Doctor’s: Rate & Economic Update for Doctor’s – Lower, Though It Could Easily Be Higher
Keeping you updated on the market!
For the week of
March 6 2017
Lower, Though It Could Easily Be Higher
Sentiment continues to shift to an interest-rate increase occurring sooner than later. In fact, more people are giving meaningful odds for the Federal Reserve to raise interest rates this month.
We refer to traders in federal funds rate futures contracts. (These contracts enable people to speculate on, or hedge, the future price of the fed funds rate.) As recently as a couple weeks ago, traders were giving scant odds that the Fed would raise the fed funds rate this month. As we write, these contracts are priced for a 68% chance of a rate increase when Fed officials convene again in two weeks.
Should the Fed raise the fed funds rate, it’s likely to raise it no more than 25-basis points. (Actually, the Fed raises the fed-funds-rate range, which would increase to 75 basis points-to-1 percentage point from 50 basis points-to-75 basis points.) If the Fed raises the fed funds rate this month, we could see a total of three 25-basis-point increases by the end of the year. Indeed, traders are giving the best odds that the fed funds rate will range between 1.25% and 1.50% when we head into 2018.
As for our prediction to start 2017, we thought one increase was all that was guaranteed. A March increase would put our prediction on the outs.
So, why the change in sentiment?
The odds for three increases spiked after President Trump’s speech last Tuesday. Trump offered a lot in the way of economic spending, which could pressure wages and consumer prices to rise. New York Fed President William Dudley further stoked expectations when he said that “a case for raising rates has become a lot more compelling” on the same day as Trump’s speech. As president of the New York Fed, the most influential of the 12 Fed banks, Dudley’s opinion matters more than most.
Interestingly, with all the increased chatter of a higher fed funds rate, movements in long-term rates have been relatively mild. The yield on the 10-year U.S. Treasury note moved higher after Trump and Dudley spoke, but it’s still below 2017 highs. A week ago, quotes on a prime 30-year conventional mortgage had drifted down to 4.125%. On a good day, a 4% quote would appear. Today, we’re closer to 4.25%. But this is subdued given the spike in higher-rate sentiment.
We mentioned last week that 30-year mortgage rates could hold near 4.25%. Our rationale was based on the Fed’s balance sheet, which still supports ample market liquidity. Given that consumer-price inflation continues to hover just at the Fed’s stated 2% annual goal, it could still take a while for today’s fed-funds-rate increases (which targets overnight lending rates among commercial banks) to work their way to the long end of the curve.
That said, we still stand by our prediction that we won’t see regular sub-4% (on a national average) quotes on a prime 30-year conventional mortgage anytime soon. We also don’t believe that we’ll see quotes exceed 4.5% and hold above that level either.
But we offer a caveat: Consumer-price inflation is key. If consumer-price inflation begins to trend higher, mortgage lending rates (along with most interest rates) are sure to tag along
Date and Time
Pending Home Sales Index
Tues., March 7,
3:00 pm, ET
$15 Billion (Increase)
Moderately Important. The slowdown in revolving credit use could dampen 1st quarter GDP expectations.
Wed., March 8,
7:00 am, ET
Moderately Important. The trend in purchase applications remains higher year over year, but week-to-week volatility has risen with daily volatility in lending rates.
Fri., March 10,
8:30 am, ET
Unemployment Rate: 4.8%
Payrolls: 170,000 (Increase)
Important. The huge increase in January payrolls did little to move Interest rates. This suggests that payrolls have become a secondary factor in Fed rate-hike decisions.
Has the Sales Rally Ended Already?
January was a blowout month for existing-home sales. Unfortunately, the same wasn’t true of new-home sales, which came in at 555,000 on an annualized rate. Most economists expected better.
Looking ahead, the pending home sales index portends weaker existing-home sales over the near term. The index was down 2.8% in the January report. This points to weakness for existing-home sales in February and March. (But let’s not get too down; the December index portended strong sales.)
Supply and affordability continue to weigh on sales growth. It’s something of a vicious circle: Low supply relative to high demand leads to rising prices and lower affordability. Expectations for strong price appreciation motivate potential sellers to hold instead of sell. This means that home prices continue to rise at a rate that exceeds historical norms. Indeed, the latest reading of the S&P/Case-Shiller Home Price Index shows that home prices, based on a national average, are rising faster than at any time in the past two-and-a-half years.
Establishing a sustainable upward trend in home sales will be difficult until more supply hits the market, thus slowing price appreciation. When that will occur is still anyone’s guess.
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