Week of Feb 21 – Econmic Roundup

Mostly good news to report as the DOW Jones stock index has recently climbed to its highest point in years and January Housing Starts are up to the highest level since October 2008.  Here are three other key recent economic developments of which you should be aware:

Good News from Greece

After several weeks of uncertainty, European officials have agreed to provide a $172 billion bailout package to Greece, and Greek officials also reached a debt deal with private investors.  As a result, Greecewill be able to avoid defaulting on debt maturing on March 20.  Anticipating that European leaders would not allow Greeceto default, investors showed little reaction to the news.  Questions remain about whether Greek leaders will fully implement the unpopular austerity measures called for by the terms of the deal.  This announcement is probably not the end of this story…..

Inflation Concern

Recent inflation data indicates that core inflation (which exclude food and energy) is on the rise.  Core CPI inflation was 2.3% higher than one year ago, which was the highest annual rate since September 2008.  Fortunately, Fed officials forecast that core inflation levels will moderate later in the year.  However, if it unexpectedly continues to rise, the impact could be detrimental to mortgage rates as higher inflation is always negative for mortgage rates.  In addition, it would be more difficult for the Fed to maintain its current loose monetary policy.  Needless to say, investors will be closely watching core inflation levels in the coming months to see if the Fed’s forecast proves correct.

Good News on the Job Front

Weekly Jobless Claims have unexpectedly dropped to 358K and are now at the lowest level in nearly four years.  Considering this measure has been consistently over 400K for a number of years, it is good news to see this figure maintaining sub-400K levels for the last few months.  This is significant because in the past when this figure improves so does the labor market.  In January, the Unemployment Rate dropped to the lowest level since February 2009, and the recent Jobless Claims reports provide additional evidence that the labor market is moving in the right direction.

Looking ahead, this will be a light week for US economic data.  Existing Home Sales will be released on Wednesday and then New Home Sales and Consumer Sentiment will be released on Friday.  In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday of this week.

Unemployment Drops to Lowest Level in Three Years

Friday’s Employment data exceeded expectations in nearly every area.  Against a consensus forecast of 135K new jobs, the economy added 243K jobs in January, the most since April 2011!  In addition, revisions to prior months added another 60K jobs.  The Unemployment Rate also dropped from 8.5% to 8.3% (see graph below), which is the LOWEST LEVEL SINCE FEBRUARY OF 2009!  Strong labor market data is great news for the economy, but it increases future inflationary pressures, which is unfavorable for mortgage rates.  As a result, mortgage rates moved a little higher on this news, but the key word is a “little.”  In past years, rates would have really jumped on such news, but rates continue to be resilient and maintain super low levels.

 The economic calendar is very light this week.  There will be Treasury auctions on Tuesday, Wednesday, and Thursday that could influence rates.  The Trade Balance and Consumer Sentiment reports will be released on Friday as well.

Economic Week In Review

In last Wednesday’s Federal Reserve meeting, Fed officials stated that they now expect economic conditions will allow the fed funds rate to remain at exceptionally low levels until at least “late 2014″.  Wow!  The Fed has never been quite this clear for so long into the future.  Prior statements extended the expected time frame only to mid-2013.  In addition, comments from Fed Chief Bernanke suggested that Fed officials would like to see stronger economic growth, and they are open to the possibility of additional Fed easing.  Many investors think it is likely that the Fed will also announce the additional purchase of Mortgage-Backed Securities (MBS) at a later meeting as well.  The expectation for a low fed funds rate and the possibility of additional Fed purchases of MBS increased the demand for MBS last week, which resulted in higher MBS prices and lower mortgage rates.

Although this is great news for anyone with a Home Equity Line of Credit because the Prime Rate will stay so low for years to come, it is not good news for those with short-term savings accounts nor does it insure that long-term mortgage rates will stay low.  Other factors such as inflation, unemployment, and consumer confidence will dictate what happens with mortgage rates.  Nevertheless, the stage seems to have been set for mortgage rates to stay low for the foreseeable future, and that’s good news for the real estate community!

