With a Fed meeting closing in, mortgage rates edged downward a little this week, closing the nation's leading mortgage survey at an average 6.5%, the lowest level since March. The last time fixed rate mortgages held near these numbers, the Fed Funds rate stood 50 basis points -- a full one-half of one percent -- below present levels. Five-one Hybrid ARMs went in the other direction, ticking two basis points (.02%) higher to 6.24% for the week.
After the last FOMC meeting, the Fed's statement asserted that "Economic growth has moderated" and that "inflation pressures seem likely to moderate over time," but "some inflation risks remain." Essentially, the Fed put its faith in the ability of slowing economic growth to quell rising inflation, and hoped for the economic data to bear this out. So far, that has been turned out to be a pretty fair bet, and one that the market increasingly trusts. Of course, continued moderation is the key: should growth hold at these moderate levels, inflation should diminish over time, if in an uneven pattern.
There are some signs that inflation has begun to moderate. The latest report covering the Consumer Price Index was actually somewhat better than expected, with headline CPI rising by only 0.2% for August. Stripping out food and energy costs, the so-called 'core CPI' edged higher by a like amount. Over the past year, the annualized rate for headline CPI is 3.8% and core, 2.8%. While those numbers are still thought to be rather above the Fed's preferred levels, they represent a falloff from annualized figures over the past few months (4.3% in June, 4.2% in July), and the pattern does seem to be one of gentle decline.
The latest look at the prices of Imported and Exported Goods was out this week, too. Prices for Imports climbed by 0.8% for the month of August, and have climbed by 6.6% over the past year, but ignoring the effects of petroleum that increase notches just 2.7%. As with the CPI, the recent pattern has been one of a downward trend. Goods priced for export rose by 0.4% for the month, and have risen by 5.4% over the past year. Since the export number has risen for five consecutive months, it appears as though we are also exporting a little inflation to our trading partners. Higher costs for goods and services may also serve to temper growth somewhat in those countries, with potential for inflation cooling abroad as well.
Of course, we continue to import far more goods and materials than we export. As a result, the nation's imbalance of trade got a little bigger in July, leaping to a record $68.0 billion as oil prices held in the mid-$70 per barrel range for much of the month. Thankfully, that's no longer the case, so there's some reason to expect some improvement in the trade deficit when the August data comes due. For the month, the dollar value of exports declined, while the reverse was true for imports.
Retail sales posted a meager gain during August, climbing just 0.2% for the month, although the increase was dragged downward (for a change) by slipping gasoline prices. Still, the positive number was a surprise to the upside, as forecasts called for a decline of 0.2%. Perhaps those easing gas prices provided some additional cash for last minute back-to-school spending.
The nation's utilities and factories slowed a bit in August. Industrial Production fell by 0.1%, largely due to less output by mines and utilities.
Manufacturing continues to show strength, but the percentage of factory floors in active use trimmed from 82.7% in use to 82.4% for the month. Some upward movement was seen in the localized survey of manufacturing activity in the New York Federal Reserve district, where their activity index moved to 13.8 in September from 11.0 in August.
Optimism levels among consumers pressed downward in July and August, but at least some signs of improvement have come lately. The weekly ABC News/Washington Post poll of Consumer Comfort continues its rebound, ticking higher to -13 during the week ending September 10. It stood at a near-term nadir of -19 just three weeks ago. As well, the University of Michigan's survey of Consumer Sentiment sported a mild gain in the September preliminary survey. Their gauge rose from a final 82.0 in August to an 84.4 mark at mid-month September.
With employment near 'full,' hiring has been holding at subdued levels. Then again, so have layoffs, with weekly applications for unemployment benefits holding just above the 300,000 level for much of the summer. Last week, some 308,000 new applications for benefits were filed, the lowest number since late July.
On balance, the economy is slowing slightly and seems to be pushing inflation gently in the right direction. With slower growth, though, comes a bit of a problem for the Fed. Confounding their hope for weaker growth are lower interest rates, engineered not by the Fed but the markets themselves.
In recent weeks, mortgage rates have backed off their highs by almost a half-percentage point, and applications for refinancing -- stronger than you might think, given the levels of interest rates -- have picked up again, as borrowers seek to trade in poor-performing ARMs and look to recast balance sheets. For many borrowers, that will translate into additional equity-fueled purchasing power. In addition, purchase applications, while still in a long slide, have also turned higher, at least for the moment.
Economy-wise, housing has been among the weaker performers this year, but the slowdown here is probably the biggest contributor to the period of economic placidity the Fed has worked hard to engineer.
Falling gasoline prices may add fuel to the fire as well. High prices work much like a tax, removing money from consumer wallets and funneling them in into a narrow economic channel. With prices sliding by maybe 50 cents a gallon in some markets, that could produce many millions of dollars of new spending in a hurry, flaring both growth and inflation higher at a time when a gentler trend would probably be more welcomed.
It's with this backdrop that the Fed meets. So far, their plans and forecasts seem to have largely worked out, and there has been little news since the last meeting which should make the Fed feel compelled to move interest rates. Inflation does still remain a problem, though, and even if the trend is mildly downward for the moment, the Fed probably won't feel that it has any breathing room until it's much closer to 2% than the 3% we're hanging near. So, we'll get a second pause come the close of Wednesday's meeting, but I'm still of the opinion that another quarter-percentage point move may come yet this fall. Will the committee change the statement to allude to such potential? We'll see.
For next week, the Fed's the biggest game in town, but Housing Starts and PPI are due out as well. If current trends hold, a mild PPI and falling housing starts are to be expected, and mortgage rates wander in a couple basis point range.
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