The job gains reported this morning don’t reflect a rapidly growing economy, but they provided enough relief to markets to boost stocks into record territory. The Dow last traded at 14,986 about 276 pts higher than last Friday. The S&P 500 is trading at 1,615. Gold is trading lower at $1,464 an ounce, while oil futures at $95.57 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.59/Gal. There’s a great “App” called “Gas Buddy” that will allow you to find the cheapest gas prices where ever you are and map you to the station.
Yields on 10-year Treasury notes, which move inversely to prices, last traded at 1.75%. 30-year Treasury Bond yields last traded at 2.95%. Mortgage Bonds have broken out of the downward trend (higher rates) they’ve been trading in since Dec 5, 2012 and continue to have established a higher range (lower rates). The MBS (Mortgage Backed Security) FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days is currently trading at 104.125 a tad worse than where we were last Friday. Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the better the rate.
In economic news this week; get your popcorn ready, it’s been a full week of economic news. the reader’s digest version is The economy is faltering early in the new year, the Fed Gods had a meeting housing seems to have reached a bottom and is at least in recovery mode and job growth seems to have rebounded a bit.
What ultimately drives the economy is spending. Without primarily consumer spending we have no economic growth.. Well… consumers were more cautious spenders in March and income growth also slowed, reinforcing a mass of reports that indicate the economy slowed as the spring began. Consumer spending rose just 0.2% last month, down from 0.7% in February. It was the smallest gain in three months. When Americans buy more goods and services, businesses generate higher sales and profits and can afford to hire workers. Less spending results in slower economic growth. Americans spent more in March on services such as eating out, but they also paid higher utility bills because of an unusually cold March. That accounted for a big chunk of the spending. Utility bills are expected to decline in the next month or two, letting consumers save the extra cash or spend it on other things. We’ll see.
While we spent less money we apparently grew more confident in April despite mounting evidence the economy may have slipped into another spring lull. The consumer confidence index rose to 68.1 this month from 61.9 in March, according to the nonprofit Conference Board, publisher of the report. Consumer confidence took a fall in March partly because of the “sequester,” the law requiring billions in federal spending cuts that dominated headlines last month. Yet the controversy over the sequester has largely died down, or fell out of media favor, while rising stock prices and falling gasoline costs may have eased concerns, at least for the moment. Before the 2007-2009 recession, the consumer confidence index hovered around the 100 mark. The index is a good long-term indicator of where the economy is headed, but it can be very choppy on a month-to-month basis.
U.S. manufacturers barely expanded in April as the industry’s rate of growth slowed to the lowest pace since December, fell to 50.7% from 51.3% in March according to the closely followed ISM or Institute for Supply Management index. Reading over 50 indicate more manufacturers are expanding instead of contracting.
Pending home sales rose nationally 1.5% in March, reversing February’s decline, the National Association of Realtors reported. The pending-home-sales index increased to 105.7 in March from 104.1 in February, and was up 7% from March 2012. Contract activity has been in a narrow range in recent months, not from a pause in demand but because of limited supply. The S&P/Case-Shiller 20-city composite index rose 9.3% in February from the same period last year, the largest annual growth since May 2006. All 20 cities saw year-over-year gains in February, with accelerating growth in 16 cities.
I’m sure you’ve heard the scuttle “is this a bubble” that housing prices could be rising so quickly. This is very much like an over correction in the stock market. On Oct 12 2007 the Dow was at 14,093, On March 6 2009 (just two years later) it had dropped to 6,626. That’s a drop of 53%. But by June 12, 2009 (just 3 months later) the Dow was at 8,799, a 32% increase from the low hit just months earlier. I just think we’ve seen the bottom and the market is reacting to having overcorrected. The housing market could go up by 100% from the bottom and we would still be half way to where we were at the top and I’m not even factoring in inflation.
The Fed Gods met this week and stated in their policy statement, that they were flexible, saying the Fed was prepared to “increase or reduce the pace of its purchases,” commonly known as quantitative easing, depending on labor market or inflation changes. Big Chief Bernanke had previously said the Fed was flexible, but this is the first time it was included in the statement. If you’ve been reading this commentary you are aware that after starting the year brightly, the economy has started to look sluggish in recent weeks. At the same time, inflation has been softening and remains well below the Fed’s 2% target.
The new flexible language matters because most of the market discussion has centered on the question on when the asset purchases will be reduced. The Fed Gods have to be careful with this because they are artificially suppressing long term interest rates on treasuries and mortgages by purchasing these securities and creating more demand with less supply (remember your econ 101). With inflation low though, the Fed wants to make clear that excessive deflation could require more aggressive easing. The minutes of this two-day meeting will be released on May 22. It’s expected that there will be an active discussion of the factors behind the weaker inflation.
On the jobs front: The U.S. created a net 165,000 jobs in April and the hiring was stronger in March and February than the Labor Department initially reported. The increase in jobs exceeded the 135,000 forecast which is causing the stock market to rally. The acceleration in hiring also nudged the unemployment rate down to 7.5% from 7.6% in March. That’s the lowest level since December 2008, the month before President Obama took office. Yet despite an improved labor market in April, companies are not hiring as many workers as they were just a few months ago and most economites think job growth will remain soft. Among the reasons: cuts in federal spending will accelerate and consumers are expected to feel a sharper bite from higher tax rates imposed in January.
The unemployment rate, for its part, won’t shrink rapidly unless companies hire at a much faster clip. The U.S. needs to average around 250,000 jobs a month for an extended period to tug the jobless rate back down to pre-recession levels of under 6%. The pace of hiring in April is far too slow to accomplish that task.
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