The big news last week wasn't actually news to anyone, as virtually no one was surprised that the Fed hiked rates a quarter percent at the FOMC meeting, to the range of 1.25%-1.50%.
The Fed's "dot plot," released at the last meeting every quarter, projects three more rate hikes next year. The latest increase was widely seen as reflecting the Fed's confidence in the U.S. economy. Their policy statement said: "the labor market has continued to strengthen" and "economic activity has been rising at a solid rate," plus they revised their GDP growth projection higher.
In fact, GDP has grown at better than 3% for two quarters, job growth is at a 10-year high and unemployment at a 17-year low. In addition, economists say low unemployment means businesses have to pay more for labor, putting upward pressure on wages, and this is good for the housing market. Also good news, national average 30-year mortgage rates went down last week. Truth is, the Fed Funds Rate does not always lead to higher mortgage rates. Economists say it's tied to short-term consumer interest rates, although next year's three projected Fed hikes should nudge mortgage rates higher.
Review of Last Week
Investors were clearly lifted by the prospect that tax-cut legislation would soon be passed by both houses of Congress. The three major stock market indexes closed at record highs, with the Dow and the S&P 500 registering weekly gains for the fourth week in a row. By Friday afternoon, it appeared that Republicans had enough support to pass their tax reform bill, but the final vote will not happen until early this week. Once both the House and Senate vote on the finalized bill, it will go to the President, who has already said it's his intention to sign it before Christmas.
One portfolio analyst noted, "There is definitely a momentum in the market thanks to the prospect of tax cuts, but let's not forget that the economic growth is also pretty good and has been supporting the market all year." More evidence of that growth came last week as Retail Sales shot up in November by 0.8%, following upwardly revised gains of 0.5% in October and 2.0% in September. Retail Sales are now up 5.8% from a year ago. Manufacturing continues to grow steadily, with factory capacity utilization at its highest level since 2008. Plus, both weekly and continuing jobless claims fell for the week.
The week ended with the Dow UP 1.3%, to 24652; the S&P 500 UP 0.9%, to 2676; and the Nasdaq UP 1.4%, to 6937.
It was a mixed week in the bond market, with shorter dated Treasuries down, but the long bond up. The 30YR FNMA 4.0% bond we watch finished the week down just .04, at $104.66. In Freddie Mac's Primary Mortgage Market Survey for the week ending December 14, national average 30-year fixed mortgage rates edged lower, remaining measurably down from a year ago.
Where are interest rates headed?
This Week's Forecast
We get a complete look at the November housing market in a single week. Home building is forecast to slip a tad in both Housing Starts and Building Permits. Likewise, New Home Sales are predicted off for the month. Analysts see Existing Home Sales back up over the 5.5 million annual rate. The GDP - Third Estimate is expected to show economic growth still a solid 3.3%. Core PCE Prices, the Fed's favorite inflation measure, is forecast to barely budge.
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 December 18, 2017 - December 22, 2017
Dec 19 08:30 Housing Starts
Dec 19 08:30 Building Permits
Dec 20 10:00 Existing Home Sales
Dec 20 10:30 Crude Inventories
Dec 21 08:30 Initial Unemployment Claims
Dec 21 08:30 Continuing Unemployment Claim
Dec 21 08:30 GDP - Third Estimate
Dec 21 08:30 Philadelphia Fed Index
Dec 22 08:30 Personal Income
Dec 22 08:30 Personal Spending
Dec 22 08:30 Core PCE Prices
Dec 22 08:30 Durable Goods Orders
Dec 22 08:30 Durable Goods Orders ex-trans.
Dec 22 10:00 New Home Sales
Dec 22 10:00 U. of Michigan Consumer Sentiment - Final
Federal Reserve Watch
Speculative Forecasting Federal Reserve policy changes in coming months:
The consensus on Wall Street is the Fed Funds Rate will hold where it is in January, but there's a good chance we'll see another hike in March, with that one holding in May.
Note: In the lower chart, a 2% probability of change is a 98% certainty the rate will stay the same.
Current Fed Funds Rate: 1.25%-1.50%
After FOMC meeting on:
Jan 31 1.25%-1.50%
Mar 21 1.50%-1.75%
May 2 1.50%-1.75%
Probability of change from current policy:
After FOMC meeting on:
Jan 31 2%
Mar 21 57%
May 2 45%
Where are interest rates headed?
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