Archive for the 'Economy' Category
The Labor Department released October’s Consumer Price Index (CPI) today on the heels of yesterday’s PPI. The overall index was up 0.3%; the core rate was up 0.2%, matching consensus estimates. This left the market to digest other news as it searched for direction.
That news came in the form of more credit market troubles that sent money into the safety of bonds this morning as Applied Material and J.C. Penny put out weak forecasts and Barclays announced a $2.7 billion write-down from its subprime lending activities and related credit issues.
The flight to quality is pushing mortgage rates a bit lower.
read comments (0)For those curious about the direction of mortgage interest rates, the August jobs report released this morning was a highly anticipated economic signpost.
Several noteworthy figures emerged. First, the loss of 4,000 jobs in August (vs. the expected rise of 114,000) was a huge surprise and the first such decline since August of 2003. Underscoring that point, the two prior month’s numbers were revised downward, to 69,000 from 125,000 in June and to 68,000 from 92,000 in July.
That shows a dramatic slowing of jobs during the second quarter job of this year, the period during which the sub prime mortgage problem burst out of its box and took the global center stage.
Expectations are increasing for a Fed rate cut later this month and for a possible series of cuts as the economy slows. If corporate earning continue to disappoint, look for the Fed to begin taking steps to forestall a recession.
Mortgage rates for conforming 30 and 15 year fixed rate loans should ease in anticipation of the expected Fed cut on the 18th.
The Fed Holds Rates Steady, Disappoints Markets
The Fed adjorned today leaving rates unchanged. Citing a desire to see more convincing signs of a “sustained moderation” in inflation, they kept up their hypervigilant stance against inflation. The decision disappointed the markets laboring under the recent spillover of the mortgage problems into the credit markets.
Here’s the text of the Press Release:
For immediate release
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.
Although not quite the canary in this coal mine, yesterday’s announcement of insolvency by American Home Mortgage Corp., one of the country’s largest mortgage banks, sent a chill through the financial markers. The announcement was significant because AHM was not a sub-prime lender and because it indicates that the mortgage industry’s problems have spread into the prime lending and corporate capital markets.
With risk spreads widening and credit tightening at all levels, the LBOs that have sustained the stock market’s recent rise are in jeopardy. Between AHM’s announcement and Countrywide’s earnings report last week, the stock and bond markets were frantic. The Dow dropped 147 points yesterday. AHM’s stock fell from a Friday high of $10.47 to $1.04 per share by the end of the day.
California Consumers “Living on Fumes”
The humor of this mixed metaphor aside, the quote from Chris Thornberg of Beacon Economics points to a serious weakness in California’s economic outlook. Taken from Dale Kasler’s Sacramento Bee article today entitled Housing Clouds Economy, both writers question the strength of our job market and consumer spending set against the backdrop of falling real estate equity.
So far, economists seem to feel the real estate problem will remained contained. Seeping out from the cracks in this confidence however are some signs that the problem will spread. With credit use skyrocketing in the first half of 2007 and home equity evaporating, how long can the consumer continue to prop up the economy?
The PMI Mortgage Insurance Company has published its Summer 2007 Economic Real Estate Trends. For Sacramento area home owners, the news is not good.
While PMI’s previous model was tuned for the rapid appreciation of the first half of the decade, the revised model gives more weight to current price trends, area volatility, and the increased use of unfriendly variable interest rate products. While the inputs have been updated, the output is the same:
“…a risk index that predicts the likelihood that home prices in a given metropolitan statistical area will be lower in two years.”
How does Sacramento stack up? How about 9th among the top 50 MSA’s in the nation, and a 56% probability of lower prices in 2009.
The benchmark 30 year conforming fixed rate mortgage ended the week essentially unchanged from last week. Freddie Mac’s weekly survey showed an average of 6.16% with .8 points cost for the western U.S.
WEDNESDAY’S FOMC MEETING
The Fed meeting adjourned Wednesday without any change to key short-term interest rates. This was widely expected, however the Fed went on to express continued concern about inflation and wage pressures, creating volatility in late trading.
PPI & Retail Sales
On Friday, the core PPI rate reported flat for the second month in a row, increasing hope for a Fed easing of rates later in the year. Compounding the sentiment was a decline in April retail sales, the biggest drop since September and worse than expected. Earlier in the week a spike in consumer revolving debt use—mostly credit cards—to 9.2% in April from 2.9% in March indicating that consumers will continue to prop up the economy even if it means increasing debt to do it.