Mortgage interest rates increased slightly on the week on mixed economic data. Economic data stronger than expected included the July Consumer Confidence Index, June Durable Goods Orders, the June U.S. Trade Deficit, and the University of Michigan Consumer Sentiment Index. Economic data weaker than expected included June Existing Home Sales, the May FHFA House Price Index, the May Case Shiller Home Price Index, June New Home Sales, weekly jobless claims, the Q2 price index, and the Q2 employment cost index. The first look at Q2 GDP was in line with expectations, up 2.6%. As expected, the Fed left the Fed Funds rate unchanged after its FOMC meeting. The Fed indicated that inflation is unlikely to reach its 2.0% target for the medium term. The Treasury auctioned $88 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes, which were met with strong demand.
The Dow Jones Industrial Average is currently at 21,780, up about 200 points on the week. The crude oil spot price is currently at $49.69 per barrel, up over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s Chicago Purchasing Managers Index and Pending Home Sales Index, Tuesday’s Personal Income and Outlays, ISM Manufacturing Index, and Construction Spending, Wednesday’s ADP Employment Report, Thursday’s Jobless Claims, Factory Orders, and ISM Services Sector Index, and Friday’s employment report for July and International Trade as potential market moving events.
Events are moving fast, this account timestamped mid-afternoon Friday.
The economic news is excellent. The other news is not.
The first estimate of second-quarter GDP arrived this morning, plus 2.6% annualized. Q1 was revised down from 1.4% to 1.2%. Add the two quarter results together, divide by two, and we have 1.8% annualized growth in the first half. Nothing wrong with that, especially if the rest of the year follows Q2 upward. And add a little Kentucky windage: there is a mountain of evidence that Q1 GDP has been under-reported in each of the last several years. Thus the economy is very close to the Fed’s 2% growth forecast.
Inflation is still under-performing, but hardly bad news. There is no repeat of the fearful prospect of deflation in 2001-2002, or 2008-2012. Core inflation in 2016 was revised down from 1.6% to 1.5%, and is running close to that in 2017. With inflation so low it’s impossible to expect wages to be growing steeply, and they are not. The Employment Cost Index, a very broad gauge including benefits is running 2.4% year-over-year. A net after-inflation annual gain of 1% is hardly exciting, but it’s real money.
A caution to all: an economic time like this, in which central banks and markets seem distant from normal patterns, and all cyclical road markers are painted over is an invitation to creative analysis. Not necessarily deceitful, but distorted. A new analysis from Seeking Alpha, a respected outfit announces a slowing housing market and deteriorating overall economy. Its advice to avoid stocks of homebuilders may be wise (I have no idea), but the analysis itself is sixteen pages of distortion. No need to read the copy, just look at the pictures here — a succession of economic charts, each one marked-up by the author as a dangerous downtrend. See for yourself — each chart is truly flat, wobbling across baseline, trendless and exactly what we should see in a 2% economy.
New and good economic news today… and markets are dead. Stocks wandered upwards early in the week on strong earnings news and a benign Fed meeting. With 34% of S&P 500 stocks reporting, 78 percent have beaten expectations on the bottom line and 73 percent have topped on sales. Today markets are as unchanged as unchanged gets. A new North Korean missile test this morning indicated enough range to reach anywhere in the US, and still no change in markets.
It is summer, this weekend is lease-turnover in the Hamptons, bigshots headed to their half-million-for-August rentals, so maybe that’s it. Can’t be bothered to trade while rounding up the nannies and the helicopter.
But there is more to it than that. This week began with the president’s daily effort to bully Sessions from office. Then on Tuesday, of 52 Republicans in the senate, nine voted against McConnell’s secret Obamacare repeal-and-replace, and seven voted against complete repeal. More senators would have voted against both measures, but as they were already dead, senators instead voted “aye” to seek cover from angry bases at home. Also on Tuesday the president spoke to the Boy Scout quadrennial jamboree, turning it into a Nuremburg rally for which the chief of scouts yesterday apologized to all scouts and the nation. On Wednesday without consultation with congress, cabinet or military chiefs came another tweet, banning transgender people from the military.
Yesterday, holy cow… the new White House director of communications, Scaramucci, revisited the flight of Icarus to the sun, an entire career burnt out in four days. Then in the senate last night into wee hours, despite presidential bullying of Alaska’s Lisa Murkowski and the veep’s wheedling and McConnell’s alleged parliamentary skill, played out the spectacle of aimless voting on Obamacare and the ultimate demise of “skinny repeal.” John McCain with perhaps months to live put the wooden stake into the proceedings.
