Jobless Claims Strong - Macro Update

Posted by urbandigs

Thu Apr 19th, 2007 11:30 AM

A: You'll see mortgage rates finally trickle a bit lower as the latest reads on inflation showed some signs of stabilization via the CPI and PPI data. Don't be fooled though as inflation pressures are not going anywhere and the fed will certainly maintain their focus on controlling prices. As for today, jobless claims came in a bit stronger than expected signaling a still strong labor market! As you know, a strong labor market means a still strong economy and cuts the chances that the fed will lower interest rates anytime soon!


Lets go in order here to get you caught up with some macro economic data that tells us some more information on what is going on in the US Economy; the short answer is inflation pressures are moderating but still there and the job market continues to strong.

Consumer Price Index (CPI)

The U.S. CPI report revealed the expected hot gain in the headline index, with a 0.6% increase...Yet the restrained 0.1% increase in the core figure—which excludes volatile food and energy prices—also paralleled the PPI report, where the core figure was flat, to leave a positive spin on the report.

Energy prices remained on the boil in March, climbing 5.9%. Food prices rose 0.3%, a third consecutive monthly increase. Housing costs were up 0.2%, with the owners' equivalent rent component up 0.3%, while fuels and utilities climbed another 1.2%. Medical care costs were up 0.1%. Apparel prices surprised, and fell 1.0%.

Until core inflation posts a meaningful moderation, or until the economy slows more significantly, the Federal Open Market Committee (FOMC) will focus more on inflation pressures than economic risks.
Producer Price Index (PPI) -
The unchanged core reading in the U.S. March PPI report was a relief, but the 1.0% headline surge still left a pop in the year-over-year pace to 3.2% that leaves a pattern of big aggregate price gains for this measure of underlying producer costs.

The monthly inflation measures have been a thorn in the side of the Fed ever since the January FOMC meeting.
Jobless Claims Drop Less Than Expected -
The number of U.S. workers filing new claims for jobless benefits fell a smaller-than-expected 4,000 last week, but remained near levels last seen in February, government data showed Thursday.

Analysts on Wall Street had expected claims, which provide a rough guide to the pace of layoffs, to fall to 323,000 in the latest week from the 342,000 initially reported for the April 7 week.
So what does this all mean for you real estate enthusiasts out there who are trying to grasp how macro economic conditions affect things like mortgage rates and affordability? In a nutshell:
The moderate inflation data will give a break to rising lending rates but the stronger than expected jobs # will put a floor to how low rates can go. I expect the 10YR note to make higher lows until more data comes out on inflation and the economy.
According to CNN's article titled, "Mortage Rates Ease as Inflation Fears Cool" -
Mortgage rates fell for the first time in six weeks, Freddie Mac said Thursday, on signs that inflation pressures are moderating. The average rate on 30-year fixed-rate loans fell to 6.17 percent for the week ending April 18, from 6.22 percent the previous week, the mortgage finance firm said. Last year at this time, 30-year mortgage rates averaged 6.53 percent.
A brief break for some recent home buyers who got caught with their hand in the cookie jar for a few weeks when rates had a quick jump higher. I wouldn't bet on rates falling too low though as I just don't see inflation fears moderating all that much. Plus with this latest report it is very possible that expectations will come down a bit for future readings setting up a possible 'worse than expected' situation when the next dataset is released; never a good thing.

I described how the 10YR Treasury note is the most reliable guide to where mortgage rates are heading in the short term in my post, "Why Rates Are Going Higher". So, on your own time you can check out the trends of the 10YR for what to expect in the mortgage world. As for right now, I expect higher lows and higher highs, especially if inflation data comes out worse than expected in the near future.

UrbanDigs Says: Folks, a fed funds rate of 5.25% is NOT RESTRICTIVE! While I understand that the fed only recently ended a 2+ year rate hiking campaign, where they ended up is not restricting the economy. The reason the fed stopped raising rates was because the housing market already started to cool and the fed knows of the past history in overshooting with hiking rates and plunging the economy into a recession. This time, they wanted to pause and see what affect their rate hikes had on the economy before making more moves.

Historically speaking, rates are still low! You hear this all the time from brokers and the like whom have a vested interest in you buying a home. As you know, I try to be unbiased and what I see is rising costs in a lot of areas; food, gas, rent, commodities, etc.. This is inflation in full gear and until these pressures retreat to the comfort zone of the federal reserve, the bias has to be towards higher rates. Of course I could be wrong and a slowing US economy could help ease inflation pressures w/out a hike in interest rates, but that is yet to occur.

What you need to know is that right now we very well could be heading into a period of stagflation; that is high inflation and slowing economic growth via rising unemployment or a recession. The problem with this scenario is that if the fed tries to control one problem they can make the other problem much worse! The markets HATE uncertainty because there is little transparency in the short term for their investments. Whether or not the fed will become more transparent with fed policy and begin to publicly announce a target fed funds rate is still up in the air. For now, we are left to speculate based on the data that comes in.