Also worth noting, Friday’s Gross Domestic Product (GDP) report showed an increase at a 2.8% annual rate during the fourth quarter of 2011, which was a little below the consensus forecast, but up from 1.8% during the third quarter.  Early estimates for the first quarter of this year are for a slower growth rate.  The long-run average growth rate for the economy is generally considered to be around 3.0%, and the economy usually grows at a faster than average rate following a recession.  Given that the economy is growing below its potential and that inflation remains tame, the Fed’s expectation that monetary policy will remain very stimulative for a long time is understandable.

There was some good economic news to report from last week as December Durable Goods Orders rose a strong 3% from November and Consumer Sentiment rose to the highest level in a year.  Significant progress also seems to have been made in reaching a new debt deal inGreece.  Unfortunately, though, the housing news wasn’t great as December Pending Home Sales declined 4% from November’s 19-month high and December New Home Sales declined 2.2% (as shown in the graph below).  2011 ended up being the worst year on record for New Home Sales. 

Looking forward, the biggest economic report this week will be the ever-so-important Employment data on Friday.  As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month.  Chicago PMI Manufacturing and Consumer Confidence are also fairly big reports that will be released today as well as ISM Manufacturing, Construction Spending, and ADP Employment on Wednesday.  Productivity, Factory Orders, and ISM Services round out a busy week.

Economic Update: Improving Economy Bad for Mortgage Rates

An improving US economic outlook was negative for mortgage rates over the last week.  Reduced concerns about Europealso caused a partial reversal in the “flight to safety” trade.  As a result, mortgage rates ended the week higher.

 Early in the month, the December Employment report showed a larger than expected increase of 200K jobs, and the Unemployment Rate continued to move lower.  Last week, Weekly Jobless Claims fell to the lowest level since April 2008.  The labor market is one of the most important factors in the health of the economy, and many investors now view the outlook as brighter than it has been since the financial crisis began.  If this is the case, it will be great news for the economy, and job gains will increase the willingness and the ability of people to purchase homes.

 The Housing sector data released last week was encouraging as well.  January Existing Home Sales increased 5%, while the inventory of unsold homes declined 9%, to the lowest level since March 2005.  December Housing Starts for single-family units increased 4%, and Building Permits for single-family units rose 2%.  Finally, the January NAHB Home Builder confidence index rose for a fourth consecutive month to the highest level since 2007.  Improving economic conditions, high affordability levels, and low mortgage rates are three solid reasons to be optimistic about the housing market.

 The most highly anticipated economic news this week will be Wednesday’s Fed announcement.  Investors will be looking for hints about whether the Fed will provide additional monetary stimulus.  The most significant economic report will be Friday’s GDP data for the fourth quarter.  GDP is the broadest measure of economic activity.  Before that, Pending Home Sales will be released on Wednesday and Durable Orders and New Home Sales on Thursday.  Leading Indicators and Consumer Sentiment round out the schedule.  In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

Economic Update

The news from Europe has been mostly negative over the last week.  Economic growth in Germany has been slower than expected.  Negotiations on restructuring Greek debt also have not progressed as planned.  S&P is downgrading the debt of several European countries, including France.  Lastly, the European Central Bank (ECB) has given no indication that it will provide relief to the troubled countries.  As a result of all of this turmoil, investors shifted funds to relatively safer investments, including US mortgage-backed securities (MBS), which has helped mortgage rates move lower.  However, we already know that Congress is imposing new fees on Fannie Mae and Freddie Mac later this spring that are going to cause mortgage rates to bump up as much as .25% over the weeks ahead.  Anyone in the market to lock a mortgage rate should do it as soon as possible.

The most significant economic data due out this week are the monthly inflation reports.  The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Wednesday.  The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday.  CPI looks at the price change for those finished goods which are sold to consumers.  In addition, Industrial Production, an important indicator of economic growth, will come out on Wednesday.  Housing Starts will be released on Thursday, and Existing Home Sales will come out on Friday.  Philly Fed and Empire State round out a very busy week.

Economic Overview

Increased concerns about European debt issues and the pace of global economic growth has caused investors to shift to relatively safer assets over the last week.  As a result, mortgage rates have nestled down to right at the low point of the year.

