Over the past week, mortgage interest rates were pushed and pulled by unusually large movements in global stock markets. The economic data had little impact. After a volatile week, mortgage rates ended just a little higher.
Concerns about slowing global economic growth, particularly in China, caused the U.S. stock market to decline sharply early in the week. However, with stocks at much lower prices, buyers stepped in later in the week, erasing the week’s earlier losses. While the magnitude of the moves were relatively smaller, a similar pattern was seen in mortgage rates. They dropped early in the week and then gave back their improvement later in the week. This relationship between stocks and mortgage rates is common, as investors shift assets between stocks and bonds.
The recent revisions to U.S. Gross Domestic Product, the broadest measure of economic activity, revealed an increase in growth during the second quarter to 3.7% from an original estimate of 2.3%. This follows a much smaller gain of 0.6% during the first quarter. One factor behind the improved performance during the second quarter was a significant increase in inventories. This is unlikely to continue next quarter, however, and early forecasts for the third quarter are for growth below 2.0%.
Next week, the important monthly Employment report will be released 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. Before that, ISM Manufacturing will be released on Tuesday. The ADP Employment Change will come out on Wednesday. ISM Services will be released on Thursday. In addition, there will be a European Central Bank (ECB) meeting on Thursday at which some investors expect ECB officials to discuss a possible need for additional stimulus.
A surprise move in China helped mortgage rates improve early in the week. Stronger than expected U.S. economic data had the opposite effect later in the week. After the offsetting influences, mortgage rates ended slightly higher.
China has long held its currency, the yuan, at a fixed value versus the dollar. On Tuesday, China unexpectedly implemented a policy change which let the value of the yuan drop versus the dollar. Mortgage rates improved on the announcement because investors saw the move as an indication that the Chinese economy is slowing more quickly than expected. If this is true, global inflationary pressure will fall. In addition, US exports to China likely will slow as U.S. goods and services will be more costly, further reducing inflationary pressure. Lower inflation is positive for mortgage rates.
Recent U.S. economic data told a different story about the outlook for inflation. Retail sales account for about two-thirds of U.S. economic activity. The report released Thursday revealed that retail sales rose solidly in July, but this was expected. The surprise was that the disappointing results for June were revised significantly higher. Friday’s report on industrial production, another important indicator of economic activity, also exceeded expectations.
Looking ahead, Housing Starts will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. The Minutes from the July 29 Fed meeting also will be released on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. Existing Home Sales and the Philly Fed regional manufacturing index will come out on Thursday.
economicIs There a Fed Rate Hike in the Near Future?
During the past week, comments from a Fed official increased investor expectations for a Fed rate hike this year, causing mortgage rates to move a little higher. The week’s economic data was mostly right on target and had little net effect.
On Tuesday, Fed member Dennis Lockhart gave investors the impression that the first federal funds rate hike is likely to take place soon. In essence, he said that he believes that a rate hike will be appropriate in September unless the economy significantly underperforms expectations. While other Fed officials may feel differently, investors took this as a warning to be prepared for a rate hike at the next Fed meeting on September 17.
The major economic reports released since Lockhart’s comments showed that the economy remains on track to meet his requirements for a rate hike. Wednesday’s ISM Services data revealed an unexpectedly large increase to the highest level since 2005.
Friday’s Employment data, the biggest report of the month, matched the consensus forecast across the board. The economy continued its pace of strong job gains above 200K with the addition of 215K jobs in July. The Unemployment Rate remained at 5.3%. Average Hourly Earnings, an indicator of wage growth, were 2.2% higher than a year ago.
Preview for the Economy
Looking ahead, we will get more labor market data on Tuesday with the JOLTS report, which measures job openings and labor turnover rates. After that, Retail Sales will be released on Thursday. Since retail sales account for roughly 70% of economic activity, this is one of the biggest reports of the month. Industrial Production, another important indicator of economic activity, will come out on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Overall, we’ll have a better idea of how the economy is looking within the next little bit.
