-than-encouraging economic news, and an investor scramble to put money in any positive-yielding investment. The relentless pounding of information helped to produce some truly poor economic numbers for February.
February's employment report, issued last week, was quite bad, and gauging by weekly state unemployment claims, March's will be worse. Last week, some 420,000 new applications for benefits were filed, and the last several weeks point to a new deterioration in the labor market.
Retail Sales for February skidded by 1.6%. Expectations were for a decline of about one-third of that number. Snowstorms, a falloff in car sales and other factors were largely blamed, but retailers continue to suffer, no matter the reason. A break in the weather may help boost sales of spring merchandise -- but at sale prices, meaning few, if any, profits for sellers.
Consumers are sporting their worst attitudes in some ten years, according to the University of Michigan Survey of Consumer Sentiment. The preliminary reading for March of 75.0 was a 4.9 point drop from February's low level, and the lowest since October 1992.
The twins of Industrial Production and factory Capacity Utilization provided no optimism, either, with Production increasing by just 0.1%, mostly due to increases output by utilities and mines due to cold weather, and CU holding at 75.6% of capacity.
There was a little increase in goods being held by business in anticipation of future sales, but business inventories remain at low levels. Sales between wholesalers improved a bit in January with a 1% increase, but that seems an awfully long time ago.
At least inflation is still at bay -- or is it? The Producer Price Index climbed by 1.0% in February, and that increase came on the heels of a 1.6% increase in January. It's true that energy prices are playing a significant role in those numbers -- the PPI "core" number which removes food and energy actually declined by 0.5% -- but there are indications the some price increases are showing up farther down the production chain and could put some upward pressure on consumer prices as a result. The CPI is due out next week.
Prices for Imported Goods are rising, as well, stepping up by 1.3% in February. Again, that's at least partly due to oil prices, but our weaker dollar is also starting to play a part, even if it's helping prices of our exported goods to be more competitive overseas.
The US's Trade Deficit narrowed a bit in January, with the gap closing by 3.8 billion dollars to 41.1 billion. While the lower dollar may have helped to increased exports, slower sales here stanched imports a bit.
Mortgage rates dipped hard, then flared back with a very strong rally in stocks on Thursday. At the moment, there is a lot of cash sitting on the sidelines awaiting buying opportunities in stocks, and at least some discussion that bonds are getting too "pricey". This is perhaps a sign that professional investors are thinking about lightening their holdings of Treasury and mortgage-backed bonds as chances come along. We mention this only because these kinds of environments lend themselves to volatility, seen quite clearly in the Wednesday/Thursday market, where the ten-year bond yield rose by about 14 basis points -- more than one-eighth of a percent -- over the course of several trading hours. It's a good time for caution and a firm lock-in agreement.
Next week, the Federal Reserve meets to try to sort this all out. The Fed has been taking a relentless pounding to lower short-term interest rates again, and futures markets suggest that there is about 30% chance of a cut at the end of the meeting.
Will mortgage rates be pounded down again next week? Probably not. Thursday's stock rally held on Friday, an unusual occurrence of late, so we'll at least start the week about where we ended it. Thursday's daily average was 5.79% and Friday's was 5.86% -- we'll split the difference and call for a slight increase in rates next week, maybe three or four basis points total.
March 7, 2003
Jittery investors continue to find that some yield is better than none, and several days of poor stock markets saw a new influx of cash into Treasuries and mortgage bonds. Mortgage rates are once again at record lows, according to the nation's most in-depth survey of mortgage prices: the overall average for the 30-year fixed rate mortgage now stands at 5.80%.
There is still little consensus on the world's political stage, a description which might also apply to prospects for the economy. This week brought business news ranging from surprisingly good to surprisingly bad, and some which merely muddies the waters.
Monday's report on manufacturing conditions by the Institute for Supply Management showed a slump to a barely positive reading of 50.5 in February. That it remains positive at such a difficult time for manufacturers is encouraging, nonetheless. Factories have been hard hit, but the recent declines in the dollar against other currencies may help to get exports revved up a little. Indeed, Factory Orders jumped a strong 2.1% in January, rather more then expected and a considerable turnaround from December's decline.
The ISM's service-industry index declined a bit, but remains solidly in positive territory with a reading of 53.9 in February.
The upward revision to productivity for 4Q02 -- from 0.5% to 0.8% -- was welcome, as was the decline in labor cost per unit produced. More productive workers can be paid more for their efforts without increasing prices, which would contribute to an increase in inflation. In January, Personal Incomes rose by 0.3% for the sixth consecutive month, but Spending didn't follow suit, declining by 0.1% during the month. Personal Savings, once a concern for being in negative territory, now stands at a decent 4.3% of income.
However, the 'dark side' of rising productivity is that companies don't need to hire more workers, and might even persuade them to lay off a few. This seems to have been the case for some time now, and there's no reason to believe any abrupt change in the pattern is coming soon.
Weekly State Unemployment Claims bear this out, at least partially, with some 430,000 new applications for the week ending March 1. The four-week moving average now stands at 408,750, a strong suggestion that layoffs are accelerating again.
The national Employment report for February totally blindsided markets. While the Unemployment rate barely budged, ticking up by 0.1% to 5.8%, the decline in payrolls by a whopping 308,000 was so out of line with forecasts it left many observers scrambling for answers. At least some explanation for the huge dip was found in call-ups of reservists to active military duty, significant weather events, and suspect seasonal adjustments. No matter what, though, the number was not a good one, and expected revisions probably won't improve it much, which make it all the more stark when compared to January's upwardly-revised 185,000 increase in hiring.
There were signs of life elsewhere, however, at least in January, when Construction Spending surged by 1.7%, mainly for residential building. This came on the heels of a 1.5% gain in December. It's curious that building is increasing at a time when new home purchases appear to be slowing. Is easy money now helping to create a more speculative environment for building? It's too soon to tell.
Consumer borrowing leapt in January as well, with an increase of 9.5% to $13.2 billion for the month. Forecasts called for a minor decline, as the last few reports have featured little to no increases in borrowing. Also, the Fed's latest survey of regional economic conditions, observed in January and much of February, observed that economic growth "remained subdued".
Are things getting better or worse? Were things getting better, only to have taken a turn for the worse? Mixed signs bring mixed conclusions and little agreement.
On Friday, UN weapons inspectors reported some increased cooperation by Iraq. Although some took that as an encouraging sign, others took the slow pace of compliance to suggest that the UN Security Council is again being deceived, and that military action should now be give a timetable to begin. Little consensus there, as well.
From where we sit, a couple of weeks of warm, sunny weather might improve our demeanor markedly, but that's probably as much wishful thinking as hoping for signs that this pronounced economic and political funk is coming to and end.
Mortgage rates still benefit from fear next week, and are likely to head slightly down. Another round of refinancings, anyone?
March 1, 2003
Skyrocketing energy prices seems to have investors convinced, for now, that those higher costs will manifest in the form of an economic slowdown instead of inflation. Such a slowdown would depress stock prices as well as inflationary pressure, making bonds attractive even at these levels. Strong demand for bonds helps to lower their yields, and mortgage rates drop as a result. This week, the average 30-year fixed rate mortgage stepped gingerly into new low territory, slipping by six basis points to an average 5.88%, according to the nation's deepest survey of mortgage prices.
Certainly, there are those believe that we may be setting the stage for a rout in bonds down the road. Even slightly higher inflation, and a likely return of a sizable issuance by the Federal Reserve, will serve to pressure holders of today's debt.
