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Some Fed Messaging, Data Seem At Odds

July 19, 2019 -- Given a recent spate of pretty fair economic data, markets had begun to ratchet down their expectation of an aggressive move of perhaps a 50 basis point cut in the federal funds rate by the Fed at the end of the month in favor of what is actually likely to come: A quarter-point trim.

This week, however, New York Federal Reserve Bank President John Williams noted in a speech before the annual meeting of the Central Bank Research Association that "It’s better to take preventative measures than to wait for disaster to unfold" and noted that it's best for the Fed to "take swift action", that central banks should "move more quickly to add monetary stimulus" and "it pays to act quickly to lower rates at the first sign of economic distress."

Financial markets sized on the comments as an expression of intent by the Fed, and bets on a 50-basis point cut jumped. Seeing the market's reaction, the NY Fed released a cautionary to the markets, tempering Mr. Williams' comments. "This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting." said a spokesman for the NY Fed.

Given the somewhat delicate state of the markets, or at least one where they seem unusually attenuated to the Federal Reserve, it might be better for Fed members and bank presidents to extend their typical pre-meeting period of silence to one that's a bit longer. In reality, Mr. Williams statements are likely the truth: That is, that acting quickly, trying to be preemptive in their actions and lowering rates sooner rather than later is probably a goal of the Fed overall. What's questionable is what constitutes "economic distress", and in this case, how forcefully the Fed should act when it looks as though the distress isn't happening in the market the Fed is charged with managing -- the United States.

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Certainly, there are signs of troubles elsewhere and some softness to be seen here, mostly in manufacturing and/or related to trade with China. However, the stock market is at or near record highs, the unemployment rate is near 50-year lows, job growth is very solid overall and inflation is only a little below desired levels here. Where is any indication that the Fed needs to be aggressive, especially when interest rates remain far closer to historically low than any reasonable measure of "high"?

Central banks around the world are taking steps to shore up their economies by cutting domestic rates and instituting stimulus measures. That's a good thing and should help to move those economies forward, and a case could be made for a small cut in the funds rate to at least keep policy rates here on relative par with where other central bank rates are positioned and perhaps provide a little insurance, but that's about it. Fifty basis point cuts (or even more) should be reserved for periods in serious need of stimulus. As well, and even though the Fed has long preferred to move the key policy rate in quarter-point increments, perhaps it is time that they consider making moves in one-eighth percent increments the norm, which would give the Fed 100% more rate-tweaking capability for each percentage point of policy, which could allow for more precise tuning of monetary policy.

Regardless, there has been little in the date to suggest the need for a bold move by the Fed. Even their latest survey of regional economic conditions was fair enough, with the overall characterization of the 12 districts in the latest Beige Book summed up as "Economic activity continued to expand at a modest pace overall from mid-May through early July, with little change from the prior reporting period." Two districts reported "moderate growth", six "modest" and four essentially unchanged. For the most part, trade and tariff issues seem to be the cause of any softness, but even then, there's no emergency to be seen here.

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The consumer seems to be feeling no ill effects of those, and retail sales put in another solid month. In June, overall spending rose by 0.4%, a fourth consecutive solid gain, and even then, the headline figure was pulled back by lower gasoline prices. Leaving them out, so-called "core" retail sales were even more impressive with a 0.7% gain for the month. Fundamentals for retail sales to continue are pretty good, as well, with rising incomes, stock-price gains and a what looks to be a new upward bump for home prices which have been goosed by lower mortgage rates this spring.

Although we won't learn of sales of new homes for June until next week, the latest Housing market Index from the National Association of Home Builders suggests a stable-to-slightly firmer level of sales should be expected. For July, the HMI rose by a single point to 65, a level a little better than average for 2019 and a fairly robust level. The measure covering sales of single-family homes were also up by a point, climbing back up to 72, also a very solid showing. Expectations for sales over the next six months were essentially level at 71 (up a point, but the same as May) while traffic at sales offices edged higher to 48 -- about the average of the last three months.

That builder moods were mostly on an even keel was likely due to the fact that housing starts for June were also on a pretty even keel. Although posting an overall decline of 0.9% for the month, housing starts remained fair at a 1.253 million (annual) rate of initiation. Single-family starts (the largest and most important sector) popped 3.5% higher for the month, rising back to 847,000 units started, while multifamily activity continued settling back, sliding by 9.2% to a 407,000 annual rate of construction. Permits for future activity were also a little slower, falling by 6.2% to 1.220 million (annual), so construction activity may tail off a bit as the last half of the year comes along, but low mortgage rates and rising wages may help them perk up.

