Rates go down as a result of QE3

What a difference a week makes.  Although the initial stock market elation over the launch of QE3 has tapered off, there are many other areas in which consumers are reaping the benefits.

Let’s start with mortgage rates.  According to Freddie Mac, mortgage rates have rapidly returned to record lows.  Just now the main stream media is starting to report about the new lows so it is expected that we will see an upswing in refinance applications.  Last week the Mortgage Bankers Association reported that refinances increased only .8% and purchases declined by 4%.  I believe that it is too early to tell the impact the new stimulus plan will have on the housing market, however I am optimistic.

Even prior to the announcement of new record low mortgage rates, housing has been continuing to maintain its slow and steady recovery.  Expectations for housing starts in August were not met however they did show improvement.  August housing starts in rose 2.3 percent following a 2.8 percent drop in July. As much as the report is not overwhelmingly positive, the numbers represent an increase of 29.1 percent from a year ago.

For the second straight month existing home sales rose strongly increasing 7.8 percent in August.  This is the largest monthly percentage gain since last August and the highest rate since May 2010. All regions showed significant improvement.

Housing supply is at 6.1 months at the current sales rate.  Housing inventory remains tight and may not only be limiting sales, it is likely the reason that home prices have been rising.  The last time inventories were this low was in January.  Next week there is more housing news to come with the S&P Case Shiller House Price Index, the FHFA House Price Index and New Home Sales reports to be delivered on Tuesday and Wednesday.

The job market continues to remain sluggish.  Last week’s report on first time jobless claims jumped to 385,000.  This increase was much larger than expected.  This week’s reports did not show any real improvement in that the total claims declined just 3,000 down to 382,000.  These higher than expected claims do not bode well for the national unemployment report coming out in 2 weeks.  Last month’s report was much worse than expected which was one of the main reasons why the Fed elected to launch another round of stimulus to try and assist the economy in recovering.

Although it is not as prevalent as it was earlier in the year, concerns about Europe are creeping back into the minds of investors.  The Euro zone crisis is not over by any stretch of the imagination.  What has also been putting negative pressure on the U.S. stock market is the poor manufacturing reports released from China.

JJ Mack

The Fed has finally taken action!!!

Well the news everyone has been waiting for happened…The Fed announced the launch of QE3.  This announcement on Thursday morning spawned a rally in the stock market driving it up over 200 points.  Investors have been sitting patiently on the sidelines waiting for this news as the Fed’s intervention was not unexpected.  The recent poor employment reports along with increasing jobless claims has the government very concerned about the job market not improving.

The goal of the Fed’s 3^rd round of stimulus is to keep interest rates artificially low.  However, this is a delicate balance because when investors believe that the stock market is going to do well, they take their money out of government bonds and purchase stocks.  This ultimately will have the opposite result that the Fed wants to accomplish.  When investors sell bonds to buy stocks, bond yields rise which indirectly causes mortgage rates to rise.  If mortgage rates rise, then the cost to finance a house rises.  If the cost of financing a home rises then….(Well you get the idea)

Immediate reaction the Fed’s announcement was for the stock market to rally and, exactly as I said, bonds got hammered and rates actually went up. 

I truly understand what the Fed is trying to accomplish.  They believe that keeping rates super low will get the housing market really going.  Here is the challenge however.  We have seen mortgage rates down to the low 3% range, yet this did little to spur housing demand.  The latest round of stimulus is not expected to even bring rates down as low as they were before.

To make matters worse, the two sides of government don’t even talk to each other anymore.  The expiration of tax cuts as well as the automatic trigger of huge spending cuts scheduled for the end of the year, has many people concerned about what is called the “Fiscal Cliff”.  If this is allowed to occur and Congress does not do anything to stop it, it is widely believed that the economy will fall back into recession.  The Fed can only do so much, however until our elected officials decide to go back to work, nothing will change.

First Time Jobless Claims took an unanticipated jump all the way up to 382,000.  The Labor Department blames the jump on the effects of Hurricane Isaac on many states.  It is in those impacted areas that the biggest jump in layoffs had occurred.

Inflation on the wholesale level continues to remain under control when you don’t factor in the volatile food and energy prices.  The Producer Price Index rose a modest .2% which is in line with expectations.  What is interesting to note is that on Thursday when the Fed announced the new round of economic stimulus, the price of oil shot up to just under $99.00 a barrel.  It is likely that $100 a barrel is just around the corner.

 

JJ Mack

Home Prices on the rise!!!

Thankfully both the Republican and Democratic Conventions are over.  It is bad enough to have to listen to both sides attack each other in advertisements and the media every single day.  For the last 2 weeks we have had to endure the brutal ramblings of speaker, after speaker, after speaker go on about how their presidential nominee is the right choice.  I am not making a political argument for either side here.  I am just glad that the conventions are over because all they have done is made the political battle between sides even nastier.

The August unemployment report that everyone has been waiting for was released this morning at 8:30AM EST.  The national unemployment rate has dropped from 8.3% down to 8.1%.  Although the drop in the employment rate is greater than most experts expected, the underlying numbers are far from positive.

The labor market added only 96,000 jobs whereas the expected range was in the area of 125,000.  In addition, job growth for July was also revised down from 163,000 to 141,000.  All of this data points to ongoing weakness in employment and an increases the likely hood that the Fed will take launch another round of stimulus.  Some experts believe the announcement will come as soon as next week as the Fed is having their FOMC meeting.

What a difference a day makes.  On Thursday the stock market rallied on three pieces of significant news.  The first is that European Central Bank announced a massive bond buying program.  Without going crazy with details, simply put, this new program places some control on the demand for bonds which means that the European government can lower the cost of borrowing for all of the governments in the Euro zone.  If the various governments can borrow money at lower interest rates, the risk of default, which is now much lower. 

The second report on Thursday was ADP’s employment report which came out with a much higher estimate of job growth than anyone expected.  ADP released an estimate for job creation in the amount of 201,000. (I guess they missed the mark big time with this report based upon the actual numbers released on Friday)

The last piece of news that drove the market to rise 245 points on Thursday is the first time jobless claims report showing a larger drop down to 365,000.  This is the lowest number we have seen in the last 4 weeks.

Outside of Thursday’s market moving reports, investors remained on the sidelines in anticipation of Friday’s national employment report.  As mentioned before, the employment report for August came in at 8.1% which normally would be considered a boost for the President.  However, the only reason the rate dropped is because more people dropped out of the job search market, not because the jobs market improved.

The Mortgage Bankers Association reported on Wednesday that applications for both purchases and refinances have declined.  The declines are relatively small in that purchase and refinances declined .8% and 3% respectively.  With interest rates off of their record lows, it appears that borrowers, especially homebuyers are going to continue to remain on the sidelines until they get a better read on the future of interest rates and the labor market.

It is likely that if the Fed launches another round of stimulus next week, the stock market will rally ultimately driving up interest rates in the short term.  Remember when the stock market does well, interest rates usually tend to rise.

JJ Mack