In the meanwhile, the military and political issues continue to fill the airwaves and keep nerves on edge. That uncertainty is producing a frazzled consumer psyche, according to two popular measurements. One produced by the Conference Board, the index of Consumer Confidence, slumped precipitously, printing a reading of 64.0, the lowest since October 1993. Analysts were expecting a reading in the mid-70's. The University of Michigan index of Consumer Sentiment also declined, but to a much lesser degree. Nonetheless, both readings were near ten-year lows.
No doubt those numbers are due in large part to the poor conditions in the job market. Weekly State Unemployment Claims jumped to 417,000 new applications, and even the more stable four-week moving average of claims is on an upward trajectory again. Having no job, perhaps trapped indoors in freezing weather, while major news channels inform you of the dire state of the world does nothing for one's optimism and enthusiasm.
At least there's the cheery prospect of buying a home with low mortgage rates. In January, Existing Home Sales gained by 3% to 6.09 million annualized sales, far better than expected, and a new record. New Home Sales, however, suffered a 15% decline in the same period; the 914,000 annualized rate of sale was a huge turnaround from the recent trend. We'll have to wait a month to see if it's an aberration, perhaps caused by weather, or the beginning of a break in the ever-upward pattern of home sales.
The backward looking revision to 4Q02 GDP was encouraging, if nothing else. The original 0.7% estimate was doubled in the Preliminary report on Friday. For last year, growth is estimated to have been 2.4%; not bad, but rather below the economy's "potential" -- its ability to grow without generating inflation -- which is believed to be about 4%.
A real surprise was found in the report on Durable Goods Orders for January; the 3.3% gain was more than triple the forecasts, and sub-reports seemed to suggest that demand for such goods by businesses (rather than consumers) is finally picking up. In addition, a regional index of manufacturing in the Chicago district was solidly positive, as well. Clearer information from around the country comes in the form of the ISM index, due out next week.
Uncertain investors are good for mortgage borrowers. The recent dip does suggest to us that the potential for a sizeable jump in rates is lurking in the shadows... perhaps to reveal itself after a military conflict gets underway. Mortgage rates continue to wander, waiting. Little if any change for next week, with perhaps only a little downward tilt.
February 22, 2003
In a week light on economic data but still full of worries, mortgage rates did the best they could to just hang tight, with the average 30-year fixed rate mortgage slipping by a single basis point to 5.94%, according to the nation's broadest survey of mortgage prices.
While it's reasonable to expect that investors' minds are occupied with worries about the timing of any military action in the Persian Gulf, it's not reasonable that they might look at recent economic data and find that investing in bond and mortgage investments is still as compelling as it once may have been.
While a month by no means makes a trend, a report such as Thursday's Producer Price Index for January -- which rose by a whopping 1.6%, some 4 times the expected increase -- would have caused a massive selloff in bonds in more normal times. Even excluding volatile food and energy components of the report left a 0.9% increase in inflation at the wholesale level. That such huge increases in costs might be getting into production streams should have set off alarms, but was just shrugged off instead.
On Friday, the Consumer Price Index failed to reveal a similar surge of inflation at the retail level, even if the 0.3% rise was the largest in months. Nonetheless, any hint of inflation should have spooked bond investors; with yields as low as they are, it won't take much inflation to eradicate those meager gains.
Aside from the inflation picture becoming a little more skewed, most of the rest of the data was at least typical of recent patterns, with the exception of the Trade Imbalance, which printed a new record of 44.2 billion dollars for December. Simply, the US's economy, weak though it may be, is importing significantly more goods than we are exporting. It seems that some kinds of "unilateralism" are acceptable to our trading partners while others fail to garner much support.
Weekly State Unemployment Claims popped back up to 402,000. It's hard to get optimistic about economic prospects when a few weeks of minor improvements are continually met with setbacks in the job markets.
Continuing strength can still be found in housing, though. Housing Starts jumped up slightly, from 1.847 million annualized units in December to 1.850m in January. Building Permits edged downward from lofty levels, and that indicator of activity to come printed a 1.781m annualized pace. The National Association of Home Builders survey of its members told of a slighly cooler outlook for housing in the months ahead, but no signs of significant softening are evident at the moment.
A fuzzier outlook was also displayed by the Index of Leading Economic Indicators (LEI), which slipped back by 0.1% in January after three consecutive gains. Essentially a forecasting tool, the LEI can sometimes reflect current conditions to a greater or lesser degree, and as things haven't looked too sanguine lately, the minor decline was no surprise.
Higher oil prices, higher gasoline prices and slow economic growth. If this is the forecast as we head into spring (and some believe it is), it's hard to see why bonds would be attractive at these levels... but where else might investable money go? Real Estate? Already getting pricey. Gold? Ditto. Petroleum markets? Might be a chance to make a quick dollar there. Cash/Money Markets? At yields that might be exceeded by inflation? Nah. Long-dated bonds? Maybe just a little more. However, even at inflated valuations with dicey earnings prospects, stocks just might start to get a bid... maybe.
That would kick rates up in a hurry... just not next week, when we're likely to see little if any change. However, according to Secretary Rumsfeld, the troops are ready. Are the markets?
February 15, 2003
With encouraging signs about the economy gaining prominence, the skies would appear much more blue if not for the cloud cover of fear. Bond yields, mortgage rates and stock prices would all be headed up, rather than testing various lows. For mortgage rates, this week's 5.95% overall average for the 30-year FRM is into new record-low territory, according to HSH Associates, Financial Publishers.
While good economic news grows slowly, that which brings uncertainty comes too fast. Without mentioning specifically what to watch out for, the nation's "terror alert" rating was cranked up a notch late last week. This was followed by a new missive purportedly from Osama bin Laden, and all within the framework of our military buildup in the Persian Gulf. On Friday, chief UN weapons inspector Hans Blix said that while Iraq was cooperating to a greater degree, there was still no sign that admitted stockpiles of banned weaponry had been destroyed. With respect to the Iraq situation, until something happens good or bad, we're going to have clouds.
Following last week's ISM survey reported at least some growth in the nation's factories, more localized manufacturing reports came from the Federal Reserve Banks in the Richmond and Kansas City districts. Both noted significant improvements in January when contrasted against December's bleak pictures.
In January, Industrial Production and factory Capacity Utilization both posted gains, with IP climbing 0.7%, well above forecasts, and CU inching back up to 75.7% of capacity. We're still a long way from full output, but any increase is a welcome sign for future growth.
Alan Greenspan gave his semiannual report on monetary policy to the Congress this week. He said, essentially, that while it appeared that financial conditions were no impediment to growth, geopolitical factors were keeping risk awareness (if not aversion) at unusually high levels. He went on to prod our elected representatives for fiscal prudence at a time when it wasn't clear if the economy even required more stimulus. He intimated that while small deficits may be manageable, new and/or expanding programs which could exacerbate deficits on an automatic basis years from now were not, given the fact that the productivity would be unlikely to persist indefinitely.
Back on the current economic side of things was the Retail Sales report for January. While the 'headline' figure declined by 0.9%, somewhat more than expected, leaving out the wild oscillations of auto sales left a considerable increase in retail sales of 1.1%, the best showing in almost two and a half years. After a long liquidation, inventories are again rising at business, with an increase of 0.6% in January, the eighth gain in a row. Stockpiles may be building in anticipation of higher sales levels down the road.
The overall cost for Imported goods rose by 1.5%, lead by higher oil costs. Export prices crept up by 0.4%. The dollar's recent weakness against other currencies is helping exporters to make slightly more profit, even if the potential for domestic inflation might be somewhat elevated at a result. There's little real price pressure at the moment, and we'll have a clearer look at that with the Producer and Consumer Price Indexes due out next week.
Weekly State Unemployment Claims came in at 377,000 for the week ending Feb. 7. That 18,000 drop was enough to erase a like-sized increase of a few weeks ago, but no clear hiring direction has yet been established.