Retail Sales Drop Unexpectedly, Mortgage rates end favorably.
Retail sales were surprisingly sluggish in June, according to a report released Tuesday.
U.S. food and retail sales unexpectedly dipped last month, ticking down 0.3 percent from a strong May in another sign that U.S. economic performance stalled in June.
Retail sales totaled $442 billion in June, up 1.4 percent from a year ago but shy of analysts’ expected 0.2 to 0.3 percent month-over-month growth. May’s originally reported 1.2 percent growth also was revised down to just 1 percent, according to a report released Tuesday by the Census Bureau.
Furniture and home furnishing stores saw a 1.6 percent month-over-month drop, while clothing and accessories stores shed 1.5 percent and building materials and garden equipment and supplies dealers fell 1.3 percent.
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Electronics stores posted the report’s highest month-over-month growth with a mere 1 percent increase. Only five of the 13 major retail categories profiled saw sales increases month over month, including general merchandise stores, gas stations, health and personal care stores and sporting goods, hobby, book and music stores.
“There was weakness in a number of segments in June. Sales of motor vehicles and parts fell 1.1 percent as unit auto sales dropped, although this followed three straight months of solid gains,” Stu Hoffman, chief economist and senior vice president for The PNC Financial Services Group, wrote in a research note Tuesday, calling the overall sales performance “a disappointment.” “Even restaurant sales, which had risen for four straight months, fell in June.”
But the broader year-over-year picture isn’t nearly as bleak. Electronics and appliance stores, gas stations and building material and garden equipment and supplies dealers are the only store categories that have seen sales fall since June 2014. Auto and other motor vehicle dealers saw sales climb 7.1 percent since this time last year, while sales at food services and drinking establishments ballooned 7.7 percent.
Weak gas station sales can almost be written off on a year-over-year basis, considering the report keeps track of the total cost of gas sold and not necessarily the volume. Lower year-over-year gas prices were a surprise to no one.
5 Things to Know About the Economy This Week: 7/10/2015
But June’s relative weakness from May’s stellar report caught more than a few analysts, who were expecting modest gains, off-guard. The soft sales figures serve as another sign that the country’s economic performance has cooled.
The domestic economy created about 223,000 new positions last month, but wage growth was relatively flat and roughly 640,000 people left the labor market altogether. Consumers are unlikely to spend more without receiving more compensation from work, so underwhelming wage gains are unlikely to fuel uncharacteristic shopping sprees anytime soon, which would otherwise bolster sales figures.
And the separate Job Openings and Labor Turnover Survey released last week showed a record number of openings in May but sluggish hiring trends. The so-called JOLTS report also showed relatively weak quits numbers, suggesting workers don’t feel confident enough in the domestic economy to voluntarily leave their jobs and find alternative employment.
U.S. economic confidence in June held steady at a seven-month low, according to a recent Gallup poll. The index had climbed for six straight months in the second half of 2014 before plummeting in 2015. Only 42 percent of respondents said they thought the economy was getting better, while 53 percent said it was getting worse.
Job Openings Reach Record High in Labor Department’s JOLTS Report
A reported 29 percent of respondents described the U.S. economy as “poor,” while only 25 percent would describe it as “excellent” or even “good.”
Still, Hoffman said a soft month of data is unlikely to derail an economy that for all intents and purposes is performing admirably well, especially considering chaotic international backdrops likeGreece’s uncertainty in the eurozone and China’s turbulent stock market.
The country is continuing to add hundreds of thousands of jobs each month and is, generally speaking, in a better place than it was a year ago.
“Despite the June drop in retail sales, consumer spending growth should lead overall economic growth through the rest of 2015,” he said. “The fundamentals for consumers are solid: job growth of better than 200,000 per month, wages that are finally starting to pick up, the big drop in energy prices that has freed up cash to spend on other items, low interest rates to fund purchases of big-ticket items, and gains in household wealth from rising home values and higher stock prices.”
China and Greece Still Left With A Big Question Mark!
