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SLOWER ECONOMIC GROWTH

Bad news for stocks was good news for bonds again this week. Weaker than expected economic data hurt stocks and helped mortgage rates improve to the best levels since Thanksgiving.

At the start of the year, investors were optimistic that the momentum in economic growth seen during the second half of 2013 would continue during 2014.  So far, though, the economic data has been disappointing. The Employment report set the tone early in the month. Then the shortfall in China caused global stock markets to fall.

The US economic data released this week was weaker than expected as well. Durable Orders, Home Sales, Personal Income, and Jobless Claims all contained downside surprises. That said, it’s difficult to determine how much the unusually severe weather experienced this winter affected the data.

The last Fed meeting, when the Fed decided to begin to scale back its bond purchases, was a major market moving event. There was little drama in this Wednesday’s Fed meeting, however. As expected, the Fed announced that it will scale back its bond purchases by another $10 billion to $65 billion per month. The Fed statement was very similar to the prior statement. According to the Fed, “growth in economic activity picked up” in recent quarters. In other Fed news, Janet Yellen takes over as Fed Chair starting February 1. Investors expect that the Fed under her leadership will look and act very similar to the Bernanke Fed.

The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Manufacturing and Construction Spending will come out on Monday. ADP Employment and ISM Services will be released on Wednesday. Factory Orders, Productivity, and the Trade Balance will round out the schedule. Investors also will be keeping a close eye on indicators of economic growth around the world.

 

 

CHINESE MANUFACTURING SLOWS

The driving force for mortgage rates this week came from an unexpected source. Chinese manufacturing data fell short of expectations, causing sharp losses in global stock markets. Investors shifted to relatively safer assets, helping mortgage rates end the week lower.

On Thursday, China’s PMI manufacturing index dropped to 49.6, below the consensus of 50.3. Readings below 50.0 indicate a contraction in the sector. China has been an important engine of growth for the world economy, so a slowdown would have significant implications for global markets. In fact, the news from China completely overwhelmed the strong results in Europe, which showed that manufacturing in the euro zone reached the highest level since the summer of 2011. The Chinese data caused concerns about the pace of global economic growth, and investors sold stocks. This resulted in an increase in demand for bonds, including mortgage-backed securities (MBS).

This week’s Existing Home Sales data showed that, despite a slowdown in the fourth quarter, 2013 reflected a year of solid gains. Over five million existing homes were sold in 2013, an increase of 9% from 2012, and the highest level since 2006.

While the gains in home sales may be more modest, most analysts expect the improvement to continue in 2014 as well. The National Association of Realtors (NAR) projects a very small increase in home sales next year, but both Freddie Mac and the Mortgage Bankers Association (MBA) forecast home sales to increase about 5% in 2014.

News from China likely will have an impact again next week. The next Fed meeting will take place on Wednesday. Investors will be eager to hear the Fed’s views on the expected pace of reductions in bond purchases and what impact a slowdown in China may have. The most significant economic report next week will be Thursday’s release of fourth quarter Gross Domestic Product (GDP), the broadest measure of US economic growth. In addition, New Home Sales will come out on Monday. Durable Orders, another important indicator of economic growth, will be released on Tuesday. Pending Home Sales will come out on Thursday. Personal Income, Core PCE inflation, and Chicago PMI manufacturing will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.

INFLATION REMAINS TAME

Mortgage rates began the week with downward momentum following last Friday’s big miss
on the Employment report. That, combined with low inflation, more than offset this week’s slightly stronger than expected economic growth data, and mortgage rates ended the week a little lower.

With the Fed’s recent decision to reduce its bond purchases, investors were left evaluating what they believed to be the appropriate level of mortgage rates for the current economic environment. In short, moderate economic growth and low inflation represent relatively favorable conditions for mortgage rates.  This week, the December Retail Sales report revealed gains consistent with moderate growth.  Since Retail Sales account for about 70% of economic activity, investors pay close attention to this data.

Two of the more significant monthly inflation reports also were released this week, the Consumer Price Index (CPI) and the Producer Price Index (PPI), and both confirmed that inflation remains tame. Core CPI was just 1.7% higher than one year ago, well below the Fed’s target level of 2.0%, while Core PPI was even lower at 1.4% on an annual basis.
JOLTS, another report released this week, is quickly gaining prominence with investors because it is considered to be a favorite of incoming Fed Chair Janet Yellen.  The JOLTS survey measures Job Openings and Labor Turnover levels, providing another level of insight into labor market conditions. Since the Unemployment Rate has been heavily influenced recently by people leaving the labor force rather than by job gains, investors and Fed officials are eager for additional details to judge the strength of the labor market. The November JOLTS data showed that Job Openings unexpectedly rose to the highest level since March 2008. The percentage of people quitting their jobs was nearly unchanged.
The Economic Calendar will be nearly empty next week. Existing Home Sales, Leading Indicators, and Jobless Claims will be released on Thursday. Mortgage markets will be closed on Monday in Observance of MLK Day.

