With a world full of constantly changing factors that make impacts on the market, we have to look for the official numbers to make projections and find insights into the markets. Here are some findings from recent reports across the country.
This week’s major economic data was generally in line with expectations and had little impact. The news that President Trump tested positive for the coronavirus was modestly positive for mortgage markets and negative for stocks. Mortgage rates ended the week with little change and near-record-low levels.
Monthly Labor Market Updates
The highly anticipated monthly labor market report revealed that the solid rebound from unprecedented job losses, caused by the partial shutdown of the economy, has continued. In August, the economy gained substantial 661,000 jobs and revisions to the results for prior months added another 145,000.
Strength was seen in leisure-and-hospitality, retail, and health care, while government jobs posted large declines. The economy has now recovered roughly half of the 22 million jobs lost in March and April.
The other key areas of the report also were encouraging. From a level of 8.4% last month, the unemployment rate dropped to 7.9%. In terms of progress on the recovery, this was down from nearly 15% in April, but still well above the rate of just 3.5% in February. Average hourly earnings, an indicator of wage growth, were 4.7% higher than a year ago, up from an annual rate of 4.6% last month.
The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has helped keep mortgage rates low. In August, the core PCE price index was just 1.6% higher than a year ago, up from an annual rate of increase of 1.4% last month. Core PCE is the inflation indicator favored by Fed officials, and their stated target is 2.0%.
Investors will remain focused on medical advances to fight the coronavirus and negotiations for additional government fiscal stimulus measures. Beyond that, it will be a light week for economic data.
Fiscal Stimulus Could Affect Mortgage Rates
During a light week for economic data, rapidly shifting headlines about additional government stimulus caused some volatility for mortgage markets. The net effect was minor, however, and rates ended the week nearly flat near record low levels.
Lawmakers remain divided about additional fiscal stimulus measures, and the outcome of the negotiations will be extremely important to mortgage rates for a couple of reasons.
First, government spending increases economic activity, which raises the outlook for future inflation. Also, the supply of bonds goes up to fund the spending. Since both of these consequences are negative for mortgage rates, news of a new stimulus deal likely would cause them to rise.
Lawmakers continue to negotiate an additional government aid package, and most investors expect a deal either before or shortly after the election. The increased fiscal stimulus would be unfavorable for mortgage rates for two primary reasons. First, government spending boosts economic activity, which raises the outlook for future inflation. Besides, the supply of bonds increases to fund the spending, so yields must rise to entice investors to purchase more bonds.
National Services Index News
The most significant economic report released this week was the national services index from the Institute of Supply Management (ISM). In September, this index unexpectedly increased to 57.8, far above the level of 41.8 seen in April following the partial shutdown of the economy. Readings above 50 indicate an expansion. Services account for more than two-thirds of US economic activity, and this marked four straight months of a solid recovery in the sector.
Retail Sales Data Affecting Mortgage Rates
An increase in coronavirus cases around the world was modestly positive for mortgage markets this week, while the major economic data was mixed and had a little overall impact. As a result, rates remained near record low levels.
Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Following sharp declines in March and April due to the partial shutdown of the economy, retail sales have shown five straight months of gains and are above the levels seen before the pandemic. In September, they jumped 1.9% from August, far exceeding the consensus forecast for an increase of just 0.5%. Strength was seen in vehicles, clothing, sporting goods, and home-improvement.
In contrast to the strong results for consumer spending, Industrial Production in September declined 0.6% from August, far below the consensus forecast for an increase of 0.5%. Capacity Utilization, an estimate of actual output as a percentage of potential output for the entire economy, was just 71.5%, compared to levels above 76% before the pandemic. While some manufacturing sectors have bounced back nicely from the partial shutdown of the economy, others are still operating at much weaker levels.
The reduced economic activity resulting from the coronavirus has caused a significant decline in inflation. In September, the Consumer Price Index (CPI) was 1.7% higher than a year ago, matching expectations. While this was up from recent levels of just 1.2%, it still was far below the readings around 2.3% seen during the first few months of the year.
Investors will remain focused on medical advances to fight the coronavirus and negotiations for additional government fiscal stimulus measures.
Housing Sector Improvements
The spectacular rebound in the housing sector from weakness during the spring due to the partial shutdown of the economy has continued. In September, Existing Home Sales increased 9% from August and were 21% higher than a year ago, at the best level since May 2006.
Low Inventory Levels
Inventory levels were down 19% from a year ago and remained the primary obstacle to even stronger sales activity. The number of homes for sale was at just a 2.7-month supply nationally, well below the 6.0-month supply which is considered a healthy balance between buyers and sellers. However, a report on housing starts contained encouraging news in this area: single-family housing starts rose 9% from August and were 22% higher than a year ago.
Gross domestic product (GDP) is the broadest measure of economic activity, and quarterly readings above 10% annualized are extremely rare. Due to the partial shutdown of the economy, however, GDP declined a stunning 31.4% annualized during the second quarter of this year. The latest report revealed that it reversed and increased at a comparable rate of 33.1% annualized during the third quarter, which was close to the expected levels. Early estimates for the fourth quarter vary widely.
Following four straight months of impressive gains, new home sales in September dropped 4% from August, which was below the consensus forecast for a small increase. Despite the minor dip, however, new home sales remained near the best levels since 2006 and were a massive 32% higher than a year ago.
It is almost hard to imagine a bigger week for potentially market-moving news. How will the election affect the market? We will have to wait to know. Until then, we can only work off of the available data presented in these reports.
For further information on the real estate industry, get in touch with one of the title and escrow specialists at Plymouth Title Guaranty Corporation.
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