As anticipated, the Federal Reserve Board left interest rates unchanged this week. The next meeting is in June where there is a 12% chance that they will hike rates. Though 12% is better than one in a million, the likelihood is still pretty small with all inflationary measures (excepting the price of homes) well under the 2.0% threshold looked to by Fed officials as the benchmark. That run-on sentence was a mouthful, but with Lloyd Christmas on my screen I’m still feeling pretty smart by comparison.
Interest rates have been below average for almost nine years now–and about 13 years if you take away a few months in 2007.
Word on the street is that the Fed doesn’t want to make waves in order to maintain calm in the markets. The zero percent chance of a rate hike today, 23% chance at the next meeting in June, and 71% chance by year’s end just confirm what history has repeatedly shown: rates aren’t going up before the election. Anything short of runaway inflation will be brushed off by middle-aged folks in New York crying “serenity now”.
The Pending Home Sales report out today shows a 1.4% expansion rate, slower than last month’s 3.4% growth but well above the 0.3% crawl expected.
Today is the commencement of the third of eight Fed meetings scheduled in 2016. There is a zero percent chance that the Fed will announce an interest rate hike at the conclusion of the meeting tomorrow, as evidenced by the announcement of no read statement and no press conference. We won’t even know what was discussed in in this FOMC meeting for another three weeks when the minutes are released. Perhaps they will be talking about how home prices continue to increase at a rate of roughly that of every other measure of inflation.
I haven’t been to Raging Waters since I was 17. It’s not that I didn’t have the time of my life as a youth at the waterpark. In fact I loved feeling my heart pound and my stomach race toward my throat, hanging out with friends, and scoping out the babes. School was out, I had no bills to pay, and life was good. This hydro-coaster was my favorite because I am pretty sure that I caught some air on the second hump one time. But the reason that I haven’t been to Raging Waters in a quarter of a century is that they closed it for a time and I moved away–like all the way down to Utah County away. And that is far; too far. Just ask anybody who currently lives in the Salt Lake valley and they’ll tell you.
As it turns out, a nice little community pool called Seven Peaks now occupies the old Raging Waters space. Like you and every other family west of the Mississippi, we have the Pass of All Passes because I want my kids to experience all of the exhilaration of youth before they get old like me and the rides make them nauseated.
Thanks to that blissful reminiscence, I lost the point that I was going to get to way back in paragraph one. It was something about the Bond Market looking just like the old hydro-coaster in this photo. The Feds meet up next week but there will be no policy statement read afterward and no Q&A news conference either. It’s like the exact opposite of fun and excitement. As a result, the Fed Fund Futures show a 0% chance that they’ll raise rates next week. For all of you who seek thrills in different ways now-a-days, there is a 21% chance of a rate hike in June and a 63% chance that the Fed will bump rates by the end of the year. There is a 100% chance that I will be at Seven Peaks again before December. Hopefully way before December.
Arguably, the Sistine Chapel has one of the world’s most famous ceilings. Nobody would dream of punching through it’s plaster just to get through to the roof. And for that matter, most of us would not blast through a ceiling even in our own home unless the drastic measure seemed warranted. So it is with the bond market. The pricing of mortgage bonds has bounced off of a ceiling of resistance now four times over the last year and with each occurrence has found that there is no pull strong enough to justify the journey into the rafters. Consequently, interest rates aren’t getting any lower–and at this point are running the risk of heading upwards in the weeks that follow.
Fannie Mae reports that the average 30 year interest rate being originated out there right now is 3.83%, up from 3.82% last week. Where rates have been at 3.625% or better for at least a month, that higher average rate is accounted for by a combination of perhaps four things:
1. no cost loans
2. investment properties
3. bad credit
4. applicants getting ripped off
As long as we are making lists, there are two items of note in the news today. The first is that Existing Home Sales are up 5.1% from last month at an annual rate of 5.33 million units. That annual rate was just above expectations by 300K.
Secondly, the oil worker strike in Kuwait appears to be coming to a close, which is causing oil prices to settle back down. Money is coming out of oil and into more liquid (ironic pun intended) assets such as Stocks and Bonds, which are both marginally positive on the news. That’s what you might call the domino effect.
Housing Starts and Building Permits both missed expectations this morning, which should be helping to improve interest rates. However, oil workers in Kuwait are on strike, causing oil prices to rise which is consequently preventing rates from moving lower.
Today is traditionally tax day, but because Emancipation Day is being observed by public officials, taxpayers across the country are liberated from cutting a check back to Uncle Sam until Monday. Since I am not directly employed by Uncle Sam and don’t get out much, this is the first I have ever heard of Emancipation Day…even though it was 154 years ago tomorrow that Abraham Lincoln freed the slaves. Man that brother deserves more than just to be on the $5 bill and the penny.
It’s also getting to be that time of year when you have to wait two hours to get into a restaurant for dinner because the parents of 80,000 college students are here to pick up their kids for the summer and hopefully see some of them graduate. If you know one (or five) of these soon-to-be college grads who is looking for a job you might recommend the manufacturing sector, which has just recently taken off after being in the dumps for the last two years. Too little too late for Geneva Steel–though most of the recent college grads are now ironically living in the thousands of new dwellings being constructed out of wood on land once used to fabricate stuff out of metal and provide jobs for half of Utah County.
Consumer inflation was tame in March as the Consumer Price Index (CPI) rose a measly 0.1%. That doesn’t seem like much below the 0.3% expected, however, that’s an annualized difference between 1.2% and 3.6% and the Fed’s target is 2.0%. For you numbers nerds out there, the Core CPI was also at 0.1%, vs. the 0.2% expected. The core year-over-year is actually above Fed expectations at 2.2%, though edging lower from the February reading of 2.3%. The difference comes from the relatively cheaper energy costs since this time last year. Oil prices have been coming up though since mid-January. Stocks and Bonds are both up a touch on the day.
Well I thought I’d get back on the horse after a nice week off and a frantic two days getting caught back up. This scatter diagram I caught in the New York Times on Monday adds additional impetus to get back to work, showing that men and women who earn more can expect to live longer lives. The snapshot was taken of the individuals’ earnings in their 40’s, and then shows when they died. Causality shares the same argument that has plagued both the chicken and the egg: do higher earnings/lower earnings allow/suppress a healthier lifestyle or does one earn more because he/she enjoys a healthier work life? Who cares; the correlation is so linear that there is no room for questioning the integrity of the data. Work hard and take care of yourself (by taking a week off every now and then?).
In the markets today, the Producer Price Index dropped -0.1% again, putting a another downer on the positive expectations. Retail Sales were also down -0.3% despite the number being anticipated to read above zero. On the flipside, the Atlanta Fed had forecast Q1 GDP at 0.1%, and the New York Fed is showing a reading of 1.1%. Cat fight?
All of this economic data hovering around zero has helped mortgage pricing to improve to near yearly highs over the last two weeks. However, profit taking and speculation have caused a 50bp drop since Monday. Money is still super cheap!