JOB GAINS FALL SHORT

Investors were focused on the strength of the labor market this week.  A strong reading for job gains in Wednesday’s ADP report caused mortgage rates to move a little higher. The ADP data turned out to be a poor indicator for Friday’s weaker than expected Employment report, however, and mortgage rates ended the week lower.

Against a consensus forecast of 200K, the economy added just 74K jobs in November. This was the smallest monthly increase in jobs since January 2011. Given that several other labor market indicators showed greater strength in December, many investors were skeptical about how accurately the data reflects the strength of the labor market. For one thing, bad weather likely was a factor in the shortfall, as the construction sector was particularly weak.  Upward revisions to the November data also partly offset the December results, leaving average gains of about 160K over the last two months. Bottom line, though, the report fell short of expectations, causing mortgage rates to move lower after the news.

Against a consensus forecast of 200K, the economy added just 74K jobs in November.  This was the smallest monthly increase in jobs since January 2011. Given that several other labor market indicators showed greater strength in December, many investors were skeptical about how accurately the data reflects the strength of the labor market. For one thing, bad weather likely was a factor in the shortfall, as the construction sector was particularly weak.  Upward revisions to the November data also partly offset the December results, leaving average gains of about 160K over the last two months. Bottom line, though, the report fell short of expectations, causing mortgage rates to move lower after the news.

In another twist, the Unemployment Rate unexpectedly   declined from 7.0% to 6.7%, the lowest level since October 2008.   Looking below the surface, reported job gains accounted for just 0.1% of the decline, while a large group of people leaving the labor force was   responsible for the remaining 0.2% decline.

 

While the headline Employment report is based on data collected from large employers, the Unemployment Rate is derived from a separate survey of individual households. According to this survey, there were job gains of about 150K in December, while roughly 350K people were no longer seeking work and thus were removed from the labor force. Since the Unemployment Rate is simply the number people in the labor force seeking work divided by the total labor force, it counts equally whether a person stops seeking work by finding a job, giving up on the job search, or retiring.

The most significant economic data next week will be the Retail Sales data and the monthly inflation reports. Retail Sales account for about 70% of economic activity and will be released on Tuesday. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts and Industrial Production will come out on Friday. Import Prices, Philly Fed, Empire State, Consumer Sentiment, and the Fed’s Beige Book will round out a busy schedule.

 

 

 

Improving Economic Activity

The economic data released this week reflected continued improvement in the economy, but there was little market reaction. While some volatility was seen during the final days of 2013, mortgage rates ended the week with little net change.

Heading into the new year, recent economic data has provided many reasons to be optimistic about the performance of the economy. The US has added an average of nearly 200K jobs over the past three months, and the Unemployment Rate has declined to 7.0%, the lowest level since November 2008. The ISM national manufacturing index held near the highest level since April 2011. Consumer Sentiment jumped to the highest level since July. Finally, Housing Starts were 30% higher than one year ago, at the highest level since February 2008. The Fed’s recent decision to taper its bond purchases reflects its confidence in the sustainability of the economic recovery.

Mel Watt is scheduled to be sworn in on January 6 as the new Director of the Federal Housing Finance Agency (FHFA). The FHFA is the agency that oversees the operations of Fannie Mae and Freddie Mac. Since a large percentage of mortgage loans made today are eventually sold to or insured by Fannie Mae and Freddie Mac, Watt will have a very significant influence over mortgage lending. Watt has not made public much of what he will do differently from outgoing Acting Director Edward DeMarco, but his policies are expected to be more
accommodating
to housing finance. Watt has stated that he will delay the recently announced guarantee fee increases that Fannie Mae and Freddie Mac had planned to begin charging in March.

The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Services and Factory Orders will come out on Monday. The Trade Balance will be released on Tuesday. The Minutes from the December 18 Fed Meeting will be released on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials, and it will be interesting to see the
degree of support behind the decision to taper. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

 

 

QUIET HOLIDAY WEEK

The mortgage market was quiet during Christmas Week.  The few economic reports released this week, including Durable Orders, Jobless Claims, and New Home Sales, were mostly stronger than expected. As a result, mortgage rates ended the week a little higher.

