Vital Statistics:
Stocks are flattish this morning as we round out a good week for stocks. Bonds and MBS are down small.
Personal incomes rose 0.2% MOM in August, according to the Bureau of Economic Analysis. Personal consumption expenditures rose 0.2% as well. The drop in spending was pretty dramatic, falling from 0.5% in July. Both the income and consumption numbers were below consensus.
The PCE Price Index rose 0.1% MOM in August, which was in line with expectations. On a YOY basis, the index rose 2.2%. If you strip out food and energy, the index rose 0.1% MOM and 2.7% YOY.
Overall, the report shows that the battle against inflation has largely been won, and the concern is now turning towards economic weakness. Much of the GDP growth over the last quarter was due to inventory build, which means the economy requires robust consumption to maintain that growth rate. August’s consumption numbers were the first half of the back-to-school shopping season, which is a good barometer for the holiday shopping season. If the consumer is tapped out, economic growth will slow, and production will halt as manufacturers and retailers need to move the merchandise first.
Overall, this means that the Fed needs to get back to neutral in a hurry if it doesn’t want to tip the economy into a recession. The November Fed Funds futures are a toss-up between a 25 and 50 basis point cut, and the central tendency for December is inching below 4%.
Pending home sales rose 0.6% in August, according to NAR. “A slight upward turn reflects a modest improvement in housing affordability, primarily because mortgage rates descended to 6.5% in August,” said NAR Chief Economist Lawrence Yun. “However, contract signings remain near cyclical lows even as home prices keep marching to new record highs.”
The West saw increased growth, while the Northeast, Midwest and South saw declines. Overall mortgage rates have been moving lower, albeit the September rate cut didn’t have that much of an impact. As the economy slows and cuts rates further, we should see mortgage rates track lower.
“In terms of home sales and prices, the New England region has performed relatively better than other regions in recent months,” Yun said. “Contract signings rose in both the most affordable and most expensive regions – the Midwest and West, respectively – because mortgage rates have fallen nationally. Housing affordability will continue to see notable improvements.”
“The Federal Reserve does not directly control mortgage rates, but the anticipation of more short-term interest rate cuts has pushed long-term mortgage rates down to near 6% in late September,” added Yun. “On a typical $300,000 mortgage, that translates to approximately $300 per month in mortgage payment savings compared to a few months ago.”
Even if we don’t get a massive refi wave, lowering mortgage rates a little should help alleviate the rate lock in effect, which would encourage people to move and increase activity in the housing market.