Also yesterday, more importantly, Republican senators (Sasse, Graham, Grassley…) flipped from their grim and silent tolerance of the president to make clear that they will not tolerate the removal of Sessions or Mueller, nor allow the Justice Department to be highjacked to Trump’s personal benefit.
The Republican break with the president is underway. The NYT’s token Republican on its Op-Ed pages opened his column this way:
“Donald Trump’s campaign against his attorney general, Jeff Sessions, in which he is seemingly attempting to insult and humiliate and tweet-shame Sessions into resignation, is an insanely stupid exercise. It is a multitiered tower of political idiocy, a sublime monument to the moronic, a gaudy, gleaming, Ozymandian folly that leaves many of the president’s prior efforts in its shade.”
Depending on the president’s near-future behavior, the way is clear for the next step in this drama. A delegation of congressional Republican leadership will visit the White House to tell the president to enter mothballs. To execute his remaining term in low and remote profile. Or else. After this week, the necessary votes for the 25th Amendment are in place, held back by the deep hope among even opponents of the president that such an act can be avoided.
But I can’t end with that — must find some humor. Douthat’s column included this sentence: “Trying to defenestrate Sessions… will make things worse….”
“Defenestrate?” While I tried to stay awake in 10th grade European history, the prof touched on “the defenestration of Prague,” and yanked us all to curious attention. In a bit of Bohemian hobby, in 1419, 1483, and finally 1618 (the famous one) attendees at meetings in Prague who annoyed and then enraged the majority were summarily tossed out the top window.
Real estate note to usage: the window treatment of any building is known as “fenestration.” Defenestration does not mean to remove the windows, but to launch a disagreeable person out of a window.
Happily in 1618 the three men flung into involuntary flight survived the 70-foot fall by landing on a conveniently located dung heap.
In Washington DC soon such flights may be common. To a few, wish the fortunate 1618 outcome.
The 10-year US T-note, stuck in range, growing grass:
There is a lot of noise in the recent CPI inflation chart (note that the Fed’s preferred “PCE core” has run about a half-percent lower, well below its 2% target). The Fed will stay on track, announcing the trim of its balance sheet in September, and another rate hike in December unless new inflation data say that down has become a trend:
A woodcut of the 1618 defenestration. The Bohemians were on to something:
The New Town Hall as it is today, the top window the point of exit in 1419:
And the Chancellery as it is today, the launching pad in 1618, the dark pillar to the right a monument to the occasion:
The world is moving out there, although it doesn’t look like it. First the explainable, hard-evidence stuff, then the other stuff.
First, try to avoid reading or thinking about the stock market. In the aggregate, stock markets constantly re-price to anticipate future global business conditions, and stocks are guaranteed to wander back and forth across the probable future baseline — which is invisible and cannot be known anyway. For useful information, watch something else.
The WSJ headline this morning: “Short Sellers Give Up As Stocks Run to New Records.” You know how that’s going to turn out. The Dow is down 90 points so far.
Interest rates have gone down all week (nothing to do with stocks), continuing last week’s trend. The 10-year T-note has fallen from 2.38% two weeks ago to 2.23% today, mortgages again trying to drop below 4.00%.
The primary rate-mover has been repositioning by the Fed and the ECB (but that “other stuff” is in play, too).
Also down is the dollar, and there lies the tool to explain the role of the central banks. Way back, before the Great Depression, currency values mattered a lot because of gold madness. To hold on to their gold, nations were prepared to wreck themselves by over-valuing currencies. After WW II, unhinged from gold, currencies could move in healthy and constant recalibration to changes in relative national productivity.
Persistent modern-era misunderstanding began with Ron Reagan’s pride in the “dollar standing tall.” The dollar had fallen in the 1970s because of the inevitable decline in US post-war dominance, and because bad policy across three administrations had allowed an oil-price shock to become the worst inflation of the century. The dollar began to “stand tall” because Paul Volcker pushed prime to 22% to stop the inflation.
Right there is Rule One of currency movement: in the short term, relative interest rates drive currency value. If US rates are higher than elsewhere, global money will pour into the dollar. In the long run things like trade flows and fiscal policy usually dominate, but in the short run it’s interest rates.
