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Wednesday, April 27, 2016

Thursday: GDP, Unemployment Claims

by Calculated Risk on 4/27/2016 07:49:00 PM

Atlanta Fed GDP Now:

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6 percent on April 27, up from 0.4 percent on April 26.
New York Fed Nowcasting:
GDP growth prospects remain moderate for the first half of the year: the nowcasts stand at 0.8% for 2016:Q1 and 1.2% for 2016:Q2.
Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released.  The consensus is for 260 thousand initial claims, up from 247 thousand the previous week.

• Also at 8:30 AM, Gross Domestic Product, 1st quarter 2016 (Advance estimate). The consensus is that real GDP increased 0.7% annualized in Q1.

• At 11:00 AM, Kansas City Fed Survey of Manufacturing Activity for April. This is the last of the regional Fed manufacturing surveys for April.

Analysis: Rate Hike in June depends mostly on Inflation

by Calculated Risk on 4/27/2016 05:07:00 PM

The April FOMC statement was very similar to the March statement. There was less emphasis on "global" risks in the April statement, and there was more emphasis on low inflation. Here are excepts from the April and March statements on inflation:

From the April FOMC statement:

Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports.
emphasis added
This was changed from the March FOMC statement:
Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
Note: I was expecting a change in the statement characterizing risks as "nearly balanced", but that wasn't included (I think that would have suggested a rate hike in June was more likely).

To hike in June, it seems the FOMC will be looking for decent employment reports for April and May, and for inflation to pickup (especially core PCE).

Inflation Measures Click on graph for larger image.

This graph shows the year-over-year change for four key measures of inflation: Core PCE, core CPI, trimmed-mean CPI and median CPI (the last two from the Cleveland Fed). 

On a year-over-year basis in March, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, and the CPI less food and energy rose 2.2%.

Core PCE (green) is for February and increased 1.7% year-over-year.

Using these measures, inflation has been moving up, and most measures are close to the Fed's target - only core PCE is still below.

Core PCE for March will be released this Friday, and core PCE for April will be released on May 31st.  If core PCE moves up further, a rate hike in June would be more likely.

FOMC Statement: No Change to Policy, Less Global Concern

by Calculated Risk on 4/27/2016 02:03:00 PM

Not much change. Less mention of "global" risks.

FOMC Statement:

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
emphasis added

Zillow Forecast: Expect Slower Growth in March for the Case-Shiller Indexes

by Calculated Risk on 4/27/2016 11:50:00 AM

The Case-Shiller house price indexes for February were released yesterday. Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.

From Zillow: March Case-Shiller Forecast: Expect the Slowdown to Continue

All three headline S&P/Case-Shiller Home Price Indices grew at a slightly slower pace in February compared to January, and the slowdown should extend into March, according to Zillow’s March Case-Shiller forecast.

The March Case-Shiller National Index is expected to gain another 0.3 percent in March from February, down from 0.4 percent growth in February from January. We expect the 10-City Index to grow 4.3 percent year-over-year in March, and the 20-City Index to grow 5 percent over the same period, down from annual growth of 4.6 percent and 5.4 percent in February, respectively. The National Index looks set to rise 5.3 percent year-over-year in March, equal to February’s annual growth.

Zillow’s March Case-Shiller forecast is shown in the table below. These forecasts are based on today’s February Case-Shiller data release and the March 2016 Zillow Home Value Index (ZHVI). The March Case-Shiller Composite Home Price Indices will not be officially released until Tuesday, May 31.
The year-over-year change for the 10-city and 20-city indexes will probably be lower in the March report than in the February report.  The change for the National Index will probably be about the same.

Zillow forecast for Case-Shiller

NAR: Pending Home Sales Index increased 1.4% in March, up 1.4% year-over-year

by Calculated Risk on 4/27/2016 10:03:00 AM

From the NAR: Pending Home Sales Maintain Momentum in March

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.4 percent to 110.5 in March from an downwardly revised 109.0 in February and is now 1.4 percent above March 2015 (109.0). After last month’s slight gain, the index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0).
...
The PHSI in the Northeast increased 3.2 percent to 97.0 in March, and is now 18.4 percent above a year ago. In the Midwest the index inched up 0.2 percent to 112.8 in March, and is now 4.0 percent above March 2015.