While the headline results for this week’s New Home Sales report revealed a decline from the prior month, this obscured the substantial improvement. New Home Sales dipped slightly in November, but this was from a level in October which was revised substantially higher. In fact, the revised October reading was the highest level since July 2008. November New Home Sales were 17% higher than one year ago. This was another in a string of recent housing market reports which provide reasons to be optimistic heading into 2014.

On December 18, the Fed announced that it will begin to scale back its bond purchases. The added demand from the Fed for mortgage-backed securities (MBS) has been a major factor helping to keep mortgage rates low, so a reduction in bond purchases is clearly negative for mortgage rates. Considering this, it is interesting to see that mortgage rates have moved only a little higher since the Fed announcement. In other words, the taper was almost completely priced in to mortgage rates ahead of the actual announcement. By contrast, the reaction in the stock market to the Fed statement was much larger.  Investors were pleased that the Fed intends to hold the fed funds rate low until much greater labor market improvement is seen, and the Dow stock index has climbed roughly 600 points to a record high.

The important monthly Employment report will not be released until January 10, leaving a  ight week for economic data to begin the new year. Pending Home Sales will be released on Monday. Chicago PMI Manufacturing and Consumer Confidence will come out on Tuesday. ISM Manufacturing and Construction Spending will be released on Thursday. Mortgage markets will close early on Tuesday and will be closed on Wednesday in Observance of the New Years holiday.

FED ANNOUNCES TAPER….

Heading into Wednesday’s highly anticipated Fed meeting, investors were divided about what the Fed statement would reveal. The Fed announced that it will begin to scale back its bond purchase program. The stock market rallied after the news,
but mortgage rates rose modestly and ended the week a little higher.

The Fed announced that it will begin to scale back its bond purchases from $85 billion per month to $75 billion. Treasury and MBS purchases each will be reduced by $5 billion per month. Fed officials expect to continue reducing the pace of bond purchases at future meetings depending on the performance of the economy. According to the statement, Fed officials anticipate that the fed funds rate will not be raised until the Unemployment Rate declines “well past” the 6.5% level. The statement also noted some concern that inflation has remained below the Fed’s objective of 2.0%, giving them reason to remain highly accommodative. The Fed’s decision reflects increased confidence that the economic recovery is sustainable.

The housing data released this week revealed that the pace of improvement slowed a bit toward the end of the year, but also provided reasons to be optimistic heading into next year. November Existing Home Sales declined a little from October, and the total inventory of existing homes available for sale also dropped. According to the National Association of Realtors, there is a “pent-up demand” for housing, but tight supply conditions have constrained home purchases.

Addressing this issue, home builders are ramping up their pace of construction.  November Housing Starts surged 23% from October to the highest level since February 2008. Housing Starts were 30% higher than one year ago.  Building Permits also increased in November. The December NAHB Home Builders confidence index jumped to the highest level since August.

The economic calendar will be light during Christmas week. Core PCE inflation, Consumer Sentiment, and Personal Income will be released on Monday. Durable  Orders and New Home Sales will come out on Tuesday. Due to the light trading volume near the end of the year, wide price swings at unexpected times are seen more frequently. Mortgage markets will close early on Tuesday and will be closed on Wednesday in observance of Christmas. Happy Holidays!

 

 

 

 

 

 

 

FED MAY TAPER SOON …

Stronger than expected economic data and progress on a budget deal in Congress caused investors to move forward their expected timing for the Fed to begin to
scale back its bond purchases. This hurt both stocks and bonds, and mortgage
rates ended the week a little higher.

Fed officials have revealed several conditions which will help them determine when
to reduce their bond purchases. Recent economic events and comments from Fed
officials suggest that those conditions may have been met. The performance of the economy may be sufficient to make Fed officials comfortable reducing the level of monetary stimulus. A broad range of recent economic reports revealed gains in the labor market, GDP growth, Retail Sales, and manufacturing. In addition, Congress moved closer this week to reaching a two-year budget deal. The proposed deal would reduce the level of uncertainty about fiscal policy, which is another concern of Fed officials. As a result, investors expect the Fed to announce in the near future that it will begin to taper its bond purchases, and some think that it may take place as soon as next Wednesday’s Fed meeting.

Congressman Mel Watt was confirmed this week as Director of the FHFA. The FHFA is the conservator over Fannie Mae and Freddie Mac and as such has tremendous
influence
over much of the mortgage market. Director Watt takes over from
Acting Director Edward DeMarco whose last act was to raise the fee Fannie Mae and Freddie Mac charge borrowers to guarantee loans. Unless reversed by Watt, the fee increase will be effective beginning early next year and will result in an increase in most mortgage rates of about 0.10%.

