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.

Employment Report Exceeds Expectations

The USeconomy received a dose of good news with Friday’s strong Employment Report. Against a consensus forecast of the addition of 60K new jobs, the economy actually added 103K jobs in September! Also, the data for July and August was revised higher by 99K jobs. More good news to pass along as well as the Unemployment Rate did not increase as many had feared and remained at 9.1% (see graph below). In addition, Average Hourly Earnings, a proxy for wage growth, increased 0.2% from August. Much weight is put on the monthly Employment report and to have a report come in this strong should ease the concerns of many investors that another recession is on the horizon. One month does not a trend make, though, and we’ll need additional strong Employment Reports in the months ahead to pull out this economic rut.

Mortgage rates are higher this week mostly due to Friday’s strong Employment Report.  In addition, last week European officials made available additional aid packages for struggling European nations and banks if needed. The effect on US markets was that investors were more willing to invest in riskier assets, which helped stocks but hurt bonds and mortgage rates.

The most significant economic report released this week will be Retail Sales on Friday. Retail Sales account for about 70% of economic activity. In addition, the other significant economic data to be released this week will be the minutes from the Federal Reserve’s September 21st meeting on Tuesday, Trade Balance figures on Thursday, and Import Prices and Consumer Sentiment on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. The mortgage markets are closed on Monday for the Columbus Day holiday.

Economic Update

It is amazing how resilient mortgage rates are these days. Despite some nervous moments last week, mortgage rates remain unchanged this week and lower than ever! The first nervous moment last week had to do with Europe. Good news on this front as the financial trouble in Europe is now a little less of a concern as five major central banks, including the European Central Bank and the US Fed, announced that they will offer a lending facility for European banks seeking short-term liquidity. This aid reduced concerns about the region and encouraged some investors to shift money out of the bond market and into the stock market. This initially caused rates to rise before they quickly settled back down.

Bad news to report from last week is that inflation is on the rise.  The August Consumer Price Index (CPI) rose more than expected from July and was 3.8% higher than one year ago. Core CPI, which excludes food and energy, was up 2.0% from one year ago (see graph below). Late in 2010, Core CPI was increasing at just a 0.8% annual rate. The August Core Producer Price Index (PPI) was up an even higher 2.5% from one year ago. With a highly anticipated FOMC meeting on Wednesday, Fed officials must factor in higher inflation levels as they consider additional stimulus measures. These inflation figures seem to be the only thing lurking out there at the moment that could influence rates higher. We’ll know more on Wednesday…..

Mortgage Rates Reach New Lows

Last week’s economic news contained few surprises. Fed Chief Bernanke gave no indication of policy changes and President Obama’s jobs package matched expectations. As a result, mortgage rates slid even further to historic lows. Shockingly, the FHA 30 Year Fixed rate has reached a new low of 3.75%! Its hard to imagine rates going any lower….

The basic issue confronting the US economy at this time is slow economic growth with high unemployment. Both Fed officials and lawmakers would like to boost economic growth, but the challenge is figuring out how to accomplish this. Thursday, Fed Chief Bernanke stated that the Fed will consider additional stimulus at its next meeting on September 21st, but he gave no indication whether the Fed will take action. The consensus view is that additional monetary stimulus from the Fed would have a limited impact on the economy. Fed officials are deeply divided about whether to ease policy to help as much as possible or whether the negative consequences in terms of higher future inflation and financial market distortions are too high a price to pay. Last week alone, two Fed officials publicly stated that monetary policy has little ability to help the job market under current economic conditions, while another official came out strongly in favor of additional monetary stimulus to lower the unemployment rate. In any case, next week’s Fed meeting may end up being a very significant event for mortgage rates. Best to lock in now before someone says something that turns the tide….

Also worth mentioning, lawmakers are faced with the difficult task of weighing the costs and the benefits of different programs to lift the economy. On Thursday, President Obama proposed a $447 billion package of tax cuts and new spending to stimulate the economy and create jobs. The debate next moves to Congress. The government has spent an enormous amount of money over the last few years on stimulus programs, and analysts disagree about their effectiveness. Given the high level of government debt, there is greater resistance now to spending more money for uncertain results.

Slow Growth Leads to Lower Rates

Debt troubles in Europe, worries about the health of European banks, and weaker than expected economic data in the UShave all contributed to an outlook for slower global economic growth.  The reaction from investors has been to shift from riskier assets such as stocks to relatively safer assets such as gold and bonds.  Despite the S&P downgrade of USdebt, USgovernment-guaranteed bonds, including mortgage-backed securities (MBS), have been a primary safe haven for investors.  Last week, 10-yr Treasury yields reached a low of below 2% for the first time since 1945.  Yes, you read that right, 1945!  As a result, MBS prices climbed to new highs and yields to new lows.  This all equates to the lowest mortgage rates of our generation.  It is hard to imagine rates being able to go even lower than current levels.

Adding to the concern of investors, the economic data released last week showed that inflation rose faster than expected in July.  The July Consumer Price Index (CPI) increased 0.5% from June, above the consensus forecast of 0.2%, and was 3.6% higher than one year ago.  Core CPI, which excludes food and energy, soared 1.8% from one year ago (see graph below).  Core CPI was at a level of only 0.8% at the end of 2010.  The July Producer Price Index also increased at a faster than expected pace.  Rising inflation makes the Fed more reluctant to provide additional monetary stimulus.  This inflation data surely prevented mortgage rates from dropping even further last week.

Wild Week for Financial Markets and Mortgage Rates

Last week was a wild week for the financial markets and one of the most volatile ever seen.  Investor uncertainty ran extremely high, amplifying the price movements.  Into a highly charged political and economic environment, a steady flow of significant news added fuel to the flames daily.  It began two Friday’s ago with the announcement that S&P downgraded the credit rating of US debt.  Then, the Fed shocked investors on Tuesday with its statement that it anticipates that economic conditions will call for the Fed Funds Rate to remain exceptionally low through at least the middle of 2013!  That is two years away!  The Fed also downgraded its forecast for economic growth, saying that it will be “considerably slower” than previously expected at the last FOMC meeting on June 22.  Slower economic growth with few signs of higher inflation will make it more difficult for the labor market to recover, but it is a favorable environment for mortgage rates.  To cap the week, a scare ran through the financial markets that European banks, particularly in France, were at risk of failing.  Fortunately, these fears abated quickly.  Investors were comforted by very strong demand for the 3-year and 10-year Treasury auctions, and then were taken aback by extremely poor results for the 30-year auction.  It is not surprising that many financial markets set volatility records last week! 

As a result of the shift of investor funds from the stock to bond markets, bond yields have plummeted as have mortgage rates.  The benchmark Conforming 30 year fixed rate has now reached the 4% level!  Who would have ever thought we would see rates this low?  I have been reading all year about how rates are going to go up and, boy, has the opposite happened!  I looked back and there was only one other time in my lifetime that the Conforming 30 Year fixed was at 4% and that was for a one month stretch last year (Oct 6 – Nov 8, 2010), and even then rates weren’t as low as they are now across the board for all programs.  It seems that we have finally hit the bottom of the bottom.  Historically, when rates move to a new low, like they are now, they don’t stay there too long.  Thus, my recommendation is that if you are in the market for a mortgage, get your rate locked as soon as you can!