Tuesday, July 16, 2013

The Amateur Economist Report by Justin Thayer 07/16/2013

Some see the recent rise in mortgage rates as a difficulty, but the latest Fannie Mae National Housing Survey posits a different point of view. Their chief economist says: "The spike in mortgage rate expectations this month...may increase housing activity in the near term by driving urgency to buy." He explains: "Consumers may recognize that today's still favourable mortgage rates and home ownership affordability levels will recede over time.... More prospective home buyers may be deciding that now is the time to get off the fence."

The share of survey respondents who believe mortgage rates will increase hit a record high 57%. And the share who believe home prices will go up in the year also came in at a record 57%. So guess what? 72% of respondents believe now is a good time to buy! Rates may ease anyway. The current rise was attributed to the Fed's announcement it could begin tapering its bond purchases as soon as September. This sent bond prices down and mortgage rates up. But last week, comments from the Fed Chairman, reported below, implied the tapering is off. 
The Dow and S&P 500 both ended the week at all-time highs, while the Nasdaq, ahead seven sessions in a row, enjoyed its longest winning streak in two years. Observers credited these blow out performances to remarks from Bernanke. The minutes from the last Fed meeting had left investors worried because some central bankers feel a tapering of their bond purchases could happen "soon." But laterthe Chairman clearly stated: "Highly accommodative monetary policy for the foreseeable future is what's needed." He said low inflation and high unemployment mean the Fed needs to press on with its stimulus.

Stimulus, of course, means the Fed's $85 billion a month bond buying spree and rock-bottom Federal Funds Rates. All of this is good for business, while the Fed's mortgage bond purchases keep those prices up and mortgage rates down. Bernanke was so successful in relieving investors' fears, that they basically ignored the economic data that missed estimates. PPI wholesale inflation ran hotter than expected in June and Michigan Consumer Sentiment slipped below expectations for July. New weekly jobless claims were up 16,000, to 360,000, and continuing claims went up 24,000, to 2.98 million.

The week ended with the Dow up 2.2%, to 15464; the S&P 500 up 3.0%, to 1680; and the Nasdaq up 3.5%, to 3600. 
Bond prices recovered last week on the disappointing economic data and Bernanke's comments. The FNMA 3.5% bond we watch ended the week up 1.77, to $100.08.According to Freddie Mac's Primary Mortgage Market Survey, national average mortgage rates continued to trend higher for the week ending July 11. This was based on market speculation that the Fed will reduce future bond purchases. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up to the minute information. Rates are still at attractive levels.
This week should show that consumers continue to do their part to help the recovery, with Retail Sales predicted up a healthy 0.7% for June. That month'sConsumer Price Index should indicate inflation still under control.  

Builders continue to boost the housing recovery, with Housing Starts expected up again for June and Building Permits predicted to hit a 1 million unit annual rate. Things aren't quite so copacetic on the factory scene, with both the NY Empire and Philadelphia Fed Manufacturing Indexes off for July, though still showing expansion.

>> The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates. 

Economic Calendar for the Week of July 15 – July 19
 DateTime (ET)ReleaseForConsensusPriorImpact
M
Jul 15
08:30Retail SalesJun0.7%0.6%HIGH
M
Jul 15
08:30NY Empire Manufacturing IndexJul3.67.8Moderate
M
Jul 15
10:00Business InventoriesMay–0.1%0.3%Moderate
Tu
Jul 16
08:30Consumer Price Index (CPI)Jun0.3%0.1%HIGH
Tu
Jul 16
08:30Core CPIJun0.2%0.2%HIGH
Tu
Jul 16
09:15Industrial ProductionJun0.3%0.0%Moderate
Tu
Jul 16
09:15Capacity UtilizationJun77.7%77.6%Moderate
W
Jul 17
08:30Housing StartsJun958K914KModerate
W
Jul 17
08:30Building PermitsJun1000K974KModerate
W
Jul 17
10:30Crude Inventories7/13NA–9.874MModerate
W
Jul 17
14:00Fed's Beige BookJulNANAModerate
Th
Jul 18
08:30Initial Unemployment Claims7/13348K360KModerate
Th
Jul 18
08:30Continuing Unemployment Claims7/62.950M2.977MModerate
Th
Jul 18
10:00Philadelphia Federal IndexJul5.312.5HIGH
Th
Jul 18
10:00Leading Economic Indicators (LEI)Jun0.3%0.1%Moderate