That's too bad, because an upturn there might help lift spirits. Consumer Sentiment, as measured by the University of Michigan, printed fresh nine-year lows with a reading of 79.2, down 3.2 from January's final report. Perhaps the record level of bankruptcies is keeping moods dark as well, with over 1.5 million recorded in 2002.
At the moment, near stasis in rates can be expected. Bonds were the benefactor of a stock selloff for much of this week, but most of those gains was eradicated in Friday's bond selloff. Back and forth, directionless, until something happens, whatever it may be.
A few basis point wandering next week. We might even creep back toward 6%.
February 8, 2003
The increasing likelihood of military action in Iraq, coupled with a lift in the nation's terror alert level on Friday, continued to cast a pall over financial markets. Risk-aversion on the part of investors belies the appearance of growing, if uneven, strength in the economy, while cash flowing out of stocks and into 'safe haven' investments such as US Treasuries pressed interest rates down a little this week. The average 30-year fixed rate mortgage finished the week at a flat 6.00%, a new record low, according to HSH Associates, Financial Publishers.
Not all the funds are ending up in bonds, however; the price of gold has been rising and posted an eight-year high at one point this week.
Despite what could collectively be described as "fair" reports about the state of individual sectors of the economy, the overwhelming market-mover remains the situation in Iraq. Secretary of State Colin Powell presented evidence before the United Nations that the Iraqi government is in non-compliance with its Resolution 1441, as well as several previous resolutions.
While members of the world body formulate their own opinions, it is clear that the United States will not wait much longer before action is taken. Until either this or some form of Iraqi capitulation occurs, the weight will remain on the markets. Speculation is that something is likely to happen in the weeks just ahead.
Domestically, tenuous growth seems to be getting a toehold. Among the releases this week was the Institute of Supply Management's survey of manufacturing activity, which did slip a little to a reading of 53.9 in January from December 55.2, but remained comfortably on the "expansion" side of the ledger. Also, the ISM's service industry gauge also remained positive at a 54.5 mark.
Additionally, the Commerce Department said that Factory Orders rose by 0.4% on December, confounding expectations of a slight decline. Business activity appears to be starting to pick up a bit.
A minor crack may have appeared in the fantastic Productivity gains the economy has produced in recent quarters. For 4Q02, productivity slid by 0.2%, a significant falloff from the 5.5% increase in the third quarter. Hours worked crept up, but workers produced somewhat fewer units per hour worked. That, in turn, can put upward pressure on costs at a time when profitablity is already an issue for many firms.
However, it may also suggest that workers with jobs are beginning to reach the limits of their ability to produce more goods, and that in turn may suggest that some additional hiring to meet demand may be ahead. Weekly state jobless claims were 391,000 last week, not much different than the general level of recent weeks. However, the national employment report on Friday showed 143,000 new hires, well above forecasts, but not enough to offset December's 156,000 job losses. The official unemployment rate slipped back to 5.7%. Over the past six months, the nation has created just 14,000 net new jobs. Nonetheless, January's number is a step in the right direction.
High mortgage refinancing levels have (finally) had an interesting effect on Consumer Credit trends, as consumer borrowing declined by some four billion dollars in December, for the second month in a row. Theoretically, with more cash on hand, borrowers need to put less on revolving charge cards even as they continue to spend at a healthy clip. The "consolidate your debt at record low interest rates!" message seems to be finding a receptive ear. However, for the second month in a row, more senior loan officers surveyed by the Fed reported that they were tightening standards for residential mortgage loans. Fast-rising home prices and a still shaky economy (not to mention high levels of foreclosures and bankruptcies) may be putting a little prudence back into loan decision making.
In the end, though, the potential for war is blocking out the economic sunshine, and the mortgage market continues to remain in the shadows. Rates may groan down a few more basis points next week, but there's no pattern to these movements at the moment. Next week, though, we'll have a new two-month forecast for a bigger picture.
February 1, 2003
Mortgage rates were about unchanged this week, despite a very full calendar of economic data, a Federal Reserve Open Market Committee meeting, a State of the Union Address full of prospects for war, and a very difficult week in the stock market. The average 30-year fixed rate mortgage inched up by a single basis point to 6.04%, according to the nation's deepest survey of mortgage pricing..
In his report to the United Nations, Chief Weapons Inspector Hans Blix was quite pointed with regards to Iraq's cooperation with his team. Simply put, he isn't getting much, despite the UN resolution calling for Iraq's complete compliance. He also mentioned that Iraq's leadership doesn't seem to understand the seriousness of the situation.
That set the tone for President Bush's State of the Union, which made it very plain that the United States and its allies won't wait much longer to enforce UN Resolution 1441. At the moment, we are clearly on a path to military action, and soon.
The overhang of uncertainty is making investors jittery and consumers quite dour. Both measures of attitude -- the University of Michigan Survey (Sentiment) and the Conference Board (Confidence) -- told the same story. The UMich final report for January dropped to 82.4 from December's 86.7, and the CB Confidence report fell back to 79.0 from last month's 80.7 mark.
When you're feeling tense, uncertain and vulnerable out in the world, you tend to stay home. Not surprisingly, home sales have been outstanding: Existing Home Sales for December printed a 5.86m annualized rate of sale, and New Home Sales were reported at 1.082 million, a new record. Both were well above expectations. Money that used to roar into stocks is pouring into real estate, fueled by cheap mortgage money.
Looking back at the fourth quarter tells us little about where we are headed, but we probably started off on a low note. The Advance estimate of GDP came in at a meager 0.7% after a solid 4% in 3Q02. Subsequent revision to the estimate could leave it in negative territory.
The cost of keeping an employee on the books was reasonably subdued in 4Q02, as well, with the Employment Cost Index rising by just 0.7% and just 3.4% for the year. Most of the year's increase was in benefit costs, which continue to skyrocket.
Weekly State Unemployment Claims trended up a bit last week, to 397,000 new applications. Labor markets are stumbling, and prospects for new jobs aren't very good at the moment, as a gauge of "help wanted" ads hit a new cyclical low. Next week comes the national employment survey, but based upon the past month's weekly readings, it probably won't contain much good news.
At least those with jobs are making money. Personal Incomes rose by 0.4% in December, a healthy clip, and Personal Consumption leapt by 0.9%. The spending figure was driven higher by strong auto sales.
The report on Durable Goods orders told of a slight rise of just 0.2%, below forecasts. The always-volatile series had fallen by 1.3% in November. For all of 2002, Durable Goods order managed to be at a breakeven level.
Amid all this, the Federal Reserve held a meeting to discuss what to do with monetary policy. The end result was no change to short-term interest rates. Even though the economy is still experiencing a "soft patch," the Fed remains confident that more pronounced growth will come later, especially after the situation in Iraq is resolved.
At the moment, the Fed appears more confident than do consumers, businesses, or the Bush administration, which is pressing for additional economic stimulus in the form of additional or accelerated tax cuts. Whether such measures can be employed in a timely manner remains to be seen, but the one thing that is fairly clear to us is that until we've got the Iraq situation settled, a lack of confidence will continue to restrain economic growth.
Which means that mortgage rates aren't going anywhere fast again next week, with the "4 and 6" relationship we discussed weeks ago still in place. However, once the uncertainty lifts, mortgage rates will rise.
January 24, 2003
Mortgage rates tied record lows this week, as little economic news, but increasing geopolitical risk, battered the stock market to the benefit of bonds, according to HSH Associates, Financial Publishers. The average rate for a 30-year fixed rate mortgage dropped to 6.03%, the same level reached three weeks ago.
