I have given ADP a hard time in the past for being a poor predictor of the official Jobs Report, which always comes out two days after ADP releases their numbers. Over the last year or so though, ADP has been pretty spot-on. Will this be the month that again tarnishes their reputation? I hope not. This morning, ADP is showing that there were 246,000 new jobs opened up last month, 30% higher than the expected 168,000, and way better than last month’s 153,000. Some say this is because of the positive optimistic outlook on business owners, some say it’s a new year with new budgets to spend. I just hope it’s accurate.
Janet Yellen & Co. wrap up their two-day FOMC meeting today. At the last press conference, Ms. Yellen downplayed the need for future stimulus, nothing that the current economy is very close to meeting the Fed’s indicated targets. Perhaps, just perhaps, higher interest rates and higher inflation are on their way? We’ll know a little more in three hours.
No news out today. The DOW just hit a new all-time-high at 19,258 and money is coming out of bonds to fuel that fire. A few Fed Governors are out speaking today ahead of the next FOMC meeting next week. William Dudley said this morning that he favors gradual rate hikes, which will increase more quickly under the Trump Administration. This is how I see that he sees the next president.
I am heading to Lake Powell this afternoon. I heard that it’s going to be windy and rainy all over the state for the next few days and I thought “why not make an adventure out of the inclement weather by experiencing it on a houseboat on a body of water where the waves have nowhere to go but back at you?”.
But since I still have four hours to kill here at the office, let’s talk about interest rates and housing for a minute. The Bank of Japan committed to do whatever necessary to keep their 10 year bond at 0%. Our own central bankers of course meet today and there is a 12% chance that they will raise interest rates today, and a 60% chance that they will hike by December. I am of the opinion that they should raise them today for the same reason that I am going to Lake Powell in a fall storm: carpe diem. There is no such thing as perfect timing in this life; you just do the best you can with what you have. Plus remember that when they hiked last December, our mortgage rates actually decreased by 0.25% :).
Here is some interesting info that you might even find useful to pass along. According to Reuters today, the supply of homes under $250,000 has fallen by 12% from this time last year. The alarming statistic is that Salt Lake leads the country in dwindling starter home inventory, where the supply has decreased by 83% over the last four years.
Last December, policymakers forecast that the Fed would raise rates four times in 2016. With three more meetings to go (including today’s) and having hiked exactly zero times so far, there is no possibility at all that they are not going to hit four. Last month, the Chair and Vice-Chair hinted that the central bank could plausibly effect two rate hikes this year. Even still, only two out of the 23 Fed preferred bond traders think that a rate hike will be announced at the conclusion of tomorrow’s meeting. Futures traders are pricing in a 20% chance that the Board of Governors hike the discount rate tomorrow. I on the other hand think that tomorrow could be the day that they do kick the rate up .25% to a whopping .5%. This accomplishes two things: The first is conveying the sentiment that the economy is in fact getting better, instilling confidence in a financial system that has been in the sickbed for the better part of a decade. The other agenda accomplished by a rate hike tomorrow is giving the Fed additional ammunition to drop interest rates again in the future when there is a slowdown (see, I am not entirely optimistic).
I place the probability of a rate increase tomorrow by the Fed at 50%. And if they do, I see mortgage rates dropping again.
The likelihood of a hike at next week’s FOMC meeting is now just at 11%. Based on the varying messages that the various Fed Governors have conveyed at their multifarious speeches this last week, it’s clear that as a body they are unclear on the future of the economy. The lower prospect of a short-term rate hike combined with lower oil prices are weighing heavily on stocks and bonds, which are both down so far this morning. Fannie Mae Bonds are only down 3bps, while the DOW has fallen by over 200 points.
This photo is supposed to connote the markets taking a breather, but I don’t think that they are as calm as the depiction suggests.
There is about a 33% chance that the FOMC will raise rates at this month’s meeting. That’s the highest probability we’ve seen since the start of 2016. Tomorrow’s Jobs Report will go a long way in determining if that really happens or not. Several Fed Governors are calling for the hike and even Janet Yellen was convincingly hawkish in her remarks in Jackson Hole last weekend (chalk it up to the fresh air and abundant wild life?). We’ll see tomorrow. And right about the time that the closing bell rings today, we’ll get the report on yearly Automotive Sales, which has steadily increased for the last five years. It’s not considered a market mover but it’s one of my favorite because I like cars.
Ahead of the Jobs Report we have a few hints into the employment picture: Challenger, Gray & Christmas show that Job Cuts fell 29% over the last 12 months, ADP shows a 9% decline in hiring from last month, and Jobless Claims are up 1% just this week.
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…
Statistically speaking, it’s not looking like the Fed will hike interest rates this year. According to research done by the CME Group and published last Friday, here are the probabilities that the FOMC will raise rates at their next three meetings:
- October 28th: 8%
- December 15th: 37%
- January 27th: 47%
It appears that just like every other set-in-our-ways human being here on this planet, those working in the financial sector just don’t enjoy change. It’s easier to push for an upset three months from now than it is to want to undergo the pressures and exerted effort required of morphosis today. Does the economy need higher interest rates to sustain growth? I think so. Is there danger in hiking too soon? Possibly. Would we be better off to peel back the bandage now to let the healing begin and to stockpile ammunition for when we need it next time? Probably. Do I talk out of both sides of my mouth in this publication depending on the most recently published data from one of a thousand inconsequential studies/articles/surveys? A resounding “yes”. I, for one, embrace change. 🙂
The big news to confirm this morning as that the launching of TILA-RESPA reform (AKA: TRID) has been kicked a little bit further down the road to October 1st.
Taking a back seat to the CFPB, the FOMC said that policy will remain “highly accommodative for a long time”. Ms. Yellen’s comments lead me to believe that a rate hike by the Fed will still happen late this year. That’s right, the Fed also kicks the can.
Building Permits rose 11.8% and Housing Permits sank 11.1%. The yin-yang numeration is uncanny. I ‘d like a little more balance in my personal numeration since I lost my wallet yesterday. While the credit cards and driver license will all be magically replaced with just a little bit of effort, the cash that was in there (which was more than I usually carry since I was out of town for the weekend) remains out of balance. I throw that out there for the universe to note. But if I don’t see the cash again, oh well, worse things have happened.
And speaking of looking for cash and worse things happening, the debt crisis in Greece may be coming to a head over the next few weeks. If the country defaults on its debt, they would cause significant economic unrest in the European Union. On the plus side, interest rates would come back down.
Back on our shores, the two day FOMC meeting starts up again today, with their eight-times-per-year statement about the Fed’s monetary policy being released at mid-day tomorrow.