We may be able to do anything, but some things are more difficult than others. Take predicting when the Fed will next hike rates. Even Fed members can't forecast their own actions. San Francisco Fed President John Williams told Reuters: "There is definitely a data stream that could come through in the next couple of months that I would think would be supportive of two rate increases." He added:
"There's data we could get that wouldn't be supportive of that and it could be supportive of one maybe, or of none." By the way, the majority of economists are betting on "none." Then again, the Fed, like we, can do anything.
What's not doing much is the economy, expanding only 1.2% in Q2. The National Association of Realtors chief economist said this "shows the economy barely above water...the third consecutive quarter of near 1% growth, as opposed to the historical long term average of 3%." He thinks housing has an answer: "More homes need to be built and that in turn will lead to faster economic growth." Hope also came from Freddie Mac's CEO who said 42% of non-refinance purchase loan buys they made in Q2 were to fund loans to first time homebuyers, the highest level in 10 years. But with no home to sell, first timers aren't helping supply. Can't do everything.
Review of Last Week
Friday's July Employment Report gave us all an upside surprise, coming in with 255,000 new Nonfarm Payrolls for the month, plus 18.000 more jobs thanks to upward revisions to May and June numbers. We also saw Hourly Earnings up 0.3% in July, and up 2.6% over a year ago. This was good stuff, but not so good that investors thought the very cautious Fed would be moved to hike rates in September. So the S&P 500 hit an all-time high, scoring its fifth weekly gain in the last six weeks. The tech-heavy Nasdaq also closed the week at an all-time high, its first record in more than a year, while the blue-chip Dow ended ahead as well.
One analyst explained that while the July jobs numbers were good, they hadn't reached "escape velocity." By that, he meant a level that would show enough economic strength to let the Fed hike. He said 150,000 new jobs a month takes care of population growth, while economic growth is indicated above that figure. And wage growth needs to be 3% annually in order to push inflation up to where the Fed wants it. Other news of the day included the June Trade Deficit jumping 8.7%, to $44.5 billion, a 10-month high. Earlier in the week we saw both ISM Manufacturing and ISM Services indexes dipping in July, though still showing slow expansion.
The week ended with the Dow UP 0.6%, to 18544; the S&P 500 UP 0.4%, to 2184; and the Nasdaq UP 1.1%, to 5221.
As usual, the good jobs report was bad for bonds, sending Treasury prices down sharply. The 30YR FNMA 4.0% bond we watch finished the week down .03, at $107.14. In Freddie Mac's Primary Mortgage Market Survey for the week ending August 4, national average 30-year fixed mortgage rates fell back near their yearly lows after inching up for three weeks. This was put to "a disappointing advance estimate for second quarter GDP." Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.
This Week’s Forecast
It's a light week for economic data, with the big report being Retail Sales, forecast up again in July though not by as much as June. The Producer Price Index (PPI), gauging wholesale price inflation, is expected to be at a standstill in July. But Core PPI, which excludes volatile food and energy prices, is predicted up, though less than it was in June. We watch wholesale price inflation because it's often a leading indicator of consumer price inflation. And that's what the Fed wants to see more of before it raises rates.
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 Aug 8 – Aug 12
Aug 9 08:30 Productivity - Prelim.
Aug 9 08:30 Unit Labor Costs
Aug 10 10:30 Crude Inventories
Aug 10 14:00 Federal Deficit
Aug 11 08:30 Initial Unemployment Claims
Aug 11 08:30 Continuing Unemployment Claims
Aug 12 08:30 Producer Price Index (PPI)
Aug 12 08:30 Core PPI
Aug 12 08:30 Retail Sales
Aug 12 10:00 Univ. of Michigan Consumer Sentiment
Aug 12 10:00 Business Inventories
Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months... Well, this week a few more Fed watchers think the central bank will hike the rate in November or December, but the majority still say it stays where it is through the end of the year. Note: In the lower chart, a 15% probability of change is an 85% certainty the rate will stay the same.
Current Fed Funds Rate: 0.25%-0.5%
After FOMC meeting on:
Sep 21 0.25%-0.5%
Nov 2 0.25%-0.5%
Dec 14 0.25%-0.5%
Probability of change from current policy:
After FOMC meeting on:
Sep 21 15%
Nov 2 15%
Dec 14 43%
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Nations Reliable Lending, LLC
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