Federal Reserve Will Allow Inflation To Run Higher – Market Update

Market update blue

Momentum is everything, whether that’s life or the economy. When good things are happening, they tend to build on each other. My baseball team is on a five-game winning streak, and I’m still riding high from vacation.

On the economic side, there’s momentum in the stock market and the Fed may be looking for prices to rise a little more rapidly. We’ll have more on that in a minute.

Headline News

Econoday contributed analysis to this report.1 Let’s dive in!

S&P CoreLogic Case-Shiller House Price Index

On a seasonally adjusted basis, home prices were flat across the 20-city index in June. Meanwhile, prices were up 0.2% overall and have risen 3.5% on the year. It’s worth noting that the year-to-year pace of appreciation fell 0.2%.

FHFA House Price Index

In contrast to the Case-Shiller index, the FHFA index showed monthly gains of 0.9% in June and an uptick of 5.7% when looking at prices compared to the same time a year ago. This is compared to a drop in prices of 0.3% and year-to-year gains of 4.9% in May.

It’s worth noting two potential reasons for the variability in price measurement among these indexes: First, the Case-Shiller index is based on a 3-month moving average of prices. Second, the S&P index includes a sample of all transactions. Meanwhile, the FHFA index only looks at conventional loans backed by Fannie Mae or Freddie Mac.

Consumer Confidence

High levels of unemployment are showing their effects when it comes to consumer confidence in the month of August. The overall number came in down nearly 8 full points at 84.8.

There was an uptick of more than 2% in the number of consumers who see their income going up at 12.7%, but they are outnumbered by the 16.6% of consumers who see income falling, which is also up almost 1%.

What has analysts most concerned is the more than 5% increase in those who see jobs as hard to get, bringing the overall number to 25.2%. Worse yet, buying plans are down for appliances, homes and vehicles over the next 6 months, falling quite a bit.

In other readings, more people see fewer jobs ahead and fewer people see more jobs on the horizon. Along the same vein, the number of people who see business conditions improving was down almost 2% to 29.9%, while more people expect business conditions to get worse, up 0.3% at 20.5%.

New Home Sales

New home sales were up 13.9% to a seasonally adjusted annual rate of 901,000. This is up 36.3% for the year. It’s worth noting that this number does tend to vary widely from month to month, but the numbers for July are nonetheless encouraging.

The number represents the best new construction result since much earlier in the recovery from the last housing crisis.

One thing that’s going to hold back numbers from going through the roof is limited supply in the market at just 4 months given the current pace of sales. It’s also worth noting that there may have been some discounting as the median sale price was down a little more than $6,000 at $330,600.

MBA Mortgage Applications

Mortgage applications were down 6.5% overall, driven by a 10% decrease in the amount of refinancing applications. Refinance applications were still 34% higher than they were a year ago.

On the purchase side, applications were up 0.4% on the week and 33% for the year. The average 30-year fixed conforming mortgage rate was down 2 basis points to 3.11% in the survey.

Durable Goods Orders

Durable goods orders were up 11.2% for the month of July after a 7.7% increase in June. When transportation was removed, there were 2.4% gains. Meanwhile, there was a 1.9% uptick in core capital goods, a data point less prone to seasonal fluctuations.

Motor vehicle orders were up 21.9%. This made up for $5.8 billion in cancellation of commercial aircraft orders.

As you may have seen in the news, airlines expect travel demand to take a while to recover and are instituting new rounds of furloughs and layoffs. However, airplane manufacturers did experience 30% more orders for defense aircraft.

Orders of computers were up 9% and there was an 8.5% increase in orders of communications equipment. Machinery orders were up and orders for fabrication increased 2%. Finally, there was a 4.1% uptick in electrical equipment orders.

On the shipment side, the number of unfilled orders was down 0.8% and inventories were down 0.5%. The hope if you’re in manufacturing is that this means employers will need to restock soon.