Investors hoping for the European Central Bank (ECB) to expand its role in providing aid to euro zone countries have again been disappointed.  The ECB has indicated that it currently has no plans to introduce any major new aid programs.  It appears that ECB officials believe that the appropriate next step in easing the debt issues is for tighter budgetary discipline.  In addition, European Union officials suggested that working out the details of an agreement on fiscal integration between the many EU countries may take months.  Investors responded to the lack of significant progress by selling many European stocks and bonds and purchasing relatively safer assets such as US government guaranteed Treasuries and mortgage-backed securities (MBS).

Last week’s Fed statement also disappointed any investors looking for a shift in policy.  It contained no major changes from the last statement.  According to the Fed, the economy has been “expanding moderately”, which is a small upgrade from the prior statement.  The Fed gave no indication of providing additional stimulus or changing its communications policies.

A lot of economic data is due out tomorrow with Durable Orders, Core PCE inflation, Personal Income, and New Home Sales all scheduled to be released.  The mortgage markets will close early tomorrow on Friday ahead of the Christmas holiday.  Also, note that trading volume is generally very light during the final two weeks of the year, which means that mortgage rates may be more volatile than usual.

Economic Update

The economic data released last week was positive for the economy, with stronger than expected economic growth and lower than expected inflation.  Retail Sales, Industrial Production, and Housing Starts all exceeded their consensus forecasts. Weekly Jobless Claims fell to the lowest level since April and the NAHB Home Builder Confidence Index rose to the highest level since May 2010. Meanwhile, Core CPI inflation was a modest 2.1% higher than one year ago. For mortgage rates, the tame inflation data was positive, while the relatively strong growth data was negative.

Investors continue to closely monitor the debt troubles in Europe. While Italy’s bond yields remained below the highs reached last week, bond yields in France and Spain climbed to new highs. Investors are concerned that nearly every euro zone country except Germany is at risk of seeing a sharp rise in yields, which will make it even more difficult to meet their debt obligations. Weaker euro zone countries are increasingly looking to Germany for additional aid, but the Germans are reluctant to bear the cost. The level of aid provided by Germany, most likely through the European Central Bank (ECB), will heavily influence the ability of the other countries to resolve their debt problems.

Ahead of Thanksgiving, Existing Home Sales will be released on Monday, revisions to third quarter Gross Domestic Product (GDP) Tuesday, and Durable Orders, Personal Income, Core PCE inflation, and Consumer Sentiment Wednesday. The FOMC Minutes from the November 3 Fed meeting will also be released on Wednesday. There will be Treasury auctions on Monday, Tuesday, and Wednesday. MBS markets will be closed on Thursday for Thanksgiving, but they will be open on Friday.

Economic Overview: European Saga Continues / Unemployment Drops

The saga inEurope seems to change by the day.  Two week ago, there was great optimism from the announced European bailout plan.  That optimism faded last week as the Greek Prime Minister surprised investors by announcing that the proposed bailout package would be put to a public referendum within a matter of only a few days.  Although Greek voters passed his plan, the saga eventually cost the Prime Minister his job as he resigned over the weekend.  Fortunately, an agreement was quickly reached to form a coalition government, which is expected to accept the terms of the bailout.

In the meantime, the focus has shifted toItaly, a country with a much larger economy and much more at stake.  While the budget vote passed, Italian Prime Minister Berlusconi failed to gain the support of a majority in Parliament.  As a result, he too agreed to resign. Italywill either hold special elections or be ruled by a national unity government (a temporary coalition).  A national unity government might be better able to implement politically unpopular austerity measures.  After this news yesterday, investors reversed “flight to safety” trading and stocks rallied putting a little upward pressure on mortgage rates.

Shifting to the home front, not that long ago investors were concerned that the USeconomy was close to a “double dip” recession.  Recent economic data and comments from Fed officials, however, have eased those fears.  Last week’s Fed statement expressed a little more optimism about the economy than in the previous statement.  Friday’s stronger than expected Employment data also suggested that the economy is gradually improving.  Against a consensus forecast of 90K jobs, the economy added 80K jobs in October.  In addition, the figures from prior months were revised higher by 102K jobs.  The Unemployment Rate unexpectedly declined to 9.0% from 9.1% in September.