The value of the dollar relative to other currencies is not cause; it is effect, and useful information. Extremely under- or over-valued currencies can create or suppress inflation and trade, but normal-range shifts like today’s are symptomatic, not disease.
Since the beginning of 2015 until May, the euro traded within an inch of $1.10, held so low by massive bond-buying by the ECB after the Fed had stopped its own QE. The euro has risen close to $1.17 in two months. In those two months these causative events: Europe is doing a little better, and under heavy (what else) pressure from Germany the ECB is signaling a taper to its bond-buying, the announcement probably coming in September. The ECB is petrified by memory of the US Taper Tantrum, the upward explosion in US rates when the Fed made its own announcement.
Even if tapering is modest, European rates have risen and so has the euro. Meanwhile the Fed in the same timeframe has entered reverse course. Yellen has signaled the Fed may be close to the end of rate hikes, and will likely suspend them while beginning to let is QE-bond portfolio to run off. Fed down, rates down, dollar down.
That neat calculus must be modified by two imponderables. First, inflation. Fed, ECB, and BOJ models are hopelessly broken, without predictive power. The central bankers are all flying by feel, and they know that their history-based instincts are misleading. Try flying with bad instruments and an inner-ear problem. They have been trying to induce inflation for most of a decade and failed. No one knows if the risk is up or down.
Second, that other stuff.
The US government has been in some form of gridlock ever since 1996, Bill Clinton’s second term. Dubya had a brief and unfortunate spurt of activity, and Obama had Obamacare, each early in each first term.
That period overlaps exactly with the fracture of the Republican party into traditional and hard-right factions, and a similar divide among Democrats, traditional and “progressive.” The Republican majority is an illusion, and there is no Democratic unity or clarity to take advantage of a disabled Republican majority.
That period also overlaps with the rise of China, accelerated globalization, undermining of the US workforce, and the inconceivable effects of the internet and i-phone upon the US body politic, our sources of information and our understanding of each other.
The arrival of Mr. Trump is taking a while to process, but financial markets have begun to react, sagging at each new bout of ineffectiveness. These fits of inaction are hardly his alone: Congressional leadership of both parties today is incompetent beyond historical imagining. Economic consequences can’t be measured directly, but in every boardroom, big or small, now there are conversations about political risks and how long they can continue.
I have hope. Big hope. One definition of an extremist is a person who wants to enact policies which will never attract a majority, and intends to force adoption anyway. For whatever reason, this president has joined the Republican extreme wing. Democrats don’t like to think about it, but Obama was closer to the progressives than to the center, no matter what he said.
The foundation for my hope: twenty years into this, we’re going to get tired of it. Either the extremists wear themselves out, or we do. If we’re lucky, both.
The US 10-year T-note in the last year. With the Fed approaching a hold-point, and unknown effects from reverse-QE, the next big move will be based on economic news:
The US 2-year T-note. The Fed’s cost of money is in a band 1.00%-1.25%, and the 2-year Treasury is hardly worth owning at a 1.35% yield. Markets have pushed the Fed’s next move off to December, if then:
The ECRI index of the economy is in a nice, healthy spot. The ECRI also forecasts a cyclical decline in inflation, although I think their metrics are confused by false signals from the Trump Trade and its unwinding:
The wonderful Atlanta GDP Tracker… if correct, 2.5% annualized growth in Q2 plus 1.4% in Q1, the whole year is on course for 2%.
Mortgage interest rates improved again this past week, continuing their trend from Fed Chair Yellen’s comments two weeks ago that the Fed Funds Rate may not need to increase much to reach a neutral bias. Mortgage activity saw positive movement this week as applications for new homes rose 1% and refinances were up an impressive 13%. Economic data on the week was mixed. Data weaker than expected included the Philadelphia Fed Business Outlook Survey, EIA Petroleum Status Report, Housing Market Index and the Empire State Manufacturing Survey. Economic data stronger than expected included Jobless Claims falling well below predictions, a large inflow of U.S. Treasuries to the tune of $91.9 billion, MBA Mortgage Applications and Housing Starts. Import and Export Prices came in flat as was expected.
The Dow Jones Industrial Average is currently at 21,575, mostly flat on the week. The crude oil spot price is currently at $45.87 per barrel, up over $2 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s PMI Composite Flash and Existing Home Sales, Tuesday’s Consumer Confidence Index and the S&P Corelogic Case-Schiller Home Price Index, Wednesday’s New Home Sales, EIA Petroleum Status Report and the FOMC Meeting Announcement, Thursday’s Jobless Claims, International Trade in Goods and Durable Goods Orders and Friday’s GDP, Employment Cost Index and Consumer Sentiment as potential market moving events.
