A couple of weeks ago, the majority of British voters echoed the movie mogul's famous malapropism in their message to the European Union. After this Brexit (British exit) vote, we've seen dramatic ups and downs in the financial markets, but the economic sky has not fallen as was predicted by Chicken Littles here and in the U.K. For us more sanguine types toiling in the housing field, there's even been a wonderful fallout.
National average mortgage rates have dropped post-Brexit, and analysts expect them to head even lower. This is due to investors sprinting to the safety of Treasuries and mortgage bonds, driving prices up and rates down.
Additionally, mortgage rates are expected to stay low as the Fed waits to see whether Brexit was indeed just an acorn, or Chicken Little's piece of sky. Minutes just released from the Fed's June 15 meeting reveal the central bankers felt it prudent to wait on a rate hike decision until after Britain's June 23 referendum. So far, the main results of Brexit are the above-mentioned boost in bond prices and dip in mortgage rates and a drop in the value of the pound, though this last consequence also makes British exports more competitive! But we must stay alert. Those Fed minutes still project two rate hikes this year, albeit before Brexit became a reality.
Review of Last Week
The nonfarm payrolls number surprised big time on Friday, as the Bureau of Labor Statistics reported the U.S. economy added 287,000 jobs in June, more than 100,000 above analyst forecasts. This was the largest jobs gain since last fall, coming on the heels of a recent spate of weak labor market reports. And it signals economic growth, but hold on. Earnings growth was virtually nonexistent, up just 0.1%. Combine this with modest inflation and Brexit uncertainties, and most economists say the Fed won't raise rates just yet. That's good news to Wall Street (and the rest of us!), so the S&P 500 and the Dow ended the week at their highest levels in a year.
As one trader put it, "After today's rally, the Brexit-related selloff looks like a temporary blip." Meanwhile, the economy may not be booming, but at least it's not tanking. We saw evidence of this last week, when the ISM Services index moved up to 56.5 in June, showing decent growth for the sector that represents at least 70% of our economy and an even greater share of our jobs. Amazingly, ISM Services has reported growth (readings above 50) for 77 months in a row. But the trade deficit grew to $41.1 billion in May, $1.0 billion larger than it was a year ago. Finally, new unemployment claims fell by 16,000 for the week and continuing claims dropped to 2.12 million.
The week ended with the Dow UP 1.1%, to 18147; the S&P 500 UP 1.3%, to 2130; and the Nasdaq UP 1.9%, to 4957.
Friday's nonfarm payrolls surprise initially sparked heavy selling in the bond market, but buying resumed when traders realized it will take more than renewed job growth for the Fed to hike rates. The 30YR FNMA 4.0% bond we watch finished the week UP .12, at $107.31. Freddie Mac's Primary Mortgage Market Survey for the week ending July 7 saw national average 30-year fixed mortgage rates drop to new lows for the year, thanks to "continuing fallout from the Brexit vote." Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.
DID YOU KNOW?
In 2015, foreign buyers purchased 214,885 residential properties, up 2.8% from the year before. The fastest growing group of immigrants is Asian, led by Indians who, along with Chinese-Americans, are more likely to own than rent.
This Week’s Forecast
June Retail Sales are expected to slow to a 0.2% growth rate. This is a bit disappointing, since consumer spending drives about 70% of the U.S. economy. At least the prices we pay for most things aren't rising too much. The Consumer Price Index (CPI) and Core CPI, which excludes volatile food and energy prices, are forecast to remain mild. This low inflation rate should keep the Fed from raising rates, as it wants more robust numbers in that department.
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 Jul 11 – Jul 15
Jul 13 10:30 Crude Inventories
Jul 13 14:00 Fed's Beige Book
Jul 13 14:00 Federal Budget
Jul 14 08:30 Initial Unemployment Claims
Jul 14 08:30 Continuing Unemployment Claims
Jul 14 08:30 Producer Price Index (PPI)
Jul 14 08:30 Core PPI
Jul15 08:30 NY Empire Manufacturing Index
Jul15 08:30 Retail Sales
Jul15 08:30 Consumer Price Index (CPI
Jul15 08:30 Core CPI
Jul15 09:15 Industrial Production
Jul15 09:15 Capacity Utilization
Jul15 10:00 Business Inventories
Jul15 10:00 U. of Michigan Consumer Sentiment Index
Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months... The Fed at their last meet talked about a couple of rate hikes this year, but economists aren't buying it. A few even see a rate cut in July, September or November. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.
Current Fed Funds Rate:
After FOMC meeting on:
Jul 27 0.25%-0.5%
Sep 21 0.25%-0.5%
Nov 2 0.25%-0.5%
Probability of change from current policy:
After FOMC meeting on:
Jul 27 1%
Sep 21 7%
Nov 2 7%
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