Market Update Santa Fe Las Campanas

For the week of December 5, 2016 – Vol. 14, Issue 49

>> Market Update

QUOTE OF THE WEEK… “I find, when you’re an optimist, life has a funny way of looking after you.” –Simon Sinek, English author, speaker and consultant

INFO THAT HITS US WHERE WE LIVE … Those of us who are optimistic about the housing market were well looked after last week. The National Association of Realtors (NAR) reported Pending Home Sales in October hit their highest pace since July. This was only a slight gain over September, but 1.8% ahead of a year ago. The NAR’s chief economist pointed out, “buyer demand has remained strong…in a majority of metro areas.” The evidence? Of the homes purchased in October, 40% sold at or above list price, versus 33% a year ago. And the NAR predicts existing home sales will end the year at a 5.36 million annual pace, up from 5.25 million in 2015.

Fannie and Freddie already announced they were raising conforming loan limits for 2017, and last week the Federal Housing Administration (FHA) did likewise. The FHA national loan limit ceiling will go up to $636,150 in high-cost areas and the floor will go to $275,665. Limits are set by county, and for next year, 2,948 of them will see increases, none will get a decrease and only 286 counties will have their FHA loan limits unchanged. Of course, home price increases drive these higher loan limits. In line with this, the Case-Shiller National Home Price Index registered a 5.5% annual gain in September, up from 5.1% the prior month

>> Review of Last Week

WALL STREET CATCHES ITS BREATH… After three weeks of healthy climbs, stocks took a breather. Only the blue-chip Dow eked out a fourth weekly gain, rising by 0.1%. The broadly-based S&P 500 and the tech-heavy Nasdaq both dipped, even though investors are still betting President-elect Trump will push policies, such as tax cuts and deregulation, that could spur faster growth. But it may take time for those policies to show results, so investors could be putting on the brakes to avoid getting ahead of where we still are. Friday’s jobs report provided a good example. November saw 178,000 new Nonfarm Payrolls, fewer than expected, while Hourly Earnings fell 0.1%.

The Unemployment Rate slid to 4.6%, but mostly from a labor force drop. Nevertheless, no one thinks the negatives are bad enough to discourage the Fed from hiking rates next week. Other reports painted a prettier economic picture. The ISM Index had manufacturing growing a bit more in November. Personal Income and Personal Spending were up in October. But the Fed’s favorite inflation measure, Core PCE Prices, is up only 1.4% the past year, nowhere near their 2% long-term target. Will this restrain Fed rate hikers? We’ll see. The second estimate of Q3 GDP pegged a 3.2% annual growth rate, although GDP has grown just 1.6% over a year ago.

The week ended with the Dow UP 0.1%, to 19170; the S&P 500 down 1.0%, to 2192; and the Nasdaq down 2.7%, to 5256.

The worse than expected hourly earnings number for November was all bonds needed to rebound on Friday. The 30YR FNMA 4.0% bond we watch finished the week UP .06, at $105.19. National average 30-year fixed mortgage rates edged higher again in Freddie Mac’s Primary Mortgage Market Survey for the week ending December 1. This puts them just slightly higher than 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?… The experts say oil has to be above $50 a barrel for U.S. producers to make money. Texas light sweet crude ended on Friday up 1.06%, at $51.60 a barrel, near its best level of the year.

>> This Week’s Forecast

SERVICES, PRODUCTIVITY UP, BUT SO IS THE TRADE DEFICIT… Expect a week of relatively upbeat economic reports, although none of them biggies. The ISM Services index should edge up a little more into growth territory, and revised Q3 Productivity is predicted higher, something the Fed wants to see. Unfortunately, the Trade Deficit is also forecast to increase, the trade balance continuing to tip in favor of foreign countries.

>> 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 5 – Dec 9

 Date Time (ET) Release For Consensus Prior Impact
Dec 5
10:00 ISM Services Nov 55.6 54.8 Moderate
Dec 6
08:30 Productivity – Rev. Q3 3.3% 3.1% Moderate
Dec 6
08:30 Unit Labor Costs – Rev. Q3 0.2% 0.3% Moderate
Dec 6
08:30 Trade Deficit Oct -$41.8B -$36.4B Moderate
Dec 7
10:30 Crude Inventories 12/3 NA -0.884M Moderate
Dec 8
08:30 Initial Unemployment Claims 12/3 255K 268K Moderate
Dec 8
08:30 Continuing Unemployment Claims 11/26 NA 2.081M Moderate
Dec 9
10:00 U. of Michigan Consumer Sentiment Dec 94.3 93.8 Moderate

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months… A week from Wednesday, we’ll know for sure what the Fed will do, but right now the vast majority of economists believe we’ll see a small rate hike at that meeting. Note: In the lower chart, a 93% probability of change is only a 7% 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       93%
Feb 1       93%
Mar 15       94%