Gross Domestic Product (GDP)

In the latest numbers for the second quarter, GDP contracted to less than the initial estimate, coming in at a 31.7% drop in activity compared to the first estimate of 32.9%. Meanwhile, consumer expenditures fell 34.1% as compared to 34.6% at first blush.

In addition to improved personal consumption metrics, business investment and residential investment both saw less of their contractions at 28.9% and 37.9%, respectively.

In other good news, the decline in inventories wasn’t as deep as previously thought and imports declined to a degree that international trade actually turned out to be a positive.

However, the fundamentals here still aren’t good. Consumers spent a lot less on health care, recreation and transportation. The decline was especially felt in spending on household services.

Other categories seeing a loss where household durable goods and clothing as well as nondurable goods. The latter is thought to be tied to declining demand for gas.
https://xd.wayin.com/embed/11fec8d2-d930-4824-96ee-c0000ec05c35?mode=responsive&ratio=16:9

Jobless Claims

Initial jobless claims came in at 1.006 million last week, which is down 98,000 from the prior week, but another week over 1 million claims. Meanwhile the 4-week moving average was down 107,250 to come in at 1.068 million.

On the continuing claims side, these fell 223,000 to 14.535 million. Looking at the 4-week moving average, this was down 604,000 to about 15.216 million. The unemployment rate was 9.9% on a seasonally adjusted basis, down 0.2% week-to-week.

Pending Home Sales Index

Pending home sales were up 5.9% to come in at an index level of 122.1 in July. While a slower pace of growth than June, it represents a full recovery and even improvement from before COVID-19 hit.

Pending home sales measure the number of existing homes under contract for sale, so this is all a good sign for next month’s existing home sales numbers.

International Trade In Goods

The U.S. trade deficit on the goods side was up $8.7 billion to settle at $79.3 billion. The good news is that this looks like it was driven by an expansion of trade in July after a period of profoundly slow activity internationally.

Exports were up 11.8%. This included a 44.6% rise in automotive exports. Consumer and capital goods were also both higher. Food exports were up 2.1%, not a bad gain for the weakest category listed.

Contributing to the deficit was the fact that imports were also up 11.8%. There was a 41.3% increase in vehicle imports. Industrial supply imports were also up 10.7% as petroleum prices were up. Meanwhile, food imports were up 3.1%.

Tracking activity, import levels are within a few billion dollars of where they were prior to COVID-19. Meanwhile, exports still have to make up $23 billion worth of ground at $115 billion.

Personal Income And Outlays

Personal incomes were up 0.4%, while spending levels were up 1.9% in July. Meanwhile, prices rose 0.3% both overall and in core categories. Still, since last July, prices are only up 1% and 1.3% under each of these metrics.

The income increases were still being boosted by government stimulus, although it will be interesting to look at August numbers because expanded unemployment lapsed at the end of July and may take a minute to get back up and running due to systems having to be reworked.

Beyond typical spending considerations, this is one of the Federal Reserve’s preferred metrics for inflation, and frankly, it’s not where they would like to see it, with the goal around 2%. Persistently low inflation has forced the Fed to modify its strategy, but more on that below.

Consumer Sentiment

In the final reading of August, consumer sentiment came in at 74.1, which is up 1.3 points from the midmonth rating. This is still a long way off from being around 100 before the virus.

The expectations component was up almost 3 points to settle at 68.5, which is still down quite a bit. Meanwhile, sentiments around the current situation were largely unchanged at 82.9.

Taking a look again at one of our favorite themes, inflation, consumer expectations over the next year show at 3.1% and 2.7% over the next 5 years. At this point, expectations are running much higher than the actual inflation data. It’ll be worth watching to see if that changes in the near future.

Mortgage Rates

One thing that really controls mortgage rates is the inflation. Bear with me for a few moments of explanation.

The reasoning is that bonds provide a fixed rate of return in general. If future inflation is anticipated to be low, people are more likely to invest in bonds for the guaranteed return.

However, if prices rise faster than the fixed return you receive, bonds become less attractive than alternatives like the stock market, which offer greater reward for higher risk.