The Economic Calendar is very light this week.  Import Prices and the Trade Balance will be released on Thursday and Consumer Sentiment is scheduled for Friday.  There will also be Treasury auctions on Tuesday, Wednesday, and Thursday of this week.  The Bond Market will be closed on Friday in observance of Veterans Day.

European Agreement Reached

The big economic news over the last week came from Europe.  Last Thursday, European leaders announced a comprehensive aid package that was broad enough to reduce the concerns of most investors.  The plan included three primary elements.  First, private banks holding Greek bonds agreed to a “voluntary” haircut of about 50%.  Second, the EFSF bailout fund will be increased to 1 trillion Euros (about $1.4 trillion).  Finally, 106 billion Euros will be used to recapitalize European banks.  After the news, stock markets around the world posted large rallies, which was not good for mortgage rates and pushed them higher.

With the European plan now announced and out of the way, the focus will again be domestic economic data.  The economic data released over the last week was moderate at best.  Consumer confidence fell to the lowest level since March 2009.  Third quarter GDP increased at a 2.5% annual rate.  Although this is at a faster pace than the first half of the year, it is still well below average.  In addition, the September Core PCE price index, an inflation indicator closely watched by the Fed, was only a moderate 1.6% higher than one year ago.  The best news of the week was October New Home Sales rising 6% from September (see graph below).

The current investor sentiment is that today’s economic environment, with slow economic growth and tame inflation, will continue to support low mortgage rates.  With this said, any signs of faster economic growth or rising inflation could push mortgage rates higher at a moment’s notice. 

 Looking ahead, another big week lies ahead with Wednesday’s Fed meeting the headliner.  Investors are looking for an update on economic growth and signs of additional easing.  The biggest economic report this week will be the important Employment data on Friday.  As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month.  Also out this week will be the ISM Manufacturing and Construction Spending report on Tuesday as well as ISM Services, Factory Orders, and Productivity on Thursday.

Possible Resolution to European Debt Crisis This Week

European debt problems are the primary focus for investors this week. European officials have been meeting over the last week and hope to release a plan for a comprehensive aid package for debt-ridden European countries by as soon as Wednesday. Officials are divided on what the necessary steps are to take to help ease debt problems in troubled nations. With large countries such as Italy and Spain continuing to experience debt troubles, the potential cost of a bailout could be very high. It has been difficult to gain political support in stronger countries, such as Germany and France, for aid to the weaker countries. For the countries that are at risk, it has been extremely difficult to implement the austerity measures required to receive aid, as the riots in Greece clearly demonstrate. Given the conflicting goals of all of the parties involved, the optimal solution is not clear. Whatever the outcome, it will likely have a significant impact on mortgage rates. A decisive plan to prevent the spread of debt problems could cause investors to reverse the flight to safety trade, leading to higher mortgage rates. On the other hand, a plan which disappoints investors could produce an increased flight to safer assets, causing mortgage rates to move lower. I know this issue feels like a long ways away and, heck, it is half way around the globe, but it has the potential to hit a lot closer to home than you might think. We’ll know a lot more over the next few days.

The housing data released last week was mostly better than expected. September Housing Starts increased 15% from August to an annual rate of 658K units, far above the consensus forecast of 595K units (as shown in graph below). This was the fastest pace in 17 months! Nearly all of the gains came from multi-family units, though. September Existing Home Sales fell 3% from August, which was close to expectations. The inventory of unsold existing homes declined 2% to an 8.5-month supply.

This week, Durable Orders and New Home Sales will be released on Wednesday. Gross Domestic Product (GDP), the broadest measure of economic growth, and Pending Home Sales will be released on Thursday. Core PCE inflation and Personal Income will be released on Friday. Consumer Confidence and Consumer Sentiment round out a busy schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. And, as mentioned above, the results from the European Union Summit will most likely be revealed sometime around mid-week.