Over the past week, U.S. financial markets were influenced primarily by events in China and Greece. Concerns about slower growth in China and increased uncertainty about Greece were both favorable for mortgage rates, which ended the week a little lower.
China is the second largest economy in the world, and it is growing at a much more rapid pace than the U.S. or Europe. This means that China is responsible for a large portion of global economic growth. Recently, investors have become more concerned that the pace of China’s economic growth may be slowing more quickly than expected. Slower global growth reduces expectations for future inflation, which is positive for mortgage rates.
The outcome of Sunday’s Greek referendum was not the expected result. The Greeks voted against accepting the reform measures demanded by creditors in return for additional aid. Greece already is unable to repay its debts, and another large payment is due on July 20. Economic conditions in Greece are worsening. Greek officials and creditors are continuing to negotiate, but it is still not certain whether a deal will be reached. Without a bailout, Greece may be forced to exit the European Union. The uncertainty has increased demand for relatively safer assets, including U.S. mortgage-backed securities.
Looking ahead, investors will be watching for progress in the Greek bailout negotiations and for clues about the pace of economic growth in China. In the U.S., the Retail Sales report will be released on Tuesday. Retail sales account for roughly 70% of economic activity, making this one of the most important reports each month. Industrial Production, another indicator of economic activity, will be released on Wednesday. Housing Starts and the Consumer Price Index (CPI) will come out on Friday. CPI looks at the price change for finished goods which are sold to consumers.
A wide range of reports in the U.S. and Europe over the past week indicated improving economic conditions. Unfortunately, good news for the economy is generally negative for mortgage rates, which moved higher.
Following stronger than expected manufacturing and construction data earlier in the week, Friday’s Employment report exceeded forecasts in nearly every area. Against a consensus forecast of 225K, the economy added 280K jobs in May. The Unemployment Rate did rise to 5.5%, but the increase was due to an unexpectedly large number of people entering the labor force in May, a sign of strength.
Average Hourly Earnings were 2.3% higher than a year ago, exceeding the consensus. The strength in job gains and wage growth raised expectations for future inflation and brought forward the expected timing of the first federal funds rate hike.
The economic data in Europe also was unfavorable for mortgage rates. In particular, the eurozone inflation data released over the past week was higher than expected. Comments from the President of the European Central Bank (ECB) suggested that inflation is expected to continue to increase in the region. Investors are concerned with how the data might influence the bond purchase program of the ECB.
Mixed news about the situation in Greece caused volatility in mortgage rates over the past week. Greece was allowed to defer its debt obligations until the end of the month, allowing more time for negotiations. It’s not clear how close Greek and eurozone officials are to reaching a bailout agreement.
Next week, the JOLTS report, measuring job openings and labor turnover rates, will come out on Tuesday. Retail Sales, which account for roughly 70% of economic activity, will be released on Thursday. The Producer Price Index (PPI), which focuses on the increase in prices of “intermediate” goods and services used by companies to produce finished products, will come out on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Investors will be keeping an eye on the negotiations between Greek and eurozone officials as well.
Mortgage markets generally were quieter than they have been over the last several weeks. The most highly anticipated economic release, the Fed minutes, had little impact. Mortgage rates ended the week a little higher.
The minutes from the April 29 Fed meeting released on Wednesday contained no major surprises. According to the minutes, Fed officials do not expect that economic conditions will justify a federal funds rate hike in June. They attributed weak economic growth during the first quarter to “transitory” factors including bad weather and the West Coast port shutdown. Most investors now are looking for the first rate hike to take place in September or December.
The housing data released this week was mixed. Single-family housing starts in April jumped 16% from March to the highest level since January 2008. By contrast, April existing-home sales fell 3% from March, but they still were 6% higher than a year ago. The median existing-home price was 9% higher than a year ago.
housing starts jump
According to the NAR, a lack of supply is holding back sales activity and pushing home prices higher. Based on this month’s strong data on housing starts, builders, fueled by low rates, may help to alleviate the shortage of available homes.
