Halloween spending is expected to reach an all-time-high this year at 8.4 billion dollars.  That ‘s a lot of candy corn.  Personal Consumption in general rose 0.1% last month, to make the total 1.7% higher from this time last year.  The Federal Reserve has raised interest rates just once in the last 40 years between September 1st and a presidential election in November, which is why there is a zero percent chance that Wednesday’s meeting will conclude with any surprise announcement.  However, the odds are at 74% that we see a hike in December.  Nobody’s bashful about spending money before Christmas.  It’s not that hard to figure this stuff out.

Sometimes the markets get spooked.  Today is one of those days.  Bond yields around the globe are rising for no particular reason that I can see.  The 10 Year Note is at a four month high at 1.82%; the German Bund has risen from -0.16% to +0.15% in the last 30 days. Mortgage pricing is down about 3/8%, causing the 30 year to notch up to 3.5%.

Tomorrow we see the first reading of 3rd quarter GDP.  It’s expected to come in at 2.5%, which would be awesome considering that the 1st and 2nd quarters were at 0.8% and 1.4%, respectively.

There are a few tidbits of information out today that show just how favorable our current housing market is. The first is that the Federal Housing Finance Administration (think of them as Fannie and Freddie’s parents) compute a Housing Price Index which shows a 6.5% annual appreciation rate for single family homes.  Case-Shiller’s similar 20 City Index estimates a 5.1% increase over this last same year.  Black Knight says that only 1% of all mortgages are in active foreclosure–the lowest in the last nine years.

On the financing side, several Fed governors have been out on the speaking circuit.  One says that he sees three rates hikes over the next year, starting a month(-ish) from now.  Another says that the Fed will need to keep rates lower over the next two years to meet the 2.0% inflation target.  Fed Futures show a 71% chance of a rates hike at the December FOMC meeting, but nary a prospect at next week’s meeting.

Good news for guys like me who lend money for a living: CoreLogic reported that the percentage of all-cash home sales decreased 1.9% to 27.7% of total transactions (meaning that more people are getting loans to buy homes).  The number of existing homes that sold last month incidentally, is up 3.2% from last month.  That’s like a 5% pay raise this month if you’re a lender!

New York Federal Reserve Bank President William Dudley (“Do Right”) said that the Fed will raise interest rates later this year “if the economy stays on the current trajectory”.  Not feeling quite as confident, the European Central Bank is keeping their interest rates unchanged at 0.25% and will continue to purchase notes to keep other rates low as well.

Stocks are mixed, Bonds are flat.  Oh BTW, the Beige Book was blase: forty-six pages of “modest to moderate paces of expansion” and “tight labor conditions” language throughout the 12 tracked districts.  And on that note, I am heading up to the Homestead Resort for Fall Break with my family in a few hours.  I hope that you also get to enjoy some respite from the grind this weekend!

Huuuuuge Numbers

Housing Starts as a whole reportedly fell 9% last month to an annualized 1.047 million units under construction across the country. Single family dwellings, which account for the majority of residential construction actually advanced 8.1%.  Yet despite the surge in new homes happening right now, the 1.047 million units is the lowest in the last year-and-a-half.  So what gives?  Here’s where it gets interesting.  Let’s say that you are a real estate tycoon.  Do you build little tiny homes for one happy family and their suburban dog to live in or do you go big?

The answer is that tycoons go “huuuuuuge”.  They build multi-family units and lots of them.  And then sometimes they don’t.  They take a hiatus from their day jobs to procure other activities where they offend a lot of people and create a few enemies.  And when they do, multi-family construction plummets 38% in one month.  That–or something like it–is what dropped the housing number to the lowest level in the last 18 months.  Don’t read too much into the headline. Building Permits (which will turn into next month’s Housing Starts) increased 6.3% to an annualized rate of 1.225 million, beating analysts expectations.

This is in no way a metaphor for anything other than housing.  I am just not smart enough to construe a political analogy that sophisticated.  I just report the numbers and try to make sense to them in an interesting way.

Thumbs Up

The major stock indices are being fueled this morning by strong earnings from big names like Goldman Sachs, Johnson & Johnson, and Netflix.  Oil prices are also climbing, lending further support to stocks.  The bond market seems to have found a bottom and has seen pricing stabilize as a result, and causing interest rates to halt their march to the north.  Thumbs up all around.

