In markets across the United States you hear that high home prices and low inventory are slowing things down. It was nice to see the report that almost 300 markets throughout the country registered an increase in economic and housing activity from the first quarter to the second. The CEO of the National Association of Home Builders, which co-authored the study, said, "This report shows that the housing and economic recovery is widespread across the nation and that housing has made significant gains since the Great Recession." Yet we are not at full strength with "the lagging single-family permit indicator."
One answer to the supply shortage was seen in a realtor.com study, which found that 35% of Millennial homeowners are planning to sell their homes in the next year. Another 6% are unsure, but may do so. These are the starter homes that are at the most sought-after price point in today's market. The realtor.com chief economist said, "Our survey data reveals that we may see more of these homes hitting the market in the next year." Increased demand is clearly helping new home sales. The Mortgage Bankers Association reports, "through July, applications for new homes remain up by more than 7% compared to the same period last year."
Review of Last Week
Geopolitical news was dominated by the spat between the U.S. and North Korea over Pyongyang's threats to take action against us. Fortunately, this amounted to nothing more than a war of words, but it provided a convenient excuse for investors to sell and take the profits they made during the recent record-breaking rallies. All three major market indexes finished down for the week, yet the economic data remains decent. Initial jobless claims stayed well under 250,000, while continuing claims fell to 1.95 million. The Producer Price Index (PPI) of wholesale inflation fell 0.1% in July, but is up 1.9% over a year ago.
Consumer inflation is a different story. The Consumer Price Index (CPI) and Core CPI, excluding volatile food and energy prices, each advanced a minuscule 0.1% in July. This is just a 1.2% annual rate, well below the 2% inflation level the Fed wants to see. Friday, the Dallas and Minneapolis Fed Presidents said they'd like to see more progress toward hitting their 2% inflation target before voting for another rate hike. It's worth noting that the Fed funds futures market now shows a 4.1% probability for a September rate cut! This won't likely happen, but it is the first time we've seen the presence of bets on the Fed lowering rates.
The week ended with the Dow down 1.1%, to 21858; the S&P 500 down 1.4%, to 2441; and the Nasdaq down 1.5%, to 6257.
Bond prices were helped by both the low inflation reports and the geopolitical concerns that typically bring investor money into this safe haven. The 30YR FNMA 4.0% bond we watch finished the week UP .06, to $105.47. National average 30-year fixed mortgage rates inched lower in Freddie Mac's Primary Mortgage Market Survey for the week ending August 10. This dropped them to their lowest level in six weeks.
Where are interest rates headed?
This Week’s Forecast
We should see some much needed growth in home building in July with both Housing Starts and Building Permits up. July Retail Sales are expected to rebound into growth territory, showing consumers are back helping the economy. Factories are humming, though expansion should slow a bit by the Philadelphia Fed Index. Finally, FOMC Minutes will reveal the Fed's view of rates at their last meeting.
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 August 14th – August 18th
Aug 15 08:30 Retail Sales
Aug 15 08:30 NY Empire Manufacturing Index
Aug 15 10:00 Business Inventories
Aug 16 08:30 Housing Starts
Aug 16 08:30 Building Permits
Aug 16 10:30 Crude Inventorie
Aug 16 14:00 FOMC Minutes
Aug 17 08:30 Initial Unemployment Claims
Aug 17 08:30 Continuing Unemployment Claims
Aug 17 08:30 Philadelphia Fed Index
Aug 17 09:15 Industrial Production
Aug 17 09:15 Capacity Utilization
Aug 17 10:00 Leading Economic Index (LEI)
Aug 18 10:00 U. of Michigan Consumer Sentiment - Preliminary
Federal Reserve Watch
Speculative Forecasting Federal Reserve policy changes in coming months:
Market sentiment points to no rate hike in September, with a small likelihood for a rate cut. It now looks more certain the rate will hold for the rest of the year.
Note: In the lower chart, a 4% probability of change is a 96% certainty the rate will stay the same.
Current Fed Funds Rate: 1.0%-1.25%
After FOMC meeting on:
Sep 20 1.0%-1.25%
Nov 1 1.0%-1.25%
Dec 13 1.0%-1.25%
Probability of change from current policy:
After FOMC meeting on:
Sep 20 4%
Nov 1 6%
Dec 13 38%
Where are interest rates headed?
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