Quiet on the surface, still. The 10-year T-note opened the week at 2.39% and is finishing at 2.32%, mortgages stuck at 4.125% The Dow set another record high, ho-hum, beginning Monday at 21,386, ending at 21,621 — the gain entirely within fifteen minutes of the release of Chair Yellen’s peaceful semi-annual testimony to Congress.
New economic data supported any mid-range opinion which you may like. If you think we’re slowing, you could find that. If you think growth-on-trend, 2% GDP, that too.
The one set of data beyond argument: inflation is tapering well short of the Fed’s 2% target. Yellen still argues that suppressed inflation is “transitory,” as she has during her entire four-year term. She also still argues that unemployment as low as it is sooner or later will mean wage growth beyond productivity gains, and inflation. Nevermind that early in her term the theoretical trigger rate for unemployment/inflation was 6.5%.
Yellen knows all of that and has acted accordingly, tip-toeing upward the cost of money, and doing so without the slightest “tightening” in credit conditions. I’m biased — I’m a believer in the central bank function, especially firefighting, no matter how prone to error, and I’m a fan of Yellen. Throughout her public life she has shown extraordinary curiosity, the self-discipline to doubt her own beliefs and reflexes, accepted new evidence no matter how unsettling, and avoided all of the many doctrinaire traps.
Mark that last sentence, please. Note the absence of those traits among so much of the public today, of both political wings, and hence among elected officials. Democracy at work: we get what we want.
Backing away quickly from the immediate scene, this is an extraordinary time. The global economy is doing things for which we have no frame of reference, and our government is decapitated.
So look elsewhere for wisdom.
Inside the current Fed there is one bright new light, Robert Kaplan, president of the Dallas Fed. He is on the trail of what is different this time, in particular the global absence of inflation. The full text of his speech yesterday is here, and the most important section describes the unprecedented impact of technology on business “pricing power” — and if business pricing power is capped, so is the power of labor.
Another person offered concise thoughts on our economic situation, and its impact on our society and politics. You may recognize his name: Bernanke. Lord, how I miss him. Yellen is good, but Bernanke had gravitas — the sheer weight of intellect and public presence which demolished fruitcakes.
You will not hear a word from Kaplan or Bernanke in support of today’s most common political prescriptions for the economy. None of the following will be useful: tax cuts or increases, more regulation or less, tax “reform” which merely tilts the table, less government or more. All are non-productive wrestling in the net.
Bernanke blogs occasionally, the only Fed chair emeritus to do so. He would not interfere with the current chair’s immediate tasks, but he does have things to say. “My talk is entitled “When Growth Is Not Enough” and is strongly influenced by recent political developments, which have cast a bright light on some disturbing economic and social trends.”
And then he went quickly to the heart of the matter: “Despite the sustained cyclical upswing and the country’s fundamental strengths, Americans seem exceptionally dissatisfied with the economy.” He identifies four patterns in general unhappiness: 1) stagnant earnings, 2) declining economic and social mobility (90% of Americans born in the 1940s would earn more than their parents; born in the ‘80s… half), 3) social dysfunction associated with economically distressed areas and groups, and 4) political alienation.
Causes follow, one above all: “The immediate postwar era, say 1945-1970, and America’s monopoly position resulted in widely shared economic gains. It’s not really surprising that the period evokes nostalgia for a time of national greatness.”
There is nothing anyone can do to recreate America’s postwar advantages. Bernanke laments our failure then, since, and now to react to the fading of those advantages.
“Whatever one’s views of Donald Trump, he deserves credit, as a presidential candidate for recognizing the deep frustrations of the American forgotten man.”
Here is Bernanke’s prescription — what could have begun in the 1960s, and still eludes us as both parties prefer base-pandering to hard work:
“It’s clear in retrospect that a great deal more could have been done, for example, to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction, and other means; and to address serious social ills through addiction programs, criminal justice reform, and the like.”
In conclusion Bernanke emphasized the need for bottom-up policies, not traditional top-down; and forward-looking, not backward-looking to old agendas. And how difficult it will be to change public policy, and even having done so to attain results.