Next week, Durable Orders, an important indicator of economic activity, will be released on Tuesday, along with New Home Sales. Pending Home Sales will be released on Thursday. Revisions to first quarter GDP will come out on Friday. Treasury auctions will take place on Tuesday, Wednesday, and Thursday. News about Greece also could have an influence on global bond yields. Mortgage markets will be closed on Monday in observance of Memorial Day.
American consumers are not behaving as economists predicted they would.
Retail sales unexpectedly barely budged in April following a revised 1.1 percent gain in March that was larger than previously estimated, Commerce Department figures showed Wednesday in Washington. Instead of spending the windfall from lower gasoline prices and rising employment, households are socking it away.
The inability to sustain a rebound in purchases casts doubts on how soon Federal Reserve policy makers will be able to raise interest rates. Central bankers need to be convinced that growth is gaining momentum before risking an increase in borrowing costs that could further slow the consumer spending that accounts for almost 70 percent of the economy.
“The economy needs to pick up steam for the Fed to be really satisfied that we’re leaving the weakness of the first quarter behind us,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, who projected sales would be unchanged and is the top-ranked forecaster for retail purchases over the past two years, according to data compiled by Bloomberg. “This puts a lot of pressure on the next month’s number to be very strong to make up for the weakness in April.”
Stocks fluctuated, after equities pared earlier gains, amid corporate deal activity and the weaker-than-forecast retail sales data. The Standard & Poor’s 500 Index rose 0.1 percent to 2,102.06 at 10:56 a.m. in New York.
The median forecast of 88 economists surveyed by Bloomberg called for a 0.2 percent gain in April retail sales. Estimates ranged from a decline of 0.5 percent to an advance of 1 percent. The March figure was previously reported as an increase of 0.9 percent.
Another report Wednesday showed the cost of foreign-made goods unexpectedly dropped 0.3 percent in April as the relatively strong dollar held down expenses for such things as food and automobiles. The decrease in the import-price index compared was a 0.3 percent gain that was the median forecast of economists surveyed by Bloomberg.
Non-fuel imports were 2.3 percent cheaper over the past 12 months, the biggest year-to-year decline since October 2009. The costs of foreign vehicles fell 1.9 percent over that period, the biggest drop since data began in 1981.
Seven of 13 major categories showed gains, led by restaurants and bars and online merchants, the report showed. A tiny advance among miscellaneous stores tipped the balance in favor of gainers.
The dour tone of the report was reinforced by declines among discretionary items such as automobiles, furniture and electronics. Demand at grocery stores, service stations and general merchandise retailers also declined. The latter category includes department stores, which saw their biggest drop in purchases since January 2014, when snow blanketed much of the U.S.
Sales declined 0.4 percent at automobile dealers, after jumping 2.9 percent the previous month.
Industry data from Ward’s Automotive Group issued earlier this month showed cars and light trucks sold at a 16.5 million annualized rate in April, down from 17 million the prior month.
General Motors Co.’s April sales exceeded projections while gains at Ford Motor Co., Toyota Motor Corp., and Nissan Motor Co. were less than predicted. With gasoline prices down by almost a third from a year ago, demand for large and luxury sport utility vehicles is soaring.
Retail sales excluding autos increased 0.1 percent, the Commerce Department report showed. They were projected to rise 0.5 percent, according to the Bloomberg survey median. It followed a 0.7 percent advance in March that was larger than previously estimated.
The figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores and service stations, was little changed after a 0.5 percent increase in the previous month in the so-called control group that was larger than previously estimated.
The upward revisions to most categories for March were a saving grace for the otherwise disappointing figures for April, and indicate consumer spending in the first quarter will be stronger than previously estimated.
Unusually harsh winter weather was blamed for some of the slowdown in retail sales in the early part of 2015, when delays related to a West Coast port dispute also held back other economic activity. The economy barely grew in the first quarter, with GDP advancing at a 0.2 percent annualized rate.
