Fixed mortgage interest rates barely budged this week as the average 30-year fixed-rate mortgage (FRM) increased by two basis points to close the nation's leading survey of mortgage prices at 6.50%. Five-one Hybrid ARMs also moved up by two basis points, finishing the week at 6.29%.
As expected, the Federal Reserve left interest rates untouched at the close of Wednesday's meeting of the Open Market Committee. The Federal Funds and Discount Rates remained unchanged for the third consecutive meeting, and -- provided the economy holds near present levels -- the Fed may be done moving interest rates for 2006. While the vote to hold rates steady found a majority, there was again a lone dissent among the voting Fed governors. Although the statement which accompanies the end of the affair can reveal some of the Fed's thoughts, this particular memo didn't shed any new light, but did have a notable omission or two.
Concerns about inflation pressures related to energy and commodities prices were absent, but the Fed reiterated that "high levels of resource utilization" could still contribute to price pressures going forward. This presumably refers to the high levels of employment the economy is enjoying at the moment, and the potential for a rise in wage pressures.
New to the October statement was an outlook for growth. While "economic growth has slowed over the course of the year," said the Fed, "going forward, the economy seems likely to expand at a moderate pace." Previous statements about the economy lacked a forecast, so perhaps the Fed is trying to keep the market from expecting a sharper slowdown which could presage a Fed aggressively cutting rates sometime soon. That doesn't appear to be likely at the moment.
Economic growth is notably slower, too. The "advance" estimate for Gross Domestic Product in the third quarter of 2006 came in at a paltry 1.6%, well below forecasts and a fair drop from the second quarter's moderate 2.6% clip. It appears that the hard slump in homebuilding and related activity trimmed about a full percentage point from the growth tally, but there has been at least some pickup in activity in the early fourth quarter. New Home Sales were 5.3% higher in September than in August, ringing in at 1.075 million annualized units sold, and inventory levels of unsold homes continue to move lower. There are only 6.4 months of inventory available at the present sales pace, down from 7.2 months in July and 6.8 in August. Those homes were moved at a discount, though, as selling prices declined by 8% in September when compared to August, and now stand about 10% below year-ago levels. While the housing rout is probably far from over, small steps in the right direction are encouraging.
Also contained in the GDP report were reflections of inflation for the period. The slower growth and decline in energy costs over the July-September period is starting to have a beneficial effect on price pressures. While there are several measures of prices found in the report, the Fed's favorite is thought to be the 'core' Personal Consumption Expenditures (PCE) index, which edged down to 2.3% during the quarter from 2.7% in the second. 'Core' typically reveals costs exclusive of energy, food and volatile components and is thought to be more indicative of the true level of inflation. Regardless of the measure, though, inflation seems to be easing toward the Fed's comfort zone.
While new homes can be priced to move, existing homes suffer from different market conditions. Unlike new homes, it's harder for a homeowner to cut prices since the underlying mortgage and sales costs must be paid, and adding in premiums and such is more challenging and expensive for a potential home seller. Because prices are more intractable, existing home sales continue to slow, slipping by 1.9% during September and landing at a 6.19 million annualized rate of sale. Prices have only fallen about 2% below year-ago levels, and there was actually a slight uptick from August to September. Inventory levels here remain plentiful, too, with 7.3 months of stock available at present sales levels, the same as seen in each of the last four months.
Economically, this week's news paints a mixed picture. Local manufacturing surveys conducted by the Kansas City and Richmond Federal Reserve Banks in their respective districts were a bit at odds. The Richmond Fed noted a distinct softening of activity in their region, with their gauge falling to a reading of -2 in October from a +9 in September. In Kansas City, though, a minor uptick in business was seen, and their indicator rose to +9 in October from +6 in September.
Manufacturing in at least some districts should have kicked higher, as orders for Durable Goods -- items intended to last three years or longer -- jumped by 7.8% during September, largely due to orders for planes and other transportation-related items. Excluding those, there was just a 0.1% lift on spending on durable goods, with most of that boost coming from business investment.
A bigger survey of economic activity conducted by the Chicago Federal Reserve which reveals national trends in growth pointed to slower growth for the third consecutive month. The National Activity Index decreased to -0.51 in September and suggests that the economy grew more slowly than its 'potential' during the month, and posits that the trend for growth is a bit on the weak side at the moment.
The Fed's mention of "high levels of resource utilization" has been reflected in the trends for weekly jobless claims. While hiring has been in a muted pattern for months as the economy has held near what is considered to be "full employment", layoffs have been steady as well. During the week ending October 21, 308,000 new applications for unemployment insurance benefits were filed, still wobbling within a well-defined range which began in late spring/early summer. The employment report covering October is due out next Friday, but if the level of "help wanted" advertising found by the Conference Board is any indication, muted levels of hiring and a steady unemployment rate are the most likely outcome.
Along with steady employment, a rising stock market and falling oil and gasoline costs continue to put a smile on consumer faces. The University of Michigan survey of Consumer Sentiment rose a stout 8.2 points in October, rising to a pre-hurricane Katrina level of 93.6 for the month. On a higher-frequency note, the weekly ABC News/Washington Post poll of Consumer Comfort held at a year's high of -7 during the week of October 22. However, a topping of the stock market and steadying gas prices suggest that optimism may have peaked for the moment.
The steady Fed and slower growth had a reasonable effect on bond markets this week, as market interest rates largely declined. Mortgage rates will follow, as yields have moved a sufficient amount as to drag rates down with them. The 10-year Treasury yield (a fair proxy for fixed-rate mortgages) declined better than an eighth-percentage point between Tuesday and Friday, so rates should head lower as we turn into next week. There are a few indicators aside from the employment report which could spook investors from Halloween though week's end: The Employment Cost Index may show spiking wages, productivity and per-unit labor costs may have turned in a poor showing during the last month, manufacturing or service business may be beginning to kick higher. If the economy really is picking up after the third quarter's 1.6%, now's the time it will start to show.
Mortgage rates should be a bit lower next week, but at least some uncertainty related to the above keeps it a modest move downward of a handful of basis points, at best. It's too soon for even weak numbers to tilt the Fed's hand in favor of an easing, so the downside remains limited.
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