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| Indecisive Markets and Mortgage Rates November 2, 2007 -- Credit markets had trouble deciding whether the economy is weakening, holding on, or getting better this week. As a result, 30-year fixed mortgage interest rates bounced around, but ended the nation's leading survey of mortgage prices with a decline of two basis points (.02%). Hybrid 5/1 ARMs went the other direction, rising by four basis points, closing the survey week at 6.26%.
Interested observers can follow HSH's daily mortgage averages here. Much of the economic data released this week seemed to be at odds with conventional wisdom and even seem conflicting at times. On the one hand has been the ongoing sage of credit market crises, which at last look have seemed to be bleeding into other areas of the economy. Manufacturing is hoped to pick up the slack from very challenged consumer markets, and the weak dollar should be powering exports higher. What then should be made of the softer report from a Chicago-area purchasing managers group, whose index slipped below the level which denotes expansion during October? That said, a local New York-area survey did reveal a minor upward blip in October, a small improvement after five consecutive months of declines, but that was overshadowed by the soft and much wider-ranging report from the Institute for Supply Management, whose index of activity closed October just barely on the expanding side of a breakeven level. At a 50.9 mark, the ISM survey found that just the barest whisper of growth is occurring, and there has been decided downshift in activity since June.
About 180 degrees opposite that came a very good report which covers the sum of the nation's output for the third quarter, the advance Gross Domestic Product report. With all of the issues during the summer, GDP was reckoned to have expanded at just a moderate 3% clip, a slowdown from the 3.8% level noted in the second quarter. Instead, the report revealed growth moving at a 3.9% pace for the third quarter, well above forecasts. As well, the level of inflation measured in the GDP report - price pressures certainly on the minds of Federal Reserve members -- decelerated from the second quarter to the third, sliding from an increase of 4.3% to just 1.7% during the most recent period. While the 'core' measure of inflation did tick higher during the third quarter, its 1.8% reading still keeps in within what is thought to be the Fed's comfort zone. Price worries were also at the forefront of the Fed's message which accompanied this week's cut in short-term interest rates. While trimming both the Federal Funds and Discount rates a quarter-percentage point, they took pains to note that "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation" and left the distinct impression that no additional rate cuts are planned at present. After all, if "the upside risks to inflation roughly balance the downside risks to growth", as they said, there is little reason to need to trim interest rates. If not for the relentless pressure of financial markets, it does seem likely that the Fed would have preferred not to cut interest rates. Growth at 3.9% in the most recent quarter and record high oil prices are usually the kinds of numbers which see increases in short-term rates, not decreases. Amid on-going concerns about liquidity and worries that even tighter lending standards may hit the market, the Fed's move this week (just as last time) represents a decline in input credit costs for lenders and financial firms, which in turn should help make lending more profitable and help keep lending windows open. New profitable lending opportunities can provide some offset for bad loans already on lender books.
Any worries about rising compensation sparking wage-led inflationary pressures were allayed by the latest Employment Compensation Index (ECI), a gauge of the total cost of keeping an employee on the books (wages and benefits included). The ECI eased by one-tenth percent to an increase of just 0.8% for the third quarter, so rising prices in the general economy have not yet fueled demands for higher wages. Over the past year, wage and benefit costs have risen 3.3% and 3.2% respectively. Personal Incomes and spending expanded mildly during September, with incomes growing by 0.4% and spending moving just 0.3% ahead. With more income and less spending, the nation's rate of saving picked up and stands at 0.9% for the month. Construction spending closed out the third quarter on a positive note, rising by 0.3%. All of the increase was non-residential and government-led spending, as spending for residences slumped yet again, this time falling by 1.4%. Over the past year, spending on homebuilding has slumped by almost 17%, and by this time last year, markets were already weakening, and there's little reason to expect measurable improvement anytime soon. Measures of consumer attitudes have been battered down in recent months. In October, the Conference Board's measure of Consumer Confidence again moved lower, and the downshift to a reading of 95.6 was well below expectations and accelerates a four-month downdraft. The weekly ABC News/Washington Post poll of Consumer Comfort continues to bob around in fairly negative waters, but moved two ticks higher to -15 during the week of October 28. Perhaps the biggest surprise came from the nation's labor markets. In recent weeks, claims for new unemployment benefits have been pretty steady, if somewhat more elevated than those seen in September. During the week ending October 27, some 327,000 new applications for benefits were filed at state windows. Given the troubles evident in financial and housing markets, weak hiring was expected to have happened in October, with perhaps 85,000 new jobs created. However, a most unexpected 166,000 new jobs were created during the month, and the nation's unemployment rate held steady at 4.7% for the period.
So, job growth is occurring, economic growth is presently estimated at 3.9%, and we're waiting for the inflationary effects of $95-per-barrel oil... and the Fed is cutting interest rates. These are very conflicting signals, indeed, so it's little wonder that markets are unsure which direction to move in. A rally in stocks after the Fed move gave way to a rout just a day later; longer-term underlying interest rates moved higher after the Fed move, but turned decidedly lower by week's end. Given the whipsaw nature of the markets at the moment, it's hard to get a clear sense of what will happen to mortgage rates next week. There are a handful of fairly prominent economic reports due next week, too, but the question is whether they buttress the "weaker" or "stronger" arguments laid out in this week's data. At least at the moment, the economic disappointment seen this week should tilt rates a little bit lower next week, but that may turn on a dime without warning. If you've got an opinion on who should fix the mortgage mess, why not take our survey and let us know how you feel? For more in-depth commentary, see our latest two-month forecast. And for today's top stories, see our daily news column. |  | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President Copyright 2007, HSH® Associates, Financial Publishers. All rights reserved. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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