No time like the present. And if you are demoralized by current proceedings, read Ben’s post and take heart. We are stuck only so long as we think we are.
The US 10-year T-note now has no trend. Good economic data will push rates up, and poor news will push down:
The US 2-year T-note is the Fed-predictor. New data in combination with Yellen’s testimony are tamping down prospects for future rate hikes:
As each month since the election, a pair of charts reflect our peculiar economic/political circumstance. For 45 years the National Federation of Independent Business has surveyed its small-business members, heavy to the political right, and the results of the “optimism” question have been an excellent telltale for the overall economy. Until now. The optimism chart spiked mightily in November; although tailing slightly since, it’s still the biggest spike on record. However, the second chart shows actual small-business performance and plans, just as tepid as before. These charts have become a perfect barometer of Bernanke’s “frustration” — irrational hopes versus reality (and on both political wings):
Mortgage interest rates improved this past week on comments from Fed Chair Yellen that rates may not need to increase much to reach a neutral bias. She also indicated that reducing the Fed’s balance sheet is still unknown and that the Fed does not intend to use unwinding as a policy tool. As a result, it does not appear that markets expect another Fed rate increase this year. Economic data was mostly weaker than expected. Of note, the NFIB Small Business Optimism Index, May JOLTS Job Openings, weekly jobless claims, the June Core Producer Price Index (PPI), June Retail Sales, the June Consumer Price Index (CPI), June Capacity Utilization, and the University of Michigan Consumer Sentiment Index were weaker than expected. May Consumer Credit, May Wholesale Trade, the June Producer Price Index (PPI), and June Industrial Production were stronger than expected. The Treasury auctioned $56 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with just okay demand.
The Dow Jones Industrial Average is currently at 21,562, up about 150 points on the week. The crude oil spot price is currently at $46.40 per barrel, up over $2 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s Empire State Manufacturing Survey, Tuesday’s Import and Export Prices and Housing Market Index, Wednesday’s Housing Starts, and Thursday’s Jobless Claims, Philadelphia Fed Business Outlook Survey, and Leading Economic Indicators as potential market moving events.
The S&P CoreLogic Case-Shiller Indices for April show Denver with the 4th largest price gains year-to-date. Our market has seen an increase of 8.4% and only comes in behind Seattle, Portland and Dallas. The country overall is averaging a YTD increase of 5.8%, which is the fastest past in over three years according to David M. Blitzer, Managing Director and Chairman of the Index Committee.
The chart below shows the Denver market’s price appreciation over the last 5 years. The numbers on the left represent an index created by CoreLogic to measure the average change in home prices in a particular geographic market. A key factor to these steady gains has been our booming population outpacing housing supply.
Some may see these dramatic increases and worry that we are on the cusp of another housing bubble. However, the home appreciations that we saw come crashing down over ten years ago were driven by much different circumstances. The primary factor back then was lending requirements being too lenient, leading too many people to buy homes they couldn’t afford.
Today, prices are being driven by a lack of supply and historically low interest rates. People are finding more purchasing power due to current rates, but lending restrictions are ensuring that they are in fact able to afford those homes. While an increase to interest rates could negatively impact home prices, it is much more likely to slow their appreciation, not send values on a downward spiral.
While disappointing to hear of this program going away, we still have several great options for first-time homebuyers and those with little money down. We will be able to honor any loans that were in process with the 2% grant but we will be unable to offer it going forward, effective immediately. Freddie released the following industry-wide statement on their decision:
DEFINING RESPONSIBLE LENDING WITH CHANGES TO LENDER GIFT AND GRANT REQUIREMENTS
Freddie Mac remains committed to working with our customers, and the industry, to provide effective sustainable solutions to make homeownership accessible to more Borrowers with limited down payment savings.
To ensure we continue to provide responsible financing options, we will change our requirements for Home Possible® Mortgages, including Home Possible Advantage Mortgages. Gifts or grants from the Seller as the originating lender will only be permitted after a contribution of at least 3% of value (i.e., the lesser of the appraised value or the purchase price) is made from the Borrower’s personal funds and/or other permitted sources of funds, including a gift from a Related Person, funds from government agencies, employer housing programs and Affordable Seconds. This 3% contribution requirement is an important factor in creating a responsible, sustainable homeownership opportunity. Gifts or grants from the Seller must not be funded directly or indirectly through the Mortgage transaction, including differential pricing in rate, discount points or fees.