With initial reports due to the UN Security Council from weapons inspectors in Iraq, equity traders have been rightfully skittish, selling stocks this week at a pace sufficient to wipe out all this year's gains in the major stock indexes. Those funds are being plowed into gold, Treasury bonds and cash, the traditional safe harbors in uncertain times.
Adding to the destabilization were statements by both French and German authorities that they may renege on already-agreed upon consequences should those inspectors have turned up any "material breach" of Resolution 1441.
Certainly, the releases of minor economic news here pale against world issues, and even somewhat-brighter earnings reports failed to attract attention.
There was a little good news in the three releases that mattered this week. Housing Starts roared upward by a full 5%, with 1.84 million (annualized) starts in December, a 16-year high. Starts of single-family homes in the fourth quarter were as high as readings in the 1970s when baby-boomers first became homebuyers. Building Permits also jumped, with that indicator of future activity printing a 1.88m rate. As homebuilding and buying affect so much economic growth, the increase was more than welcome. We are wondering, though if easy-to-obtain money might be leading toward a more speculative building environment. We'll need to see as the year unfolds.
The Index of Leading Economic Indicators managed a third consecutive gain, rising by 0.1%. That period of increase followed one of four consecutive declines, so the longer six-month pattern is about flat. However, those three gains may signal stabilization, if nothing else, and that is mildly cheery.
Weekly State Unemployment Claims tripped back up a little, rising by 18,000 to 381,000 new applications for the week ended January 17. However, some flakiness in seasonal adjustments and extensions to benefits have made this labor indicator somewhat less reliable than usual. Overall, the job market is stagnant, and will likely be for a while yet. We're hopeful that it's actually fewer people losing their jobs than number-fudging.
Mortgage rates will have much more to respond to next week. Right now, the issues which surround Iraq have drowned out all other influences, so next week could see a huge swing in markets, good or bad. Next week also brings a Federal Reserve Open Market Committee meeting, news on new and existing home sales, durable goods orders, and a report on Consumer Sentiment.
The market next week will probably be a lot of things, but not boring. We hesitate to issue rate forecast for next week; we'll call it "mostly unchanged" but that shouldn't be interpreted as a smooth ride, by any means.
January 17 2003
End-of-the-year economic numbers reinforced the fact that 2002 ended on a weak note, and revelations in Iraq this week make January 27 seem more like a deadline for military action than simply for a report. The poor economic news and flight-to-quality flows saw stocks get sold, and money worked its way into Treasury and mortgage bonds. The average 30-year fixed rate mortgage slipped by a lone basis point to 6.08%, according to HSH Associates, Financial Publishers.
The Fed's latest survey of regional economic conditions, known as the "beige book" for the color of its cover, reported weak and uneven growth around the country, with little good to report outside of residential construction and finance. Retail sales were reported as "disappointing", manufacturing was described as continuing to struggle with weak demand and excess capacity, and labor conditions remain difficult.
Officially for December, retail sales were disappointing, rising just 1.2% -- but when incentive-laden auto sales were factored out, sales remained unchanged from November. For the year, retail sales gained an unspectacular 3.4%.
Prices of Imported goods rose last month by 0.7%, largely attributed to energy costs. Overall, Import Prices rose by 4.2% in 2002. Export Prices, on the other hand, slipped by 0.2% and crept up only 1% for the year just passed. That makes the $40 billion trade imbalance reported for November rather unsurprising, as domestic industries simply have no pricing power and instead turn to productivity enhancement and layoffs to try to remain afloat.
Remaining afloat was a little more difficult in December, with Industrial Production unexpectedly sliding by 0.2% where a small increase was forecast; a larger portion of the factory floor went idle as well, with Capacity Utilization dipping back to 75.4%.
While input costs for some commodities and energy have risen considerably over the past year, consumers didn't feel the pinch of much higher prices. Inflation at the consumer level rose by just 0.1% for December and only 1.9% for all of 2002, an appreciable decline from the already-low 2.7% seen in 2001. Quiet inflation has paved the way for the low interest rates we've been enjoying, and the trend seems likely to continue for a while.
Weekly State Unemployment Claims dipped back to just 360,000, a hopeful sign that at least some people are finding employment. It's more likely, however, that benefits have simply expired, and that there are no benefits for which to apply. The 28,000 drop caught observers by surprise since a small increase was expected.
A preliminary measure of consumer sentiment from the University of Michigan showed a new slump, with the gauge falling by three points to an 83.7 mark. All of the decline came from a darkening mood about the six-month period just ahead. There is thought to be a correlation between consumer attitudes and spending habits, but 2002 patterns suggest that the relationship isn't that obvious.
The potential for military action weighed on the markets heavily this week, after an Iraqi cache of missiles, capable of delivering biochemical agents, was unearthed. Whether this constitutes a "material breach" of the UN resolution, or is a "smoking gun," is unclear, but it's safe to say that tensions have risen another notch.
Against a backdrop of uncertainties, investors pushed yields on the ten-year Treasury back toward 4% after flirting with five-week highs late last week. The "four and six" pattern persists, and there is little significant economic data due, so rates probably stay mostly unchanged next week -- barring any new revelations in Iraq.
January 11, 2003
Rates Drift Up
A volatile week in bond markets left mortgage interest rates slightly higher on average, with the overall 30-year fixed rate climbing six basis points (.06%) to an average 6.09%, according to nation's premier mortgage pricing survey.
While the rise was largely expected, a little added lift to rates was provided by a resurgent stock market, buoyed by new proposals of incentives and tax cuts to aid economic growth. A feature calling for the elimination of taxes on dividends got the most play, helping market players to take a new look at riskier investments. Also, a spate of new corporate bond issuance is coming next week, so there was also likely some rejiggering of portfolios to make room for higher-yielding investments.
Economic data this week was a mixed bag of pretty good and pretty poor. Retailers wondering where all the holiday shopping dollars went -- since they didn't show up in their cash registers -- needed to look no farther than the report on Vehicle Sales for December, which featured an 18.3 million (annualized) sales pace, the best since August. Those "tax, title and license fees" would probably have otherwise been spent on baubles of one sort or another, but instead wound up in auto dealer coffers. An indicator of "chain store" retail sales from the Bank of Tokyo/Mitsubishi said that those sales were the worst since the series began in 1970.
Factory Orders dipped by 0.8% in November, but since the ISM index for December was back into positive territory, scant attention was paid to the report. It's likely that the Factory Orders will show a rebound when the next report comes.
Consumer borrowing dropped by 2.2 billion dollars in November, according to the Federal Reserve. Consumer spending was a little soft during the period, but one explanation is that since strong mortgage refinancing in October left consumers with no mortgage payment in November, they opted to use cash instead of credit. After a holiday lull, refinance activity also flared anew during the week ended Jan. 3, and should remain strong this week as well.
Thursday's report on Wholesale Sales left the impression that factory activity may be set for a little more revival. The 1.2% increase in sales was the best in eight months, and the inventory-to-sales ratio is now at a new record low. Lean inventories will need to be replenished, even if upstream sales aren't roaring at the moment.
But labor markets continue to be a concern, even if Unemployment Benefits have been extended again. Weekly State Unemployment Claims slipped back to 389,000 new applications, a 19,000 drop, but there has been no significant change in direction in months as we continue to flirt with either side of 400,000 apps each week. We're in a sort of labor stasis at the moment.
We suggested earlier that the December employment report wouldn't be pretty, and we were right. While forecasts called for an increase in payrolls of about 37,000 jobs, those optimists were battered by the 101,000 decline in payroll employment and a national unemployment rate stuck at 6%, the same as November. While much of the decline was blamed on seasonal adjustments in retail employment, no amount of 'adjusting' can change the fact that layoffs yet continue and new jobs remain difficult to find, and probably will for a while yet. January might be a little better, though.