The Consumer Price Index (CPI) increased 0.3% in September, inline with estimates and above the 0.2% from last month.  The Core CPI, which strips out volatile food and energy sectors, rose 0.1%, below the 0.2% expected.  Year-over-year headline CPI was up 1.5%, above the previous 1.1% last month, while Core edged lower to 2.2% from 2.3%.  This mixed bag of jumbled numbers is having no effect on the markets, but it’s good to see solid price appreciation at the consumer level.

Running Hot

At a speech last Friday, Janet Yellen expressed a hypothesis that in order to breathe life into the U.S. economy, the Fed might need to let it run hot for a little while.  I believe that her words were to “run a high pressure economy”, meaning that they could let inflation charge ahead of their 2.0% target to get things moving again.  It’s an interesting comment considering we haven’t even maintained that  2.0% growth rate for years now.  On the plus side, while things aren’t cooking as quickly as hoped for, the economy has been growing for the last 87 months, the third longest streak on record.

The tool that the Fed has been using to keep the economy running at their desired growth level is interest rate manipulation.  To eek out what minimal growth we have experienced over the last eight years, that rate has been kept pretty close to zero. There is currently a 7% chance for a rate hike at the next FOMC meeting on the 2nd of November, and a 69% chance for a bump at the conclusion of the December 14th session.

Hesitation is that thing that mother nature gave us to protect us from ourselves.  It saves us from the potential for pain, which also prevents our growth and inhibits our burgeoning character.  Wow, that was deep for a Friday morning!  Nothing gets me waxing philosophical like the contemplation of spending money.

The monthly reading of Consumer Sentiment was released today. This survey measures consumers’ attitudes and expectations of both present and future economic conditions.  In a lab, Consumer Sentiment should predict Consumer Spending, including Retail Sales.  The more confident consumers are about the economy and their own personal finances, the more likely they are to spend their hard-earned money, and vice-versa.  Since 2/3 of the economy is in the palms of consumers’ hands, it’s kind of a big deal.  And everybody knows that the outlook for our economic growth in the U.S. is still…well, let’s call it “hesitant”.

Today, Retail Sales are up 0.5% over last month, which is always nice to see a positive number there.  The dangerous prospect for this quivering little plant in our collective hands is in the outlook for the future of consumer spending.  The Consumer Sentiment released this morning shows that our propensity to spend money this month actually dropped almost 4% since the last reading four weeks ago.  Consumer Spending is just one piece of economic data, but it is considered to be one of the foremost important, as well as one of the best indicative precursors of that which is to come.

There are currently 5,440,000 job openings in the United States, yet there were 246,000 filing for their first unemployment check last week.  Like the sign above, those two pieces of numerical data defy the logical thought process of most rational human beings.

The minutes from the most recent FOMC meeting were released yesterday, which revealed that several members of the committee want to raise the Fed Funds Rate “relatively soon” if “economic developments continue to unfold as expected”.  Stocks and Bonds are both down this morning on the anticipation of higher interest rates in the future.

I honestly have no idea about the representation of this photo, so if you can shed any light onto the subject, please share.  I chose the image because of the number 63.  There’s nothing inherently special about the number 63, which is why when you google it, some pretty random images pop up.  The number 63 is significant today because it’s the percent chance that the Federal Open Market Committee has of raising rates at their meeting help December 13-14.  The last time I looked, that number was only like 18.  So the markets are bracing for higher interest rates ahead.  The Fed is also meeting on the 1st of November, but nobody seems to want to talk about that meeting–November has bigger problems.  But back to the Fed, the minutes from last month’s meeting will be released early this afternoon.

With no economic reports out again today and the mortgage coupons trading under the ceiling of resistance created by the recent historical (somewhat of a paradoxical statement) floor of support, as well as falling below the 100 day moving average, it looks like higher interest rates are already upon us.  That is, unless another country has a total meltdown sometime soon.  That’s bound to happen sooner rather than later and it could be the U.S., but I am really hoping it’s someone else.  Let’s root for Greece or Italy.