Household consumption expanded 1.9 percent in the January through March period, according to Commerce Department data issued last month.
Economists may mark down estimates for this quarter after the retail sales figures. Consumer spending was projected to accelerate to 3.5 percent in the April through June period, according to the median forecast of economists surveyed by Bloomberg in April.
Since it’s still early in the quarter, some economists are more sanguine.
“It’s too early to add up the quarter based on one disappointing number,” Jim O’Sullivan chief U.S. economist at High Frequency Economics in Valhalla, New York, said before the report. “The job market is improving. Wage income is growing. Wealth has been generally rising, that’s a plus on top of wage income growth.”
First-quarter results showed the saving rate climbed to 5.5 percent, the highest since the end of 2012. Disposable income adjusted for inflation rose at a 6.2 percent annualized rate, the most in more than two years, according to the Commerce Department figures.
The labor market continues to provide the wherewithal for Americans to spend. Payrolls bounced back in April with a 223,000 increase following a 85,000 gain the prior month, and the jobless rate fell to 5.4 percent, the lowest since May 2008, according to Labor Department data.
Wage gains remain steady at relatively low levels. Hourly pay was up 2.2 percent in April from a year earlier, holding within the narrow range tracked over the past four years.
Improving home sales and demand for remodeling-related materials bode well for companies such as Sherwin-Williams Co., the largest U.S. paint retailer.
“We remain optimistic that U.S. residential demand for architectural paint will continue to strengthen as we move into the prime painting season,” Chris Connor, chief executive officer, said during an April 16 conference call with analysts. Sherwin-Williams predicted second-quarter sales may rise as much as 8 percent, and reiterated its full-year earnings forecast.
Yellen Is Watching These Four Indicators for Signals on When to Raise Rates
The Three Most Important Things Janet Yellen Said
Forget the Federal Open Market Committee’s pledge to be “patient” in raising rates from near zero. Forget “considerable time” and unemployment “thresholds.”
The new buzzword at the Federal Reserve is “reasonably confident.”
That’s the phrase Chair Janet Yellen and her colleagues at the Fed used in the statement this week to describe their need to feel pretty sure that inflation is on the way back to their 2 percent target before liftoff.
In her press conference on March 18, Yellen laid out the markers for what “reasonably confident” means. While “I don’t have a mechanical answer for you,” there are four targets that matter.
1. Jobs, jobs, jobs
Labor markets need to continue to improve. “A stronger labor market with less labor market slack is one factor that would tend to, certainly for me, increase my confidence,” Yellen said.
One key measure of slack is the unemployment rate, which was 5.5 percent in February. The FOMC this month lowered its estimate of longer-term unemployment to 5-5.2 percent. That is a kind of speed limit at which further declines would push up inflation as the stronger hiring spurs faster wage gains. So the labor market has a little further to run before officials expect to see wages rise.
2. Core inflation
Inflation without the food and energy components needs to stabilize. “We expect inflation to remain quite low because of the depressing influence of energy price declines and the dollar,” Yellen went on. “We will be looking at the inflation data carefully” to discern what’s happening beyond those short-term influences.
In other words, a stabilization or rise in core prices, excluding food and energy, might have more weight than the actual headline price data.
3. Wage growth
Wages need to break out of their slump. “We will be looking at wage growth” as a signal of inflation though “I wouldn’t say either that that is a precondition to raising rates.”
There is plenty of anecdotal evidence from the likes of Target Corp. and Wal-Mart Stores Inc., for example, that wages are edging higher. Yet there’s not much support in the data. Average hourly earnings rose just 2 percent over the past year through February. That is in line with the average since the recession ended in June 2009.
4. Inflation expectations
What households and investors expect inflation to be in the future has to rise a bit. “We’ll be watching inflation expectations.” For one thing, “market-based measures” of expectations are too low. “If they were to move up over time, that would probably serve to increase my confidence.”
The measure that looks at inflation expectations five years from now fell as low as 1.75 percent in January. A move back to 2 percent would add to confidence.