Mortgage rates continue to bounce around at the bottom of their recent ranges. However, the "record" low set two weeks ago is behind us for the time being, and we will probably see an increase of a few more basis points next week as "supply issues" are worked out.
January 4, 2003
A Step Behind
The first mortgage shoppers of the new year chased "the lowest rates ever!" but most are a step behind, according to the nation's largest survey of mortgage terms and fees. While the average interest rate managed to slip by two basis points by week's end to a new record low of 6.03%, you might have thought that there would be a bigger payoff to borrowers, somehow.
Actually, there was, at least for a little while. Early in the week, in the waning hours of the old year, came some of the lowest interest rates yet seen. The daily average for a 30-year conforming loan hit a low mark of 5.85% + 0.36 points on Dec. 31, but three days later, the same average stood at 6.03% + 0.27 points. Those borrowers drawn in by the headlines Thursday afternoon and Friday morning were just a little too late to grab those unbelievably low fixed mortgage rates.
The turnaround in the market occurred on the first day of the new year, when the Institute for Supply Management survey of manufacturing conditions reported an index mark of 54.7 for December, its best reading in seven months. The 'new orders' component of the index led the way higher, but it was solid all around. That, plus the return of at least a few more traders to their stations led to a several-hundred point rally in stocks, all coming at the expense of bonds, which suffered their worst rout in a year.
Perhaps it was a case of "darkest before the dawn." The early-week number for Existing Home Sales, which slipped by 3.5% to 5.56 million (annualized) units sold was unspectacular, and below expectations. Nor was a weekly gauge of retail sales much to get excited about, even if it did feature a 2.1% gain during the Christmas week. However, the Conference Board's reading of Consumer Confidence for December was quite dim, with a sharp fall to 80.3 from last month's 84.9 level. Forecasters hoped for a slight improvement to about 86.
Thursday's report of weekly state unemployment claims climbed back up to 403,000, about where we have been on average for the last eight weeks. Seasonal adjustments to the data have made it a little jittery over the past few months, but with the national employment report due out next Friday, we'll finally get a clear picture of labor conditions in December. Our guess is that it won't be a pretty one.
There was good news on Friday, though, as Construction Spending climbed by 0.3% in November, its third consecutive gain. October's increase was revised upward to a full 1% increase. If construction is picking up, and manufacturing can get a toehold, we might just have ourselves a real recovery sooner rather than later.
We wouldn't be too surprised to see a sharp uptick in mortgage applications despite the short-lived dip in rates. Savvy borrowers timing the market are likely filing their applications with "wait till I call you" orders, then calling their retailers to execute their transactions when they think the timing is right. This can be a dangerous game -- but it is hard to lose when the difference is between 35-year or 36-year lows.
Next week, the first full business week of 2003. It's hard to take any lesson from the last few weeks, but if one exists, it's that it's very difficult to act before an event becomes known... unless you pay very close attention, that is.
A few weeks ago we mentioned that we were in a "four and six" kind of pattern (4% for the 10 year Treasury, 6% for mortgage rates). After a holiday dip, we're right back there again. Mortgage rates probably add a few basis points to the overall average next week.
December 27, 2002
Fixed mortgage rates tested new lows this week, putting a fitting exclamation point on a very difficult year for the economy. At an average of 6.05%, the overall 30-year fixed rate mortgage stands at a level last seen in early 1966, according to HSH Associates, Financial Publishers..
Not that borrowers are reacting to the low rates right now, as holiday activities have kept potential homebuyers and refinancers busy. The Mortgage Bankers Association of America's applications index slumped by about 8% for the week ending Dec. 20; you can bet it'll slide a little for this week, but then start to pick up after that, provided rates don't climb much.
In holiday weeks such as this, thinly populated trading pits serve to exaggerate the relatively few trades made; most of this week's trades appeared to be out of stocks and into the relative safety of bonds. That's not to say that there are no significant economic or geopolitical risks of concern. In fact, several stood out particularly well this Christmas week.
North Korea's re-opening of a "nuclear power plant," and subsequent expulsion of UN inspectors, signals that there are more challenges before the US than just terrorism and Iraq. This has lent a set of new worries to already-jittery markets. Any associated pullback from risk-taking activities by investors is usually good for mortgage rates and bad for stocks.
Oil prices have risen sharply in recent days, pressed upward by the general strike in Venezuela and the potential for supply disruptions which might accompany military action in Iraq. Higher fuel prices act as a tax on US consumers, and reduce discretionary cash available for spending. This would slow the economy further at a time when it is barely growing.
Weakness was evident in Durable Goods Orders, which slumped by 1.4% in November. Expectations focused around a gain of a half-percent after October's 1.7% increase. While the number is frequently erratic, it signals that manufacturing just isn't going to get better soon, especially since the economies of our trading partners are also encountering trouble.
Other than those issues, the rest of the news was pretty good. In the final report for December, Consumer Sentiment, as measured by the University of Michigan, held pretty steady at a reading of 86.7, a slight decline from the preliminary reading of 87. According to early reports from retailers, though, even less-dour consumers couldn't prevent this holiday shopping season from being a difficult one, with some estimates suggesting it was the worst in some 30 years.
With inventories pretty lean going in, much of the popular merchandise was gone long before Christmas, and what remained was perpetually on sale at sharply reduced prices. Even if lots of goods were sold (and they were), dollar volume may have been lower and profits thinner as a result.
Certainly, those with jobs had money to spend, and they spent it. In November, Personal Income rose by 0.3%, and Personal Consumption rose by 0.5%. Both were slightly above expectations and represented increases from October's figures.
Some of that money will be going to mortgage payments in the next month or two. New Home Sales posted a new record sales pace in November, with a 1.069m annualized rate of sale. The 5.7% increase over October was a surprise, as most forecasts called for a slight cooling in sales. New Homes must have been on sale, too, as the average price of a new home sold slid by 3%.
Somewhat fewer people showed up to apply for Unemployment Benefits this week, with 378,000 new claims filed at state offices. After several weeks of 400,000 plus, the decline was welcome, even if the report has been less than trustworthy in recent weeks. Since next week's number will be "seasonally-adjusted" to a great degree as well, we may have to wait until the national employment report to get a clearer reading.
Challenges persist, with new ones seeming to come every day. However, with the New Year upon us, what better time to look to the future with renewed resolve that we can meet those challenges head on.
The seasonal drift for mortgage rates continues next week. We wouldn't be surprised by a new low to start 2003.
We're closed January 1, 2002. Happy New Year!
December 20, 2002
The two basis points decline in the average 30-year fixed rate mortgage this week was expected. Little movement during the holidays is commonplace, so potential borrowers should get used to seeing these numbers for at least the next two weeks, according to HSH Associates, Financial Publishers..
As the focus has turned from all things economic -- a slow grind, at the moment -- to the frenzied pace of a million little deadlines rapidly approaching, market players and borrowers alike pay little attention to mortgages.
While no one's looking, the collective message of this week's economic news is more of the same: tepid, uneven growth with sporadic bright spots, no inflation but hopeful promise of things yet to come.
It appears that we now have a foundation, if a shaky one, for our recovery. The final report for 3Q02 Gross Domestic Product was unrevised at a 4% gain, the fourth increase in a row. The final report did suggest that a goodly portion of the growth came early in the period but waned, and forecasts for the fourth quarter all seem to have a 1% ring to them.
Building permits slid a little bit, dropping to 1.73m annualized pace. However, the National Association of Home Builders reported that their Housing Market Index printed a reading of 65, a two-year high. All signs point to a continued strong housing market heading into 2003... just like 2002.
