Market Update: No Fed Rate Hike Expected by Ron Schulz

For the week of July 17, 2017 – Vol. 15, Issue 28

>> Market Update

QUOTATION OF THE WEEK… “To succeed in life, you need three things: a wishbone, a backbone and a funny bone.” –Reba McEntire, American country singer, songwriter, actress and businesswoman

INFO THAT HITS US WHERE WE LIVE… Home ownership is still popular. The National Association of Realtors (NAR) 2017 National Housing Pulse Survey reports 84% of respondents believe buying a home is a wise financial decision. The NAR president summarized the findings: “Building equity, wanting a stable and safe environment and having the freedom to choose their neighborhood remain the top reasons to own a home.” The survey also revealed buyers need to be educated about down payment options: 40% think they have to put at least 15% down. Black Knight reported total “tappable” (lendable) equity increased $695 billion in the last year.

The chief economist at property information firm CoreLogic says “the market continues to benefit from improved economic growth.” Their CEO adds, “the rebound in the U.S. housing market continues to gather steam.” A national listing site found that the biggest homeowner regret was not choosing a larger home, while the biggest renter regret was continuing to rent instead of buying. Credit scores are rising, as the national average FICO score hit 700 for the first time in history. FICO’s vp for scores and analytics said a 700 score is considered “very good credit.” Better credit scores can get buyers more favorable mortgage terms.

BUSINESS TIP OF THE WEEK… Successful people are visionary, but they’re also very utilitarian: practical, bottom-line types who can cut through the noise, address the heart of a problem and solve it.

>> Review of Last Week

THANK YOU, CHAIR YELLEN… Wednesday Fed Chair Janet Yellen made her semiannual appearance in Congress and Wall Street interpreted her testimony as more dovish than expected, implying rates will stay pretty low. This ignited a rally that held through Friday. The major indexes enjoyed solid gains, the S&P 500 posting its largest weekly increase since the end of May, hitting a new all-time high. Yellen’s magic words acknowledged “the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” Investors say that means the Fed will keep the longer term neutral level of the fed funds rate lower than it’s been in past decades.

Although the economy is doing better, it still isn’t booming, so the Fed should go easy on hiking rates. Retail Sales were down 0.2% in June, although they’re up 2.8% compared to a year ago.
Inflation is nowhere near the Fed’s 2% annual target rate, as the Consumer Price Index (CPI) is up only 1.6% year-over-year. Dallas Fed President Robert S. Kaplan commented that he’d need to see signs of higher inflation before voting for another rate increase. Not surprisingly, Wall Street is taking a December hike off the table: the probability that won’t happen is now above 50. Yet Industrial Production and Capacity Utilization were up nicely in June.

The week ended with the Dow UP 1.0%, to 21638; the S&P 500 UP 1.4%, to 2459; and the Nasdaq UP 2.6%, to 6312.

Friday’s weaker than expected economic data sparked a rally in government notes and bonds. The 30YR FNMA 4.0% bond we watch finished the week UP .19, at $105.03. Freddie Mac’s Primary Mortgage Market Survey for the week ending July 13 reported national average 30-year fixed mortgage rates edged up for the second week in a row. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?… The average University of Michigan Consumer Sentiment Index for the first half of 2017 was 96.8, the best half year read since 2000. The Index average since its inception is 85.4. 

>> This Week’s Forecast

HOME BUILDERS BUSIER, FACTORIES NOT SO MUCH… June Housing Starts are expected to move up from the month before, to a 1.160 million unit annual rate. Likewise, Building Permits, a good gauge of home builder activity going forward, should rise to 1.196 million. But factory activity is forecast to slip in the two regions measured by the New York Empire Manufacturing Index and the Philadelphia Fed Index, although they’re both in positive growth territory.

>> The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of Jul 17 – Jul 21

 Date Time (ET) Release For Consensus Prior Impact
Jul 17
08:30 NY Empire Manufacturing Index Jul 13.0 19.8 Moderate
Jul 19
08:30 Housing Starts Jun 1.160M 1.092M Moderate
Jul 19
08:30 Building Permits Jun 1.196M 1.168M Moderate
Jul 19
10:30 Crude Inventories 07/15 NA -7.56M Moderate
Jul 20
08:30 Initial Unemployment Claims 07/15 245K 247K Moderate
Jul 20
08:30 Continuing Unemployment Claims 07/08 NA 1.945M Moderate
Jul 20
08:30 Philadelphia Fed Index Jul 22.0 27.6 HIGH
Jul 20
10:00 Leading Economic Index (LEI) Jun 0.4% 0.3% Moderate


>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months… Fed Chair Janet Yellen’s Congressional testimony left Wall Street more certain than ever there will be no rate hike for the next three FOMC meetings. Note: In the lower chart, a 3% probability of change is a 97% certainty the rate will stay the same.

Current Fed Funds Rate: 1.0%-1.25%

After FOMC meeting on: Consensus
Jul 26 1.0%-1.25%
Sep 20 1.0%-1.25%
Nov 1 1.0%-1.25%

Probability of change from current policy:

After FOMC meeting on: Consensus
Jul 26         3%
Sep 20         8%
Nov 1       12%
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