Hurricane damage continues to appear in the housing market. The latest example, last week’s report that New Home Sales dropped 3.4% in August to a 560,000 unit annual rate. This monthly glitch sent sales 1.2% below where they were a year ago. New home sales are counted at contract signing, not closing and it’s likely Hurricane Harvey delayed many buyers ready to sign in August. It’s expected Hurricane Irma will have a similar effect on September’s numbers. The Census Bureau say areas hit by the storms accounted for 14% of single-family homes authorized in 2016.
August’s Pending Home Sales measure of contract signings on existing homes showed similar storm damage, slipping 2.6%. This points to a September sales skid, although analysts expect a Q4 rebound. A National Association of Realtors survey reports - the share of homeowners who say now is a good time to sell hit 80%, a new high; the share of renters who think now is a good time to buy went from 52% in Q2 to 62% in Q3; and the share of households who feel the economy is improving grew to 57%, from 48% a year ago. The chief economist noted, “the typical household looks as healthy as it’s been since the recession.”
Review of Last Week
The long-awaited tax reform announcement from President Trump’s administration contained the anticipated features of significantly lower taxes for corporations and the middle class. The proposal promises to grow businesses and jobs, especially small businesses that support the majority of our payrolls and to boost consumer spending which drives 70% of our economy. Wall Street felt this bodes well for faster economic growth, so stocks went higher. The three major indexes scored weekly, monthly and quarterly gains, with the S&P 500 hitting its 39th record high this year, and the Nasdaq posting its 50th new benchmark.
Even though lower taxes are not yet the law of the land, the economy steadily improves. The final GDP read showed economic growth in Q2 “exploded,” as one report put it, to a 3.1% annual rate. We also had the Chicago PMI showing Midwest manufacturing surged in September, while the Philadelphia Fed index reported a similar boost in manufacturing activity in that region. Durable Goods Orders rose 1.7% in August. Personal Income and Personal Spending also improved. The Fed’s favorite measure of inflation, Core PCE Prices, went up only 0.1% in August and is up just 1.3% the past year, a long way from the central bankers’ 2% inflation target.
The week ended with the Dow UP 0.2%, to 22405; the S&P 500 UP 0.7%, to 2519; and the Nasdaq UP 1.1%, to 6496.
It was a down week again in the bond market as Fed Chair Janet Yellen gave a speech Tuesday that bolstered expectations for a December rate hike. The 30YR FNMA 4.0% bond finished the week down .09, at $105.22. National average 30-year fixed mortgage rates were unchanged from the week before in Freddie Mac’s Primary Mortgage Market Survey for the week ending September 28.
Where are interest rates headed?
This Week’s Forecast
Monday we get the ISM Index of manufacturing activity for September. That sector continues to strengthen with the read predicted to stay well north of 50, indicating solid expansion. The services sector, which generates most of our jobs, should also look good, with the ISM Services Index forecast well above 50. Friday’s September Employment Report is expected to deliver a smaller Nonfarm Payrolls number, thanks to Irma’s impact on the major Florida market. Hourly Earnings should keep creeping up.
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 October 2th – October 6th
Oct 2 10:00 ISM Index
Oct 4 10:00 ISM Services Index
Oct 4 10:30 Crude Inventories
Oct 5 08:30 Initial Unemployment Claims
Oct 5 08:30 Continuing Unemployment Claims
Oct 5 08:30 Trade Balance
Oct 6 08:30 Average Workweek
Oct 6 08:30 Hourly Earnings
Oct 6 08:30 Nonfarm Payrolls
Oct 6 08:30 Unemployment Rate
Federal Reserve Watch
Speculative forecasting Federal Reserve policy changes in coming months:
The Fed futures market is still looking for a quarter percent rate hike in December but nothing more come January.
Note: In the lower chart, a 2% probability of change is a 98% certainty the rate will stay the same.
Current Fed Funds Rate: 1.00%-1.25%
After FOMC meeting on:
Nov 1 1.00%-1.25%
Dec 13 1.25%-1.50%
Jan 31 1.25%-1.50%
Probability of change from current policy:
After FOMC meeting on:
Dec 13 78%
Jan 31 78%
Where are interest rates headed?
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