There is still no inflation, and none appears to be coming anytime soon. While there are certain industries and services which are seeing some significant price increase (health care, for instance), the overall price level -- as measured by the Consumer Price Index -- inched up just 0.1% in November. The last twelve months have seen a 2.25% increase in inflation. Exclusive of food and energy costs, "core" inflation was a tad higher, registering a 0.2% increase.
The week produced two hopeful signs. Industrial Production moved upward by the barest amount possible in November, increasing by 0.1%, as did Factory Capacity Utilization, to 75.6%. Any increases represent at least stability for manufacturers, which is considerably better than the frequent declines of the past two years. A regional manufacturing indicator from the Philadelphia area exceeded expectations, too. Quarterly National Closing Cost Survey A professional product. We collect a select group of over 20 different fees from hundreds of the nation's largest mortgage originators. Need to know the closing fees charged by your competitors? Interested in regional fee variations, national averages or trends? There's only one place to find out.
Then, the Index of Leading Economic Indicators posted its best showing since May, rising by 0.7%, rather higher than expected. While this may be pointing to higher levels of economic growth the the months ahead, it's not a perfect forecasting tool, as it may be influenced too much by current conditions. Nonetheless, it is a welcome sign.
Weekly State Unemployment Claims, though, left little cheer for the second week in a row. The mild decline in new applications to 433,000 suggested that labor markets remain weak, and may have weakened more in November than was previously believed. December probably isn't improving much either, so the "jobless recovery" will be with us a while yet.
All in all, it feels like we've heard this before. Holiday pauses are welcome, but we're hoping for renewed economic vigor, and soon, rather than the same old, same old news we've to which we've become accustomed. However much we might wish it otherwise, though, we're likely to hear it again next week, with rates barely moving.
We're closed December 24, 25 and 26. Have a Merry Christmas.
December 13, 2002
Mortgage rates drifted back down this week, with the average 30-year fixed rate mortgage sliding to 6.17%, a dip of 15 basis points, according to the nation's leading mortgage pricing survey..
The decline is related to renewed pessimism that the economy remains stuck in first gear. Coupled with no inflation to speak of, that mood sees market players shift money from stocks to bonds. For fixed rate mortgages, as goes the bond market, so go interest rates.
The Ten-Year US Treasury is usually the best proxy for the 30-year fixed rate mortgage; their movements track each other well. At the moment, the Treasury seems to be stuck at a yield of about 4%, and as a result, the average 30-year fixed is stuck at about 6%, levels that appear likely to persist through the next several weeks and into January. Even this week's Federal Reserve Open Market Committee meeting failed to generate any excitement in the markets. No policy move was expected, and none came.
Although stumbling, the economy is not dead. After plunging earlier in the fall, Consumer Sentiment measurements are improving, according to The University of Michigan Survey of Consumers. The preliminary December reading, which rose by 2.8 points to 87.0, is in an improving trajectory after a recent nine-year low.
Retail Sales for November weren't bad, either, posting an overall gain of 0.4%. On a year-over-year basis, retail sales grew by 2.1%. Although the benefits of consumer largesse aren't being spread equally -- department stores are still hurting, for example -- even modest year-to-year increases are impressive when weighed against this year's economy and amid heavy discounting.
Falling prices were evident upstream of the consumer. The Producer Price Index, which measures input costs for good at varying stages of the manufacturing process, declined by a sharp 0.4% in November. Falling energy prices led the downward charge, but there are still some commodity price increases working their way through the system from a runup earlier this year. Even if consumers never see them, those increases crimp profitability; some profits might cheer industry up a little at a time of low sales.
Sales are low mainly because the economies of our trading partners are weak, the US is beset by cheap imported goods, and buyers of goods are keeping inventory stockpiles very lean. Bearing that out, the Trade Deficit for 3Q02 printed a 127.0 billion gap as we are exporting considerably less than we are importing. Import prices declined last month by 0.1%, but costs of exports rose by a like amount. On balance, that worsens the trade imbalance. Business inventories of goods rose by 0.2%, about as expected, but sales were twice that, and inventories are depleting faster than they are being replenished as sellers remain cautious about the prospects for sales in the future. Need jumbo-only or conforming-only stats? Only HSH has them, current and historic, at reasonable cost. Click here for more information.
With a considerable rise in applications for unemployment benefits, that caution is probably a good idea. After weeks of trending downward into the mid-300,000 range, new applications for benefits leapt by 83,000 to 441,000 new claims, making it clear that November's spate of holidays kept some folks from filing right away. The number will likely settle back a little next week, but it wasn't a welcome one.
Borrowers have stepped into the holiday mode, as well. Mortgage applications, as tracked by the Mortgage Bankers Association of America, dropped off by another 8% this week. There's little time to get a mortgage at the moment with so much cleaning, baking, shopping and decorating to do, so don't look for a significant pickup in apps until early next year.
Collectively, the economy's getting better, but not much. Looks like we'll be stuck as four and six or thereabouts for the next several weeks unless some major change in the pattern occurs. Doesn't seem likely at the moment.
Rates flatten out next week at just about where we are.
December 6, 2002
The average 30-year fixed rate mortgage rose by just 2 basis points (.02%) this week despite a decent downdraft in Treasury yields, most of which came late in the week. This may help press rates down a little next week, according to the nation's leading mortgage pricing survey..
After several weeks of economic data which featured a more positive tone, this week's set of releases ranged from muted to downright poor, even if there were bright spots among them.
For the past four weeks, State Unemployment Claims have trended mostly downward, even with November's holidays distorting the readings somewhat. For the week ended Nov. 29, one of those holiday weeks, the number of new claims was 355,000, the smallest number since February 2001. The past four weekly numbers suggested that job markets were improving, if in a meager fashion.
What, then, to make of the National Employment Report for November, which reported losses of some 40,000 jobs and an unemployment rate of 6%, matching the high for the cycle to date? It's true that mass layoff announcements have been higher in the past two months, but the decline at state windows left the impression that at least some of those folks were successful in finding new employment. However, that appeared not to be the case, renewing doubts about a more robust recovery.
Those with jobs are working harder. Productivity measurements for 3Q02 were raised to a 5.1% gain from the previous estimate of 4%, with the cost of labor per unit produced sliding by 0.2%. While this is good news for corporate profitability, rising productivity lets businesses keep staffs lean, exacerbating the plight of those seeking work.
Factory Orders rebounded a bit in October, climbing by 1.5%. While less of an increase than expected, it was a fair turnaround from September 2.4% slide. However, the improvement seems to have failed to carry into November, at least according to the Institute of Supply Management's survey of manufacturing businesses. The ISM reported a reading of 49.2, an improvement over last month but still below the breakeven reading of 50. Manufacturing continues to languish and will until business investment spending improves here, and until our trade partner's economies improve. Neither seems imminent at the moment.
Construction Spending did post a better-than-expected gain, rising by 0.2%.
There was little new this week to signal any significant improvement in the economy which would put meaningful upward pressure on mortgage rates. Instead, we're left with the impression that rates have settled in for a spell, a not-uncommon occurrence during the holiday month of December.
This week's minor rise will be gone by next week; look for a drop of about 8 basis points.
November 30, 2002
If you were hoping for bad economic news to help press mortgage rates down, you had to look much harder than usual this week. While better news is something to be thankful for, the accompanying rise in mortgage rates tempers that warm feeling a little bit. The average 30-year fixed rate mortgage climbed by nine basis points (.09%), with the promise of a slightly higher rates yet to come. according to the nation's deepest survey of mortgage pricing.
The market seems to be slowly accepting the idea that the economy might actually be getting off the floor. This week, the revised GDP report for 3Q02 told of a 4% increase in the nation's output, up from the 3.1% previously estimated. While there's nothing soft about this report, some observers believe that at least some of the additional growth was "borrowed" from the current quarter, but new data from October failed to reinforce that argument.
