US Mortgages To Disappoint – 10 Yr Note Auction, Fed Minutes
Saxo Bank | Jul 09, 2014 04:26AM ET
- Weak housing market could dampen US recovery
- Looming Fed interest rate rise to impact housing market
- Consensus still expects rate rise until well into 2015
Wednesday’s a relatively quiet day for economic news, although the US economy will come under renewed scrutiny with the release of Fed minutes. Meanwhile, a Treasury auction of 10-year Notes will offer guidance on the appetite for debt at current interest rates, an increasingly crucial topic as the market ponders the end of quantitative easing. We’ll also see a new weekly release on demand for mortgage applications, which will provide more context about the mixed state of the housing market.
US: Mortgage Applications (11:00 GMT) The outlook for housing remains a key source of uncertainty for the US economy. Recent data has improved since the winter, but the rebound has been modest and uneven. The wobbly state of this critical sector raises questions about the macro outlook, albeit on the margins. Economic news otherwise has been generally encouraging for the US in recent months. The question is whether a weak housing market threatens the upbeat trend?
“You've got much more negative vibrations in the housing surveys about home ownership than we ever had before," Karl Case said this week. Case, of course, is one-half of the economic team that developed the widely followed S&P/Case-Shiller Home Price Indexes and so he knows a thing or two about the real estate market. Speaking to CNN earlier this week Case reasoned that the current run of “negative vibrations” are a byproduct of people getting “hosed” in recent years. “They thought that housing prices will never go down. That's just bull.”
Deciding how much bull is in the market these days is mostly art rather than science. The analysis depends largely on the data sets one chooses to emphasise. Home sales have picked up in recent months. The latest jump in the Pending Home Sales Index, which reached an eight-month high in May, suggests that purchases will continue to rise in this year's second half. But a sluggish trend for housing starts and newly issued housing permits implies that the market will face headwinds.
Today’s weekly release on mortgage applications—a measure of demand—will provide another clue on how the market’s evolving this summer. For the moment, the recent numbers suggest that the market’s treading water at best.
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A critical variable, of course, is interest rates. The national average for the 30-year mortgage rate continued to inch lower, falling to 4.12 percent for the week through July 5—the lowest since late-May. That’s a positive tailwind, but for how long? As discussed below, the market’s increasingly focused on when the Fed will start raising interest rates. Although the first rate hike probably won’t come until deep into 2015, the crowd is thinking more about the implications for what's coming--for real estate and the economy generally.
US: 10-Year Note Auction (17:00 GMT) The benchmark 10-year yield has remained in a tight range of roughly 2.5-2.7 percent for the past two months. Inflation expectations have been creeping higher, based on the yield spread for the 10-year nominal Note less its inflation-indexed counterpart, although the roughly 2.3 percent rate for implied inflation is largely unchanged from recent history. In other words, the market’s taking the rising chorus of discussion about higher rates in stride… so far.
The current climate may be calm, but the future course for the price of money is becoming ever more topical. A few days ago Goldman Sachs revised its forecast for the first rate hike, predicting the change in the monetary weather will start in next year’s third quarter, or a bit sooner than the firm’s previous forecast of Q1 2016. Meanwhile, Fed funds futures imply that the market estimates a 78 percent chance for a rate hike by September 2015, Bloomberg reported yesterday. Veteran Fed watcher Tim Duy (an economist at the University of Oregon) recently wrote that the turning point will come even earlier—in next year’s second quarter.
An obvious catalyst for expecting a hike relatively soon is the relatively stronger pace of growth for payrolls, which inspires forecasts of an economy that will strengthen. The path of macro will, of course, dictate the Fed’s decisions, and on that front there’s still room for wondering if the Fed’s easy money policy can survive for longer than the consensus view anticipates.
The cautiously optimistic aura that prevails suggests that we won’t see any surprises in today’s auction of new 10-year Notes. When the trend for rates changes, however, we’ll probably see the evidence in the 10-year yield. A rise above the 2.7 percent level would be a sign that the assumption of stronger macro growth has become the dominant view. For now, the bulls and bears appear to be evenly balanced. It’ll be interesting to see if today’s auction tips the balance one or the other.
US: Federal Reserve FOMC Minutes (18:00 GMT) Today’s release will be closely read for fresh clues about the near-term path for monetary policy. One of the issues that traders will focus on in today’s minutes is inflation, which has drawn heightened scrutiny in recent weeks. By some accounts, the recent rise in inflation is a sign that the central bank will turn hawkish much sooner than expected—consumer prices rose 2.2 percent for the year through May in unadjusted terms, the highest since October 2012.
Is that a reason to think that the Fed will tighten well ahead of what the consensus current anticipates? No one knows, of course—probably not even the Fed at this point. But reading through today’s minutes may shed some light on how policymakers are thinking and what they’re looking for in the months ahead. Meantime, higher inflation is one of several factors that will influence the Fed.
Rising inflation accompanied by rising wage growth, for instance, would be taken as a strong pressure point for rolling out a rate hike. It’s worth noting that wage growth is higher in 2014—running in the low-two-percent range, or nearly twice as much vs. the trend in late-2012. But it’s also true that wage growth (based on average hourly earnings of production/nonsupervisory workers) has been fluctuating in a range so far this year: roughly 2.2-2.4 percent. In other words, the case is still quite weak that the Fed has lost control of inflation demon.
Nonetheless, the market’s eager for more guidance on the Fed’s game plan for the months ahead. The broad themes of what will unfold are widely known, but the details (including timing) are still a matter of much debate. Today’s release isn’t likely to fill in the missing pieces to any great degree, but even a few tidbits of insight will be seized on at a time when uncertainty is growing about how policy will play out as QE winds down.
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