Modest GDP Growth Considered Insufficient to Reduce Unemployment
Economy grows 2.0% in real terms; Unemployment claims dip; Speculation about Wednesday’s Fed announcement continues market domination; Employment data due this week
While last week’s biggest headline was the first reading on 2nd quarter GDP, it was questions, doubt, and confusion about exactly what the Federal Reserve Open Markets Committee will announce at the conclusion of its meeting this Wednesday. The Fed essentially announced the program at its last meeting in September, saying it was prepared to take action if it perceived the economy to be growing at too slow a pace. It also noted concerns about deflation, an economic condition in which the price level of goods an services in the economy decreases over time. This Fed announcement ignited a flurry of buying in bond markets that pushed mortgage rates to all-time lows.
Since then, traders have questioned the size and timing of the Fed’s plan. Will it be $500 billion over 6 months or $1 trillion over 8 months? This uncertainty led last week to significant retreats in mortgage pricing, as traders wondered whether the slightly improved data since the prior meeting might cause the Fed to reconsider its strategy. This resulted in the first ever auction of a Treasury security with a negative yield. The 5-year Treasury Inflation Protected Security yielded -0.55% at last Monday’s sale, indicative of a market that believes future inflation will increase.
Investors in TIPS receive most of their return through periodic principal increases that follow the CPI.
Later in the week, sentiment reversed, after mortgage pricing worsened by as much as 1 point. (Mortgages are priced following two variables – rate and points; when pricing worsens by 1 point, it means that the 4.375% rate that might have been available with 0 points now costs 1 point, for example.) There wasn’t much data between Monday and Friday, although some measures of the housing market suggested that sales had started the slow recovery from August’s abyss.
Friday brought the first look at 3rd quarter GDP. Economists had been expecting to see economic growth on the order of 2.0%, and were not disappointed. This represented a slightly higher growth rate than in the 2nd quarter, when the economy grew by 1.7%, but it is still not a high enough to rapidly decrease the current 9.6% unemployment rate.
And that is why the Fed will act on Wednesday.
Apart from the Fed meeting this week, there are many other significant events happening this week. The week started with a report showing consumers are less likely to open their wallets, followed by another showing that manufacturing is having a better go of it lately, although manufacturers appear to be less inclined to hire more workers. We will get an even better look at employment later this week with the highly influential employment situation report. Here’s a look at some of the most influential reports due this week:
- no significant data, however, the mid-term elections will be closely watched
- Election results
- ADP private payrolls
- Fed announcement at 2:15
- Initial Jobless Claims
- Employment Situation Report (non-farms payrolls)
As you can see, this week is about as market impacting as it possibly could be. At the end of the week, pricing could easily be right back where it started this week, and it could just as easily have moved by a point in either direction. Keep a close eye on this one, folks.
If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell 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.