The next Fed meeting will take place on Wednesday. The statement is scheduled to be released at 2:00 et, and a press conference will take place at 2:30 et. Whatever indications Fed officials reveal about the timing of the taper likely will produce a significant reaction. The most closely watched economic data next week will be the inflation indicators and the housing market reports. The Consumer Price Index (CPI), an influential monthly inflation report, will come out on Tuesday. Housing Starts will be released on Wednesday, and Existing Home Sales will come out on Thursday. Industrial Production, Philly Fed, GDP revisions, Empire State, and Productivity will round out a busy week.

DECORATING YOUR HOME FOR THE HOLIDAYS !!

Decorating Your Home for the Holidays

Decorating Your Home for the HolidaysEach year, when the holidays roll around, it’s an exciting time for creating a beautifully decorated space. There’s no need to spend a fortune each year to have the latest colors or newest trend. Here are some tips to decorate in a meaningful way, without breaking the bank.

Look to years past

Take inventory of what you already have before dashing out to the craft or department store to obtain the newest baubles. Look in your attic or basement for decorations that were used in years past. Alternatively, using different trimming in different areas of the house can breathe fresh life into family heirlooms. Once you’ve taken stock of your Christmas ornament stash, keep it in mind while scanning holiday decorating magazines or displays.

Do your own thing

Each year holiday designers claim a new hot color or decorating scheme for the season, hoping to separate you from your hard earned dollar through color or style obsolescence. The trends can vary so widely from year to year that it will make your head spin. Bright primary colors one year and vintage evergreen swags with deep burgundy velvet ribbons the next. Stopping the madness and putting your foot down by adopting your own personal style will make decorating more meaningful and easier on your holiday budget. Choose a theme, texture, color, and a metallic and stick to it.

Choosing a color is easy, but choose something other than green. Green is a Christmas neutral. You can also pick within a color spectrum. Do you want primary colors? Dusty hues or super saturated, sharp contrasts or an ombre range are ways to get variety within your chosen color scheme. Textures can be smooth and polished, velvet, or wood cut. You can even choose a fabric type for your texture inspiration; calico or plaid. Then metallic is easy; silver or gold.

Once you’ve selected your personal style, stick to it. If you choose items that have at least two of your three elements, it will fit in with your decoration scheme. Red velvet ornaments will work with last year’s bright-blue ornaments as long as both have the velvet-texture. Or, if you choose calico as your texture, colors can vary as long as each new item sports the calico texture. You can also vary textures, as long as the metallic tones are the same and the colors stay in the same hue. Shopping during season clearance sale is easy when you head into it with a plan.

Look to the kitchen

Nothing makes the holidays more special than good food and family. Get in the kitchen with the whole family and start a tradition of making ginger bread houses or cinnamon Christmas ornaments. This will give you both decorations and memories. Simmer whole cloves and orange rinds on the back burner while spending time in the kitchen. This will add an additional element to the feeling of the holidays. Even something as simple as a bowl of seasonal fruit or nuts on the table as a centerpiece can set up the holiday mood and fit within any decorating budget.

LABOR MARKET IMPROVING

A wide range of major economic data released this week revealed an unexpectedly strong level of improvement in the labor market and other areas. This is good news for the economy, but it is negative for mortgage rates. As a result, mortgage rates ended the week higher.

The data released earlier in the week hinted at healthy improvement in the labor market, and Friday’s Employment report confirmed the gains. Against a consensus forecast of 180K, the economy added 203K jobs in November. The Unemployment
Rate declined from 7.3% to 7.0%, the lowest level since November 2008.  The economy has added an average of 193K jobs over the past three months.  Several Fed officials have suggested that they would like to see sustainable job gains around 200K per month to confirm that the labor market is back on more stable ground before scaling back on monetary stimulus. This data brings the Fed closer to tapering its bond purchase program.

This week’s economic data revealed that the strength in the labor market is consistent with improvement in the overall economy as well. Third quarter GDP was revised substantially higher to 3.6% from 2.8%, well above the consensus of 3.0%. This was the fastest pace of growth since the first quarter of 2012.  The ISM national manufacturing index rose to the highest level since April 2011.  October New Home Sales increased 25%, but this was from a somewhat depressed level in September.  Finally, consumer Sentiment jumped to the highest level since July.

The most significant economic data next week will be the Retail Sales data and the PPI inflation report. Retail Sales account for about 70% of economic activity and will be released on Thursday. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. The next Fed meeting will take place on December 18.

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