Although manufacturing (and farming) have been bearing the brunt of the administration's erratic trade and tariff policies, the so-called (and likely temporary) "truce" between the U.S. and China and a for-now holding off of the imposition of levies against Mexican-made goods seems to have cheered up manufacturers in at least two regions. The Federal Reserve Banks of New York and Philadelphia weighed in with their local reviews, and the news was pretty good. in New York, which suffered its biggest one-month decline ever in June, a small rebound was seen, with the barometer here posting a 12.9-point rise, moving from negative territory to a positive 4.3 for July. Measures covering new orders improved by still remained at a slightly negative -1.5 for the month, and employment measures declined for a second consecutive month. Dow the New Jersey Turnpike to the Philadelphia Fed's region, the new was resoundingly positive, as the headline value rose by 21.5 points to hit its highest value since last September. Submeasures covering new orders improve sharply with a 10.3 point upward move to 18.9, and that covering employment moving from 15.4 to 30 for the period. If the President's trade saber-rattling can be held silent for another month or two, we might see some additional continued improvement here.

Overall industrial production was flat in June, posting no change from May. The trend here has been rather erratic over the last six months, with negative readings seemingly as likely as positive ones. That said, manufacturing output was higher, climbing by 0.4% and generally firming after a rough early 2019. Mining output put in a fourth straight month of rising output, adding 0.2% for the month, while utility output was surprisingly soft, declining by 3.6% despite warmer than typical weather, which usually increases output. The overall percentage of industrial production floors in active use edged down by 0.2% to 77.9% for the month but is essentially flat over the second quarter of 2019.

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The index of Leading Economic Indicators closed out the second quarter with a 0.3% decline in June, the first negative monthly value since December 2018. The Conference Board's activity tracker was dull at best in the three month period, where it looks like overall GDP growth will be pressed to hit even a 2% mark after posting an unexpectedly string 3.1% rate in 1Q19. The stumble at the end of the period does suggest very little momentum to start the third quarter, but it may be that the drop off was correlated with fresh trade-and tariff concerns impacting economic activity in myriad ways and so may improve with their cessation.

Prices of imported goods declined by 0.9% in June, and are cooling rather quickly, stepping down in a regular cadence since an unlikely 1% flare higher in February. With prices have moved from flat to negative, import prices are now running 2% below year-ago levels, and the sound of falling prices probably isn't what the Fed would prefer to hear. Costs for goods leaving these shore are falling, too, with export prices sliding by 0.7% during the month and no retreating at a 1.6% annual rate. A strong dollar tends to put downward pressure on the prices of imported goods, so that's to be expected, but we also wonder if prices of imported goods are actually being cut as a means to offset the effects of tariffs, which are added after these figures are tallied. This action would be a way to keep purchasers from paying higher prices, and in turn help those then selling goods to end users from passing along those increased prices. Conversely, it also may be that a strong dollar is seeing folks here cutting costs to try to help keep U.S.-made goods competitive. Whatever, the reasons, prices for both import and exported goods have zero traction at the moment.

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Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Jul 12Jun 14Jul 13
6-Mo. TCM2.10%2.20%2.15%
1-Yr. TCM1.97%2.02%2.36%
3-Yr. TCM1.83%1.83%2.67%
5-Yr. TCM1.86%1.88%2.75%
10-Yr. TCM2.09%2.12%2.85%
Federal Cost of Funds2.321%2.326%0.943%
FHLB 11th District COF1.144%1.095%0.698%
Freddie Mac 30-yr FRM3.75%3.84%4.52%
Historical ARM Index Data

Consumer moods seem mostly level at elevated levels. That's at least the initial takeaway from the preliminary July reading on Consumer Sentiment from the University of Michigan. The initial headline value for July was 98.4, up 0.2 from June's final reading a few weeks ago. The measure covering current conditions eased a little, slipping backward by 0.8 points to 111.1, while the one tracking expectations for the future managed a 0.8-point gain to 90.1 for the month. Overall, not much seems like its happening with consumer moods for now, so we'll just call it the summer doldrums kicking in.

With the implied retraction of Mr. Williams comments by the New York Fed, expectations for a 50-basis point cut in the federal funds rate again subsided by the end of the week, but longer-term rates did not rebound and ended the week rather lower than where they began, but may tick up a little once the new week gets underway. No matter for mortgage rates, though, as the six basis point increase in the average conforming 30-year FRM we saw this week is likely to be trimmed back somewhat; we think that we'll see a 3-4 basis point fall in the benchmark mortgage rate when Freddie Mac reports next Thursday morning.

For an outlook for mortgage rates that carries past Labor Day and into the start of the scholastic and football years, check out our latest Two-Month Forecast.

See our mid-year review of our 2019 Outlook , where we provide updates to our speculations for ten topics that are in and around housing and mortgage markets.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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