There is currently a likelihood of 30% that the Federal Open Market Committee will raise interest rates at their June meeting. But the Fed is figuring in a 2.9% GDP forecast for the second quarter of this year, which won’t be published until after the June FOMC meeting. The second reading of the 1st quarter was just published this morning registering 0.8% domestic growth. Will we see a 2.1% pickup over the next 33 days? As of next week, the 2nd quarter will be 2/3 of the way over and I am not feeling it so far. But I am also writing this column as the last thing I do before heading down to Lake Powell for a week, so unlike the presidents of the 12 Federal Reserve Banks and their well-versed companions, my finger isn’t exactly on the pulse of the U.S. gross domestic product calculation right now. Other than I know that we just spent a small fortune on new life vests and a few coolers full of food. Nevertheless, I wouldn’t place any money on a 30% bet.
Happy Summer Vacation! For some reason I feel like I need to go back to Target…
For the fourth month in a row, New Home Sales rise faster than expected. This month’s 619,000 newly constructed homes is 119% of what analysts predicted. Jobless Claims (first unemployment check requests) dropped 2.5%, and Durable Goods Orders shot up from 1.9% last month to 3.4% this month. Stocks are down and bonds are up, though quite modestly. Tomorrow brings another reading of the first quarter GDP. The last consensus was a 0.5% increase and the expectations are that tomorrow will show a 0.9% spike. Perhaps the additional data since the previous poll will facilitate that much-searched-for bump in perceived economic activity. Any surprises one way or the other in GDP will most likely cause a breakout in the Bond market (hence the Breakout picture). We’ll see tomorrow.
Just like my kids’ elementary school today, there is nothing going on in the financial markets. As the school year winds down and we are all preparing for the first summer vacation next week, money stops trading hands and the markets quiet.
Tracking interest rates, the 100 day moving average (which represents a strong pricing support level) has been creeping ever upward to meet the current MBS downtrend and fortunately has helped stabilize prices over the last six days.
If it breaks through, the next floor of support would not kick in until interest rates have risen another 1/4%.
The Federal Reserve currently owns $2.5 trillion in Treasury Bills/Notes and $1.7 trillion in agency Mortgage Backed Securities, and consequently has the potential to increase or decrease liquidity in these markets at will. In fact, the Fed owns about 30% of outstanding agency MBS making them the largest single holder of mortgage loans in the world. That could change relatively swiftly. With $600 billion of the $13 trillion in outstanding Treasuries, and $200 billion of the $6 trillion MBS trading on average each and every day, that ownership can change hands fast. Today the Fed is auctioning off $26 billion of 2-year notes, for example. The old adage “don’t fight the Fed” means that when the majority shareholder sells, many others jump on the bandwagon too. Mortgage pricing is down 15bps this morning ahead of the auction, and from the look of it the money is going into stocks. The DOW is currently up 210.
After bouncing around a bit post Wednesday’s Fed meeting minutes reading, there is currently a 28% chance that the Open Market Committee will raise their rates next month. Remember that a short-term hike doesn’t necessarily translate to long-term rates going up. Case in point, when they increased the Fed rate a quarter percent last December, mortgage rates actually dropped a half point. Sometimes you don’t get everything you expect.
With interest rates continuing to be near record-low levels, the percentage of home buyers paying all cash has now dropped to an eight year low at 35.6%. I couldn’t be happier. More than 5.45 million existing homes have been sold over the last 12 months, resulting in 3.5 million sets of loan documents. That’s over a half billion signatures; there must be a better way.
Yesterday there was an 11% chance of a Fed rate hike in June. Today the likelihood stands at 34%. The increased probability comes from the release of the minutes from the April Fed meeting yesterday where it was said that “most participants judged” that if the economy continued to make progress in the second quarter (in terms of growth, the labor market, and inflation) “then it would likely be appropriate” to hike rates in June. “Members judged that information received since the FOMC met in March indicated that labor market conditions had improved further, even as growth in economic activity had appeared to slow”. And that the committee “noted that growth in household spending had moderated, although households’ real income had risen at a solid rate and consumer sentiment had remained high.” They also noted that since the beginning of the year, the housing sector had improved further, but business fixed investment and net exports had been soft. At the same time, I thought I’d pass along this table from rent.com showing that most property managers have raised rents in the last year and most will raise them again this year–by an average of 8%
Building Permits are up 3.6%, and Housing Starts are up 6.6%, both an attestation to the growth that continues in the New Construction arena. The Core Consumer Price Index also rose 2.2% year over year, meeting the Fed’s expectations. Even still, the odds that the FOMC will raise rates next month is only at 11% still.
Still nothing in the news department today. Here is a fun fact to share with your clients that piggy-backs on my assertion yesterday about the financial well being of home owners versus renters. Americans who own homes have an almost 50 X average net worth compared to those households who choose to rent. With interest rates in the 3’s, and homes continuing to appreciate at 5+%, now is the time to purchase a home–not after the Olympics or the election or the Chinese New Year.
Here is something crazy: according to a survey published yesterday, only 30% of Americans feel that now is a good time to purchase a home. This is an all-time low number. What gives? Home price appreciation is almost double that of the going interest rate. The Unemployment Rate is at a meager 5.0%, and the Job Openings report out today shows that there are currently more job postings than at almost any time in history. So what’s the hang-up? Pessimism? Non-committal? Mom still doing your laundry? Whatever it is, it’s rubbish. Study after study show that home ownership is the number one fastest way to financial freedom and a major determinant of long-term emotional well-being.
So man living in Mom’s basement: it’s time to grow up.
Happy Mothers Day to you to whom that applies!
So once a month the Jobs Report comes out and all of us nerds huddle around our media outlet of choice to see how many new jobs were created in the previous month. My media outlet of choice would be curled up on a couch with the mother of my children eating shortbread chocolate chip cookies that our son made. But, since the BLS announces the Unemployment number at 6:30 AM our time, I see it on the muted TV in front of the treadmill in my basement. By the time the number flashes across the screen I know that I only need to endure the sweaty monotony for another eight minutes before I go wake up the kids for school. Life is full of sacrifices, and sacrificing is what moms do best. So thanks Mom!
BTW: Though there were 50,000 fewer jobs created last month than expected, the Unemployment Rate stayed at 5.0%. Another standard of measurement, the Labor Force Participation Rate, shows that only 62.8% of eligible adults are working outside the home, for money.
The price of mortgage loans on Wall Street is right up at the highest level it’s been in the last two years–translating to interest rates being as low as they have been as well.