For the week of December 12, 2016 – Vol. 14
QUOTE OF THE WEEK… “Nothing happens unless first we dream.” –Carl Sandburg, American poet
INFO THAT HITS US WHERE WE LIVE … In the housing market we’re in the business of making people’s dreams come true. Lately, some are saying that fewer people may have those dreams realized and the housing recovery may stall. Why? Because mortgage rates have crept up a little. This is patently absurd. Average interest rates are now about where they were in 2014. Yet the housing recovery was fine then. Some say, yes, but home prices were lower. Well, so were wages. Plus, it looks like the newly elected administration may remove some of the constraints on lenders that have made it difficult for home buyers to qualify for mortgages.
Pundits may be pessimistic but not so the public. Fannie Mae’s chief economist said their latest study revealed “there is evidence of an increase in consumer optimism in the immediate aftermath of the election.” Investor’s Business Daily reported that their measure of “Economic Optimism rose 3.4 points to 54.8, the highest since November 2006.” And even though the vast majority of economists expect a Fed rate hike this week, one prominent international investment strategist feels that if the dollar “continues to strengthen, in anticipation of higher Fed rates, the Fed may actually hold off.” Now wouldn’t that be a dream come true
>> Review of Last Week
RALLY RACKS UP RECORDS… The market rally they’re calling the Trump Bump resumed in earnest last week after taking a breather the week before. The blue chip Dow ended Friday at a new record, less than 250 points shy of the 20,000 threshold! The broadly based S&P 500 also finished at a record high, while the tech-heavy Nasdaq shot up a none too shabby 3.6%. One portfolio manager explained that the “outlook for lower regulatory hurdles, lower taxes and higher infrastructure investments all paint the picture of a resurgence in growth prospects.” She described this as “euphoria surrounding higher cyclical growth after years of stagnation.”
The week’s economic data included final Q3 Productivity holding at a 3.1% annual rate. This data point might inspire the Fed to hike rates this week. However, as usual, all economic players were not on the same page. Imports grew while exports dipped, so the October Trade Deficit ballooned to a larger than expected $42.6 billion. To be fair, this can be explained by the above mentioned stronger dollar, which made our products more costly over there and their products cheaper here. But Michigan Consumer Sentiment vaulted from 93.8 in November to 98.0 for December. Apparently consumers, like investors, expect an upturn in our economic situation.
The week ended with the Dow UP 3.1%, to 19757; the S&P 500 UP 3.1%, to 2260; and the Nasdaq UP 3.6%, to 5445.
Bond prices suffered as investors were lured away by buoyant stocks, higher prices for West Texas crude and the European Central Bank’s decision to trim its bond buying program. The 30YR FNMA 4.0% bond we watch finished the week down .21, at $104.98. Freddie Mac’s Primary Mortgage Market Survey for the week ending December 8 had national average 30-year fixed mortgage rates edging up. But rates are barely above a year ago. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.
DID YOU KNOW?… Remodeling magazine reported home improvements with the highest return on investment are attic insulation, manufactured stone veneer and new garage doors. Next came new steel and fiberglass entry doors and minor kitchen remodels.>> This Week’s Forecast
THE FED MEETS, AS HOUSING STARTS, RETAIL SALES AND INFLATION SLOW… Yes we know, most Fed watchers are treating this week’s FOMC Rate Decision as a done deal hike, but they also felt that way last May. The latest data should still indicate a crawling economy. November Housing Starts are forecast down and although Retail Sales should be up, they’re growing more slowly. The Consumer Price Index is expected to show inflation slowing as well. We’ll see whether this will be enough to restrain the Fed, who’d like to see the economy a bit hotter before subjecting it to higher rates.
>> The Week’s Economic Indicator Calendar
Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.
Economic Calendar for the Week of Dec 12 – Dec 16
Date
Time (ET)
Release
For
Consensus
Prior
Impact
M
Dec 12
14:00
Federal Deficit
Nov
-$135.0B
-$56.8B
Moderate
W
Dec 14
08:30
Retail Sales
Nov
0.3%
0.8%
HIGH
W
Dec 14
08:30
Producer Price Index (PPI)
Nov
0.1%
0.0%
Moderate
W
Dec 14
08:30
Core PPI
Nov
0.2%
-0.2%
Moderate
W
Dec 14
09:15
Industrial Production
Nov
-0.1%
0.0%
Moderate
W
Dec 14
09:15
Capacity Utilization
Nov
75.1%
75.3%
Moderate
W
Dec 14
10:00
Business Inventories
Oct
-0.1%
0.1%
Moderate
W
Dec 14
10:30
Crude Inventories
12/10
NA
-2.389M
Moderate
W
Dec 14
14:00
FOMC Rate Decision
12/14
0.5%-0.75%
0.25%-0.5%
HIGH
Th
Dec 15
08:30
Initial Unemployment Claims
12/10
256K
258K
Moderate
Th
Dec 15
08:30
Continuing Unemployment Claims
12/03
NA
2.005M
Moderate
Th
Dec 15
08:30
Consumer Price Index (CPI)
Nov
0.2%
0.4%
HIGH
Th
Dec 15
08:30
Core CPI
Nov
0.2%
0.1%
HIGH
Th
Dec 15
08:30
Philadelphia Fed Index
Dec
9.0
7.6
HIGH
Th
Dec 15
08:30
NY Empire manufacturing Index
Dec
3.0
1.5
Moderate
F
Dec 16
08:30
Housing Starts
Nov
1.225M
1.323M
Moderate
F
Dec 16
08:30
Building Permits
Nov
1.236M
1.229M
Moderate
>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months… It’s hard to find an economist who thinks the Fed won’t hike this Wednesday. It’s also hard to find one that thinks it’ll go up more than a quarter percent. And most feel it will stay there for a while. Note: In the lower chart, a 95% probability of change is only a 5% certainty the rate will stay the same.
Current Fed Funds Rate: 0.25%-0.5%
After FOMC meeting on:
Consensus
Dec 14
0.5%-0.75%
Feb 1
0.5%-0.75%
Mar 15
0.5%-0.75%
Probability of change from current policy:
After FOMC meeting on:
Consensus
Dec 14
95%
Feb 1
95%
Mar 15
96%