Home Sales in October were still strong, both existing and new. New Home Sales remained over a 1 million annualized rate of sale at 1.007m, and Existing Home Sales climed 6.1% to a 5.77m annualized pace. Cheap, easy financing and solid income gains for the employed have been offsetting sharply rising home values, but we could be nearing the end of that beneficial happenstance as the biggest part of the fall in mortgage rates appears over.
Personal Incomes rose by 0.1% in October, an expected rise, but spending shot up by 0.4%. That spending continues at such a pace will certainly cheer retailers now that the holiday sales rush is fully upon us.
Better still, consumer attitudes about the economy are improving. The Conference Board's report on Consumer Confidence rose to 84.1 in November from October's 79.6 mark, a nine-year low. The University of Michigan Survey of Consumer Sentiment also sported an increase for the month of November, even if the 84.2 final level was slightly lower than the 85.0 preliminary mark. It is believed that happier consumers will spend more money, but the relationship is a tenuous one, at best. This year has certainly proven that, with spending cranking along despite sour moods at times.
Order for Durable Goods posted an unexpectedly large rise, with the volatile gauge climbing by 2.8% in October, better than double forecasts. September's number was also revised upward to a smaller decline. If durable goods orders are rising, improvements in the beleaguered factory sector may just start to show. At least one regional Fed report suggested that, but we'll wait for the national ISM survey to get a better read.
Lastly, the employment situation may be a getting a little better, as well. Weekly State Unemployment Claims slipped to 364,000 new applicants, and the four-week moving average is now solidly below the 400,000 mark, which points to improvement or deterioration in the national employment picture. We'll get a clue about that next Friday.
There remain worrisome economic signs yet, though, like a 12% increase in bankruptcy filings in the third quarter. While the economy may indeed be reviving, it's still got a way to go. Nonetheless, should the economy continue to improve like this, we just might start to hear that "recovery" word being used more often. Based upon the reaction of mortgage borrowers as rates tick up, we reckon that only a half-point rise in rates from these levels would cause refinancing activity to just about disappear.
The bond market posted a large selloff on Wednesday as a stock rally took hold. Day-before-holiday trading in typically thin, making movements in yields more exaggerated that they otherwise might be. Still, indications of improvement mean higher mortgage rates, and that's what seems to be on tap for next week. We may even trend toward October's highs in the 6.40% range.
November 23, 2002
Mortgage rates erased some of their recent declines this week; news about the economy just wasn't all that bad, prompting an uneven stock market rally. The average rate for a 30-year fixed rate mortgage finished the week at 6.21%, up by just under an eighth of a percent, according to the nation's deepest survey of mortgage pricing.
While no blockbuster announcements were released, what there was suggested that even if things aren't getting much better, they are at least improving.
Deflation is no longer a topic for debate; after last week's sharp increase in the PPI, the Consumer Price Index posted a 0.3% increase, with a rise of 0.2% without volatile energy and food prices in the mix. Deflation -- widespread falling prices for goods and services -- isn't happening, even if prices are falling for certain items, just as inflation isn't an issue if the prices of only a few specific items are rising. Modest inflation would be welcomed by some industries (such as manufacturing) which are having trouble making profits, but would spell trouble for service industry prices, such as health care costs.
The Balance of Trade deficit, slightly smaller than the recent record, was $38 billion last month. America continues to buy goods and services at a significant clip, even as our own exports of goods aren't selling as briskly overseas. The high number means that American consumers continue to spend apace, which indicates that a renewed slowdown isn't likely anytime soon.
A headline of "Housing Starts Plummet 11%" would normally put a scare into the markets, but instead was shrugged off by traders. The 1.60 million (annualized) pace of starts is scary only if you didn't know that it was a decline from a record last month, and that it remains near a record pace for the year. Building Permits, an indicator of future activity, printed a 1.76m annualized rate, so there isn't as yet any appreciable housing slowdown.
Weekly State Unemployment Claims stood at 376,000 new applications last week. Though possibly an inaccurate reading because of the Veteran's Day holiday, the 25,000 drop in claims is a hopeful sign that layoffs are beginning to wane for this cycle, and that new hires may be picking up again.
Pointing sideways after four months of decline was the Index of Leading Economic Indicators. The unchanged reading for October is a signal that a bottom for the slowdown seen in late summer and early fall may be in sight, perhaps presaging an upturn in growth in the next few months. Got questions? We have answers on our Question of the Day page. If your question hasn't been answered, ask us.
Lately, even such soft numbers are a reason for the stock market to cheer, and it did so this week at the expense of bonds and mortgage rates. We've also seen somewhat more issuance of debt by both the US Treasury and corporations; those additional supplies for sale mean that investors can be a little more picky about how low a yield they might accept. That has the effect of pressing rates up a little, as well.
It could very well be that a floor for rates is forming. After printing a record low, rates bounced a bit, then a slightly lower record low, followed by a bounce. All this has happened in about six weeks, and all the while the news has become somewhat less dire since the elections have passed.
Next week, a very short holiday week. Expect little meaningful change in mortgage rates, on the order of a few basis points.
Have a great Thanksgiving.
November 15, 2002
After touching new lows early in the week, a sel loff in bonds left mortgage rates just barely holding in new record territory, with the average 30-year fixed rate finishing the week at 6.10%, two basis points below the previous record and a drop of 12 basis points (.12%) for the week, according to the nation's deepest survey of mortgage pricing.
With a Monday bond-market holiday and little significant economic news until Thursday, early-week mortgage pricing was still responding to last week's rally after the Federal Reserve cut rates, but switched their "bias" to neutral. That rally was based upon the belief that the Fed was not likely to lower rates again to help spur growth, meaning the difficult economic climate would persist for a while longer -- a bet on a weaker period or at least a continuation of decline yet ahead.
Unfortunately for those bettors, the most recent economic data suggest at least some improvement in the economy, and that makes stocks rally and bonds sell off, lifting yields and mortgage rates.
Recent sharp declines in consumer confidence have raised fears that people would slow their spending habits at a time when the responsibility for almost all the economic growth rests on their shoulders. Retail Sales for October, however, painted a different picture; the headline number was flat, unchanged from last month and dragged down by slumping auto sales. Exclusive of autos, however, the report jumped by 0.7%, the best showing since April. Forecasts had called for a 0.3% decline in the headline.
Weekly State Unemployment Claims drifted down, too, with 388,000 new applications. It was the second week in a row below the 400,000 mark, a rarity of late. That 400k level is thought to be a breakeven point for increases or decreases in hiring. This, too, was mildly good news.
Import Prices rose by a meager 0.1%, but Export costs were unchanged. Our manufacturers are having trouble raising prices due to competition and to a strong dollar which makes U.S. goods more expensive abroad. Those conditions make generating profits quite difficult.
Friday's reports about the health of manufacturing were less encouraging, as well. Industrial Production posted its third decline in a row, falling by 0.8%. Forecasts expected a much milder decline after last month's 0.2% drop. Slower production also meant that Factory Utilization rates remain low, falling to 75.2% in October after more hopeful readings in the summer.
Although inflation remains tame, the surprise 1.1% leap in the Producer Price Index isn't a welcome sign, especially after the Federal Reserve just lowered interest rates which can exacerbate inflation down the road. Although much of the headline increase was energy-related, the "core" rate rose a sharp 0.5%. While not yet worrisome, more inflation wouldn't be welcome just yet -- and next week's CPI might quiet the deflation argument a bit, as a result.
There was one final surprise on Friday, as well. The University of Michigan Survey of Consumer Sentiment printed a nice rise to 85.0 in the preliminary November survey. After a truly bleak October, perhaps we're feeling a little better about prospects ahead. It's also likely that the end of the torrent of negative political ads lent some cheer.