At its virtual annual policy symposium, the Federal Reserve moved off its goal of 2% inflation for the short-term, signaling it would keep short-term rates low even if prices ran quite a bit higher than they are right now.

The reasoning for this policy change is that the Fed actually wants to see prices rise at a faster clip. Without an environment of rising prices, consumers have less incentive to buy now. Low consumer spending is bad for the economy.

Fewer buyers in the bond market would generally mean higher rates because yields have to be higher in order to attract investors. However, it’s been an interesting couple of weeks in the mortgage markets.

At the same time this was happening, the Federal Housing Finance Agency (FHFA) instituted a new fee on most conventional refinances backed by Fannie Mae and Freddie Mac of 0.5% of the loan amount to cover losses related to COVID-19.

Because it was initially due to take effect September 1, lenders had already priced the change in because it takes time for loans to close. The implementation of the fee has been delayed to December 1 in order to give lenders time for smoother implementation.

If you’re looking for a bottom line out of all this information, it’s that you should consider locking your rate now, particularly if you’re in the market to refinance your home. Rates are in a really good spot and the combination of these policy decisions means they may soon move up.

The average rate on a 30-year fixed mortgage with 0.8 points paid in fees was down 8 basis points to 2.91%. This has fallen from 3.58% a year ago.

Meanwhile, looking at shorter terms, the average rate on a 15-year fixed mortgage fell 8 basis points to 2.46% with 0.7 points paid. This is a decline from 3.06% last year.

Finally, the average rate on a 5-year hybrid, treasury-indexed adjustable rate mortgage was flat at 2.91% with 0.2 points paid. This has dropped from 3.31% last year.

Stock Market

The Dow Jones Industrial Average erased its 2020 losses and is in the positive now as stocks continue to rally. In addition to the above-mentioned Federal Reserve policy change favoring investment in stocks, it’s earnings season and Coca-Cola and Walmart had good days, while the tech and energy sectors also outperformed.

The Dow finished the day at 28,653.87, up 161 points and more than 2.5% for the week. Meanwhile, the Nasdaq was up 3.26% over the previous 5 days after rising 23.46 points Friday to close at 3,508.01. On the Nasdaq, stocks rose 70.3 points to 11,695.63, a weekly rise of 3.39%.

The Week Ahead

Tuesday, September 1

ISM Manufacturing Index (10:00 a.m. ET) – This index measures the general direction of manufacturing within the U.S. The qualitative survey of purchasing managers looks at production, new orders, order backlogs, inventories and supplier deliveries, among other factors.

Wednesday, September 2

MBA Mortgage Applications (7:00 a.m. ET) – The mortgage applications index measures applications to mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Thursday, September 3

International Trade (8:30 a.m. ET) – International trade is composed of merchandise (tangible goods) and services. It’s available by export, import and trade balance for six principal end-use commodity categories and for more than 100 principal Standard International Trade Classification system commodity groupings.

Jobless Claims (8:30 a.m. ET) – New unemployment claims are compiled weekly to show the number of individuals filing for unemployment insurance for the first time. An increasing trend suggests a deteriorating labor market. The 4-week moving average of new claims smooths out weekly volatility.

Friday, September 4

Employment Situation (8:30 a.m. ET) – The employment situation report measures unemployment in the labor force as well as the sentiments of workers about the job market.

There’s not as much information out this week, but we get the heavy hitters, including the employment situation as well as a key look at manufacturing. We’ll have it all covered in next week’s Market Update!

If this doesn’t get the juices flowing on a Monday afternoon, we get it. We’ve got plenty more home, money and lifestyle content to share with you if you subscribe to our mailing list below! Here’s a feature with everything you need to know about cottages.

One final note that Market Update will be out on Tuesday next week because Quicken Loans® is closed for Labor Day. Have a great week!

1 Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2020 Econoday, Inc. All rights reserved.

The post Federal Reserve Will Allow Inflation To Run Higher – Market Update appeared first on ZING Blog by Quicken Loans.

Source: Home Loans

Leave a Reply

Your email address will not be published. Required fields are marked *