Companies Succeed, Consumers Suffering
Bank Profits Beat Expectations; Infrastructure Results Strong; Consumers’ Woes Worry Wall St. – Weekly Recap for the week of July 12 to July 16th, 201o and preview of July 19th-23rd
Last week started on a very bright note for the US economy as traders returned from the Independence Day-shortened week of July 6-9.
Monday, after markets closed, Alcoa and CSX reported better than expected earnings, suggesting that the corporate side of the US economy is looking better than previously expected.
Alcoa supplies sheet aluminum and custom forged aluminum products to US companies, so the better their earnings, the more optimistic other companies are regarding the state of the economy.
CSX carries industrial products throughout the US Eastern Seaboard and Southern Canada, and is busiest when other companies are also succeeding.
Between the two, it should indicate a better than expected economic situation. But did it?
Mortgage pricing was soft Monday and Tuesday indicating investors preference towards riskier assets, like stocks, as high corporate profits will tend to drive stock prices higher while hurting returns on fixed income securities, like mortgages and US Treasury notes.
Wednesday showed that retail sales trailed behind expectations, and markets began to worry that, while corporations are succeeding smashingly, the US consumer, responsible for 70% of this country’s GDP, may not be doing so well. Microchip manufacturer Intel again supported expectations of growth in the corporate sector by reporting that its business grew substantially through increased business buying.
On Thursday, the proverbial wet blanket hit Wall St. jarringly. While unemployment claims declined, growth in industrial activity slowed sharply, suggesting that the strength of the current economic recovery may not be as solid as previously believed.
The manufacturing indexes of the New York and Philadelphia Federal Reserve banks were sharply lower than expected leading to increased concern that the US economy might be in line for a slower economic recovery than previously expected or hoped for. Meanwhile, mortgage bundler Freddie Mac reported that home mortgage interest rates held their lowest level on record, averaging a scant 4.57% for a 30-year fixed mortgage.
Monday through Thursday were lambs in comparison to Friday’s lion.
Thursday’s Producer Price Index (PPI) suggested that inflation was negligible, possibly even negative. On Friday, the Consumer Price Index (CPI) showed that to be true, with total inflation -0.2% while core inflation (which excludes volatile energy and food prices) rose a mere 0.1%.
Inflation is a strong indicator of future interest rates, as one of the primary goals of the Federal Reserve is to maintain inflation at reasonable levels.
If inflation should stray too high, the Federal Reserve would be forced to increase its Federal Funds Rate, which currently stands at the negligible level of 0 to 0.25%. While the Federal Funds Rate does not directly impact mortgage rates, it is sufficiently important to indirectly influence them. At present, the Federal Funds Rate has not been increased for more than 4 years due to the deepening economic malaise.
The bigger news on Friday was the pessimistic level of consumer sentiment. The University of Michigan Survey, which had been expected to show consumer sentiment decreasing from a level of 76.6 to 74.5 actually dipped to 66.5, suggesting that consumers grew substantially less optimistic in the past two weeks.
This is bad.
Bear in mind that consumers are responsible for more than two-thirds of the activity in the US economy. For the most part, if consumers aren’t comfortable, economic growth won’t happen. Forget Alcoa and CSX and Intel reporting better than expected earnings; at the end of the day, they only account for a small portion of the US economy, and, so far, they haven’t been responsible for increases in hiring. Let’s face it – the number one problem in the USA right now is the lack of suitable jobs.
And this is why housing continues to suffer. People don’t buy houses unless they believe there is a reasonable probability that they will still have jobs a year from now and 2 years from now and beyond.
At the end of the week, the 10-year treasury had moved from last Friday’s close at 3.04% to over 3.10% only to fall under 2.94%. While there isn’t a complete correlation between Treasury rates and mortgage interest rates, there is a strong relationship between the two. The Dow Jones Industrial Average, which opened July 12th at 12o points above its previous weekly close ended this week at 10,071, 8 points below its July 9, 2010 close after touching 10,436 on Tuesday.
If I had to choose a word for investor sentiment in the current economy, I would choose “trepidation”.
Investors want the stock markets to move higher, but too many factor are pushing against that possibility. In the coming week, we will see substantial data about the housing market, key to most consumers’ concern. On Tuesday we will hear about June housing starts, that is, new ground broken, and on Thursday, we’ll hear about new contracts for sales. Expect this data to be substantially off of earlier numbers, as the true effects of the end of the Home Buyer Tax Credits become more apparent. Meanwhile, we will have the standard weekly unemployment claims data to boot.
I expect that mortgage pricing will improve in the coming week, as I feel that traders have undervalued the consumer sentiment data in estimating results of the coming existing home sales data. Apart from new sales of Treasury securities (which happen next week for 2- 5- and 7-year notes), the only other significant data is Thursday’s new unemployment claims number, and that could actually trigger a rebound if claims remain low or decrease further.
Locking an interest rate at this time is a bet that the economy is turning around, and I simply don’t see that as the case at this time.
I feel there is enough worry in markets to justify a wait-and-see attitude for interest rates. Waiting until next Friday likely won’t cost anything, and may open up new opportunities at lower rates.
Thanks for reading this first installment of Dan Hartman’s Weekly Mortgage Market Blog. I hope you will continue to read. I welcome your relevant comments, and look forward to next week’s edition. If you have any questions regarding Rhode Island refinance rates, or any other topic, please comment below, or call me at (401) 263-8655.
Have a great week!
Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.
July 18, 2010 by Dan Hartman · 3 Comments
Dan Hartman is a founding Senior Mortgage Advisor with Province Mortgage Associates, a Rhode Island Mortgage Lender, and a Massachusetts, Connecticut and New Hampshire Mortgage Broker. Dan has worked in the mortgage industry for more than 10 years, and holds an MBA in Finance from Clark University. Every day, Dan helps homeowners and home buyers in southern New England with their mortgage and refinance questions. He also serves as an Adjunct Professor at Roger Williams University and the University of New Haven. NMLS #13507.
It seems to be a viscous cycle of low consumer sentiment, lowered production, high unemployment, which causes low consumer sentiment…..
Excellent first post, Dan. Looking forward to these every week. Thank you