Only one other interesting note this week. The Fed's survey of Senior Loan Officers about credit and lending conditions is usually not one we watch for, but the sharp increase (albeit, only to 10%) of respondents remarking that they are tightening credit standards for residential mortgage loans does stand out a bit, since it was the highest number in some ten years. Tighter credit standards coupled with higher interest rates helped cause a sharp disruption in the housing markets at that time. This bears watching in the months ahead.
Since the news wasn't universally weak this weak, mortgage rates fell early and rose late. Next week, some firming up of the weekly averages should be expected. We think that about a 8-10 basis point increase is possible.
November 8, 2002
Fixed mortgage rates slipped back a little this week, but several days of stock selling and corresponding bond buying should press them down more heading into next week, according to the nation's deepest survey of mortgage pricing. The average 30-year fixed rate finished the week at 6.22%, a decline of just 3 basis points (.03%).
In recent days, stock markets have "bought on the rumor and sold on the fact;" the rumor was the hope of a rate cut by the Federal Reserve, and the fact was a 0.5% cut in rates -- twice what was expected. Once the deed was done, the sell-off in stocks and a return to bonds was underway.
In short, the Fed gave the markets what it wanted. However, one of the the problems with getting what you want is that it isn't always what you expect it will be. In this case, the Fed turned its posture to one of a "balanced" assessment of risks; that was seen as a signal that no further rates cuts are coming, and that none should be expected. From here, the markets will need to press forward without more assistance from monetary policy (not that the latest move can really address the problems the economy faces).
The question then is, "Now what happens?" The economy is weak, providing little support for stock prices and investable money must go somewhere -- and that somewhere is bonds, once again. If the economy seems likely to remain weak for a while, there is little chance of inflation to take hold, helping rates remain low. Inaction on the part of central banks around the world to help spur growth in the economies of our trading partners means that there is less of a chance that some global economic resurgence is coming. Simply put, it's going to take time, patience, and -- very likely -- some sort of fiscal policy changes to get the economy rolling again.
Not that there aren't signs of life. Admittedly, there wasn't any stellar economic news out this week with the exception of Worker Productivity, which climbed a stout 4% in the third quarter. That's a very healthy sign for the economy, but suggests that business still don't need to add employees, meaning the "jobless recovery" is set to continue. Overcapacity and high productivity don't add up to new hiring anytime soon.
The rest of the data can be summed up as "not as bad as feared." Factory Orders in September declined by 2.3% (about a 3% decline was forecast). The Institute For Supply Management survey of service-business conditions slid mildly, too, with a reading of 53.1 where about 52 was expected.
Non-mortgage borrowing by consumers rose appreciably in September, climbing by 9.9 billion dollars, well above forecasts. If consumers are willing to purchase goods on credit they may be more confident about the economy than recent surveys may suggest. However, the all-important holiday season is nearly upon us, and retailers fear that a difficult period is ahead, and that only last minute sales will tempt shoppers. If last year is any indication, they're probably right. Find the 'best' mortgage for your needs! Need a mortgage? Browse the Lender Showcase for competitive lenders near you.
Weekly State Unemployment Claims continue to baounce over and under the 400,000 new claims level. This week it was below, with a 20,000 decline in applications for a total of 390,000.
In the end, the market got all it wanted and then some, but that appears to be all there is. With the Fed now out of play, mortgage rates will probably respond more purely to the stock market, economic reports, and supply issues. That may produce a choppy ride, but it's only about two weeks till the holidays, which typically puts a damper on market activity, anyway.
A downdraft in rates for next week is coming. We could be ready to revisit October's lows.
November 1, 2002
Mortgage rates declined as expected this week, but are still above the recent lows of early October. A larger-than-expected decline of 23 basis points (.23%) left the average 30-year fixed rate mortgage at 6.25%, according to the nation's largest mortgage pricing survey.
The last few weeks have featured a growing chorus of calls for the Federal Reserve Open Market Committee to again trim short-term interest rates when it meets next Wednesday. (The last cut was December 11, 2001.) The chorus got a bit louder after the Conference Board's October report on Consumer Confidence showed a sharp slump, landing at a reading of 79.4. Both this and the University of Michigan's Sentiment reading are at nine-year lows.
Regular readers of Weekly Market Trends are well aware that Fed moves have little effect on mortgage rates, especially fixed mortgage rates.
While there are many issues which are preventing the economy from getting a head of steam, high interest rates and tight credit standards don't seem to be among them. Rather, excess capacity, high productivity levels and uncertain business conditions (which affects business purchases) appear to be the culprits. A cut in short-term rates won't help these much, if at all.
If the difference between optimist and pessimist is how they view the contents of a glass, what to make of the state of the economy? It's true that there isn't a great amount of improvement to celebrate, but stasis isn't the same as decline, and some economic data have been reasonably healthy.
For example, the Advance report on Gross Domestic Product told of a 3.1% increase in growth for the quarter which ended in September, a respectable improvement from the seond quarter's 1.3% rise. A rising GDP is usually met with enthusiasm by market players, but there was some grumbling that the number should have been stronger. In addition, the 'business investment' component of the GDP report posted its first gain (0.6%) in eight quarters. It's useful to note that not too long ago, a 3% growth rate was believed to be near the economy's "potential" to grow without generating inflationary pressures. So, is 3% growth good, or isn't it?
The cost of keeping an employee on the books slipped back a little in the third quarter; the Employment Cost Index, which measures the total costs of wages and benefits combined, rose by just 0.8%, a decline of two tenths of a percent from 2Q02. More slowly rising costs costs might mean fewer layoffs to come or perhaps an opportunity for greater business profitability sooner. Those seem like positive trends to us. Need jumbo-only or conforming-only stats? Only HSH has them, current and historic, at reasonable cost. Click here for more information.
While Weekly State Unemployment Claims rose again, back to 410,000 new applications, the last four weeks have danced above and below the 400,000 mark, which suggests improvement or decline in national employment trends. Using that mark as a backdrop, October's national employment report was to be expected. The nation's Unemployment Rate crept up to 5.7%, a smaller increase than feared, and a net loss of 5,000 jobs was noted. September's job decline was revised downward to a 13,000 loss from an original estimate of 43,000 jobs lost. Not an outstanding employment report, but not too bad overall.
That's not to say everything is rosy by any means. The Institute of Supply Management survey declined a little further into negative territory, printing a reading of 48.5; the hope was for no change to last month's 49.5 reading. As a diffusion index, readings above or below 50 signal growth or contraction. After several months of improvements this year, largely related to inventory rebuilding, manufacturing has slumped again. Until business investment returns in a measurable way, or until trading-partner economies revive, manufacturing will continue to have a rough time of it.
Construction Spending revived in September after a drop-off in August, climbing by 0.6%. Construction Spending has moved by fits and starts this year, with increases followed by decreases virtually every month.
We fielded several questions about mortgage activity this week, too. Mortgage applications have fallen off in recent weeks, especially for refinancing. We'll only say that with consumers accustomed to low or falling rates, the two-week runup in rates -- now over -- simply put some plans on the back burner until rates decline again, which has come to be expected. With interest rate sensitivity at very high levels, we may be seeing "application opportunism" -- i.e. "hold that application until I call."
While we've been optimistic much of this year, our enthusiasm about the economy has waned lately. Recent market performance and economic data have left us with a more improved demeanor, especially in the last couple of weeks. As of now, we're firmly of the opinion that the glass might be half full or half empty, but that what it holds right now is lukewarm.
Mortgage rates tango with the Fed next week, probably holding steady. We suggest that you make your own "economic impact" next week -- vote!