Economic Notes – August 26, 2013


Written by: Jon McGraw

It was a relatively light week for economic reports. Unfortunately, a few weak data points this last week and in recent weeks have been steadily eroding economist GDP estimates for the coming quarter, although growth for the second half is expected to be better than what we saw in the first half.

(+) The FHFA house price index, which measures prices of homes financed with conforming mortgages, rose +0.7% for June and slightly beat the median forecast +0.6%. By region, the strongest gains were located in the East South Central (KY, TN, MS, AL) and Pacific (HI, AK, WA, OR, CA) regions—both up around +1.5% on the month. The Pacific and Mountain (MT, ID, WY, NV, UT, CO, AZ, NM) regions that were so heavily hit during the housing crisis have shown the strongest regional year-over-year gains, while the nation as a whole rose +8% for the year. Nevertheless, the index remains about 10% below the pre-crisis peak.

(+) Existing home sales rose more than expected for July, up +6.5% versus a forecast +1.4%, as single-family homes and condos/co-ops both rose in the upper single-digits. The July result brought the rolling twelve-month gain to +17%. Regionally, the Northeastern U.S. saw the largest gains, at over +13% on the month, but all other regions also rose in a range of 5-7%. The months supply of existing homes held steady at 5.1, as did the ratio of distressed homes to overall sales at 15% (lower than nearly a quarter of all sales a year ago).

(-) New home sales fell a surprising -13.4% in July to an annualized rate of 394k units (compared to expectations of a -2.0% decline and a 487k level). This is the biggest drop since the first-time homebuyer tax credit expired in 2010 and brought sales to their lowest level in nine months—considering June’s numbers were also revised downward a bit. All four national regions lost ground, but the West declined most, falling over -16%. At the same time, the median price of a U.S. home rose to $257k from $237k a year ago. New home sales numbers in the shorter-term have gone through choppy periods without any inherent deeper meaning, so other data and additional monthly results will be needed to make a conclusion.

Are rising interest rates on mortgages having an impact? Perhaps, according to a few economists, but rates remain low in absolute terms and not prohibitive in relative terms. Positive homebuilder index figures also stand in contrast to these new home sales results somewhat, and point to better forward-looking activity. Housing affordability measures (which are generally based on median house prices relative to median household) have deteriorated a bit, however, with the recent gains in home prices from lower levels post-crisis and high levels of investor/non-occupant homebuyers. From a mortgage rate perspective, even a $100 increase in mortgage payment levels can play a role in first-time buyer and lower-income housing decisions.

(+) The Conference Board’s Index of Leading Economic Indicators for July rose +0.6% to a level of 96.0. This is a pick-up for the month, following a flat June reading and +0.3% rise for May. Gains were widespread among eight of the ten elements measured (mostly led by interest rate spreads and loosening of credit, as well as building permits and ISM) and are on the fastest pace in six months, which points to a stronger 2nd half of 2013 (as expected per separate estimates from other firms). Separately, the Coincident Economic Index increased +0.2% for the month, while the Lagging Economic index declined -0.2%.

(0) The Markit manufacturing PMI rose from July’s 53.7 to 53.9 for August’s preliminary report (still short of a consensus 54.2 reading).  New orders and employment gained, while output and new export orders were down—so a mixed release overall.  Some economists find this Markit release to be of some value in predicting upcoming ISM manufacturing data.

(0) The FOMC meeting minutes aren’t usually a big issue since the immediate release a few minutes after the close of the initial meeting creates the bulk of market reaction; nonetheless, the minutes (sometimes) provide additional clarity as to committee sentiment and discussion.  This particular set wasn’t as helpful to investors as many would’ve hoped, but comments did continue to allude to possible tapering at the Sept. meeting (as July ‘market expectations of the future course of monetary policy…appeared well aligned with their own (Fed’s) expectations’); however, with some recent choppiness in economic data, it wouldn’t be surprising to see this decision remain data-dependent.  Member opinions are mixed on this issue of continuing asset purchases.  In addition, there was discussion of other communication refinements (forward guidance is one of the ‘tools’ deemed most effective from a policy perspective), as well as possible lowering of the unemployment threshold from the current 6.5%.

(-) Initial jobless claims for the August 17 week were a little weaker than expected, rising to 336k versus an expected 330k.  No states reported any estimated data, and no special factors affected the reports on the surface.  Continuing claims for the August 10 week were a little disappointing as well, at 2,999k vs. a forecast 2,969k.  On the positive side, the four-week moving average of initial claims fell to 331k, which is a new post-recession low.  Claims aren’t in the news as much, perhaps due to their weekly frequency and low-key release, but this series continues to dramatically improve on a cyclical level.

Market Notes

The FOMC minutes and some mixed consumer stock results created some U.S. stock volatility mid-week, pushing stocks downward and bond yields higher on fears of an end to tapering. However, sentiment improved and equities generally ended positive on the week overall. Materials and technology led (the latter in no small part to the announced retirement of Microsoft’s CEO Steve Ballmer), while consumer staples and financials lagged on the week.

Developed foreign markets came in only slightly negative, with generally positive gains from Western Europe and a weaker Japan. Overall returns were strong from several emerging markets, including Russia and Brazil (despite an overall negative performance from the EM group—largely the result of terrible weeks in the Far East x-China area, such as Indonesia, Thailand, Malaysia and India). In the case of the latter, the Indian Rupee has depreciated 17% since May vs. the dollar as fiscal conditions and current account deficits, coupled with disappointing growth and internal struggles/infrastructure problems have frustrated investors in the region. The China HSBC Manufacturing PMI reading came out strongly positive, while concerns remain about the accuracy of the government’s own PMI data.

In Latin America, Brazilian unemployment improved; at the same time, while a cheaper real is good for exporters, the Brazilian Central Bank announced a $60 Billion intervention program to keep the real’s value from declining to excessively low levels—boosting investor confidence somewhat.

Bond markets continue to be influenced by perceptions of taper timing, but pared back a few basis points this week. From sheer duration effect, long governments and treasuries outperformed, while high yield bonds also gained ground. General bond indexes were mostly flattish, but international bonds lost ground—upwards of several percent, as major emerging market currencies, such as the Brazilian real, Turkish lira, Indian rupee and Mexican peso all reached multi-year lows against the US dollar.

In real estate, U.S. residential gained nearly 3% in keeping with generally benign housing reports, while retail and industrial/office lost ground. Both Asian and European REITs declined on the week, in keeping with respective regional equity markets.

Commodity markets were slightly higher on the period, as a whole, in no small part to a stronger US dollar. Higher prices were led by soybeans (due to hot/dry weather threatening crop yields), as well as positive returns from energy and precious metals—with some weaker data taking tapering risks back a bit perhaps. Industrial metals, such as zinc and nickel, fell back on the week, as did sugar, coffee and cotton in the ‘softs’ category. The latter has been affected by flooding in Asia as well as depreciated currencies in the region.

Have a great week!