Inside Lending - November 21, 2016
The surprises, they keep on coming. The week before last, the nation faced the biggest election surprise in history, and since this is the first time the leader of the free world will be a real estate tycoon, last week's surprise seemed to fit right in.
Housing starts shot up and incredible 25.5% in October, to a 1.323 million annual rate, the fastest pace in nine years. This gain totally offset the drop in September. The two month average of 1.189 million starts is likely close to the underlying trend.
Home building activity is indeed volatile, but October's 25.5% spike was still the largest monthly percent gain in more than 30 years.
The single family part of the market zoomed ahead by 10.7% for the month and now sits 21.7% above where it was a year ago. October's rate represented a sizable increase, it's still well below the 1.5 million units a year housing analysts are looking for. The chief economist at an online listing site said, "housing starts are only about 66% of their 50 year average" (adjusting for the number of U.S. households.) He added, "Clearly, the home building sector represents an industry that has potential to grow." Building permits in October hit a 1.229 million annual rate, up 0.3%. And just think, now we'll have a licensed broker in the Oval Office.
Review of Last Week
Stocks saw their second straight week of post-election gains, bringing the S&P 500 into what one analyst called "the neighborhood of its record high." Nice neighborhood, that. Why this strong uptrend in the market after Donald Trump's surprise Presidential victory? Analysts say many investors feel Trump's policy proposals could spur our economy back to the growth rates we once enjoyed. That would mean more jobs and higher wages. It could also mean inflation and higher interest rates. But a little inflation is okay if people are making more money and the Fed is only talking about hiking by a quarter percent, then sitting on that for a while.
For now, almost no one sees the economic recovery reversing, just continuing to plod slowly ahead. This was documented last week by the usual mixed bag of reports. We received the terrific Housing Starts data covered above, joined by Retail Sales climbing 0.8% in October. But manufacturing still falters, with production flat and capacity down a bit. The Consumer Price Index (CPI) is up 1.6% annually, but wages need to keep up with that price inflation and, unfortunately, cash earnings of all workers are up only 1.2% the past year. Initial Unemployment Claims fell to 235,000 and Continuing Claims finally came in under the two million level.
The week ended with the Dow UP 0.1%, to 18868; the S&P 500 UP 0.8%, to 2182; and the Nasdaq UP 1.6%, to 5322.
Over in the bond market, prices continued losing ground, with Treasuries leading the way down. This then pushed yields and interest rates up. The 30YR FNMA 4.0% bond we watch finished the week down .72, at $105.50. National average 30-year fixed mortgage rates moved higher in Freddie Mac's Primary Mortgage Market Survey for the week ending November 17.
This Week’s Forecast
Reports on October Existing Home Sales and New Home Sales are expected to reveal some slippage, though not a lot. The other thing to watch is Wednesday's release of the FOMC Minutes from the Fed's last meeting. We will look for more indications of their now widely expected December rate hike.
The stock and bond markets are closed on Thanksgiving and close early Black Friday.
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 Nov 21 – Nov 25
Nov 22 10:00 Existing Home Sales
Nov 23 08:30 Initial Unemployment Claims
Nov 23 08:30 Continuing Unemployment Claim
Nov 23 08:30 Durable Goods Orders
Nov 23 10:00 New Home Sales
Nov 23 10:00 U. of Michigan Consumer Sentiment
Nov 23 10:30 Crude Inventories
Nov 23 14:00 FOMC Minutes
Federal Reserve Watch
Speculative Forecasting Federal Reserve policy changes in coming months:
Fed Chair Janet Yellen's testimony last Thursday before Congress made more that 9 out of 10 economists feel certain we'll see a rate hike from the central bank next month.
Note: In the lower chart, a 95% probability of change is only a 5% certainty the rate will stay the same.
Current Fed Funds Rate: 0.25%-0.5%
After FOMC meeting on:
Dec 14 0.5%-0.75%
Feb 1 0.5%-0.75%
Mar 15 0.5%-0.75%
Probability of change from current policy:
After FOMC meeting on:
Dec 14 95%
Feb 1 96%
Mar 15 96%
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