Pending home sales in the South rose 3.0 percent to an index of 125.4 in March but are still 0.6 percent lower than last March. The index in the West declined 1.8 percent in March to 95.3, and is now 7.9 percent below a year ago.
emphasis added
This was above expectations of a 0.5% increase for this index.  Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in April and May.

MBA: "Mortgage Applications Decrease in Latest MBA Weekly Survey"

by Calculated Risk on 4/27/2016 07:00:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 22, 2016.
...
The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index decreased 2 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 14 percent higher than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.85 percent from 3.83 percent, with points increasing to 0.35 from 0.32 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added
Mortgage Refinance Index Click on graph for larger image.


The first graph shows the refinance index since 1990.

Refinance activity was higher in 2015 than in 2014, but it was still the third lowest year since 2000.

Refinance activity has increased a little with lower rates.


Mortgage Purchase Index The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 14% higher than a year ago.

Tuesday, April 26, 2016

Wednesday: FOMC Announcement, Pending Home Sales

by Calculated Risk on 4/26/2016 07:34:00 PM

A few FOMC previews ...
From Tim Duy: The Fed Is Meeting in April to Talk About June

From Goldman Sachs: Goldman: Expect FOMC statement next week to say risks are "nearly balanced"

From me: FOMC Preview: No Rate Hike, Risks "Nearly Balanced"

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 10:00 AM, Pending Home Sales Index for March. The consensus is for a 0.5% increase in the index.

• At 2:00 PM, the FOMC Meeting Announcement.  The FOMC is expected to make no change to policy at this meeting.

Duy: Fed Is Meeting Today, Talking About June

by Calculated Risk on 4/26/2016 04:54:00 PM

From Professor Tim Duy writing at Bloomberg: The Fed Is Meeting in April to Talk About June

The Fed will stand pat this week. We know it, they know it. So what then will the Fed talk about[?]
...
The April meeting of the Federal Open Market Committee (FOMC) will be about the June meeting. Policymakers' fundamental challenge is that the FOMC doesn't want to rule out a June hike, but the markets already have.
...
Bottom Line: Look for the Fed to hold steady this meeting, but be aware it is probably not comfortable with the market’s assessment of potential rate hikes this year. It will likely want to increase the uncertainty surrounding the June meeting in particular. The improving financial situation gives it room to do so by moving to a balanced assessment of risks. ...

Chemical Activity Barometer "Accelerated" in April

by Calculated Risk on 4/26/2016 02:31:00 PM

Here is an indicator that I'm following that appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Accelerated in April; Signaling Increased U.S. Business Activity Into Fourth Quarter

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), expanded 0.6 percent in April following a revised 0.1 percent increase in March and 0.2 percent decline in February. All data is measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 1.8 percent over this time last year, a marked deceleration of activity from one year ago when the barometer logged a 2.7 percent year-over-year gain from 2014. On an unadjusted basis the CAB jumped 1.4 percent, following a solid 0.8 percent gain in March.
...
Applying the CAB back to 1919, it has been shown to provide a lead of two to 14 months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added
Chemical Activity Barometer Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

Currently CAB is up slightly year-over-year, and this suggests an increase in Industrial Production over the next year is possible.

Real Prices and Price-to-Rent Ratio in February

by Calculated Risk on 4/26/2016 11:54:00 AM

Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 5.3% year-over-year in February

Note: There was an error in the Case-Shiller press release this morning. From the press release:

"Fourteen of 20 cities reported increases in February before seasonal adjustment; after seasonal adjustment, only 10 cities increased for the month."
The NSA count is correct (14 of 20 cities increased before seasonal adjustment), but the SA number is incorrect. After seasonal adjustment, all 20 cities increased in February (not 10).

The year-over-year increase in prices is mostly moving sideways now around 5%. In February, the index was up 5.3% YoY.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $273,000 today adjusted for inflation (36%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

It has been almost ten years since the bubble peak.  In the Case-Shiller release this morning, the National Index was reported as being 3.0% below the bubble peak.   However, in real terms, the National index is still about 17% below the bubble peak.

Nominal House Prices


Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through February) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to November 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to April 2005 levels, and the CoreLogic index (NSA) is back to July 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to February 2004 levels, the Composite 20 index is back to November 2003, and the CoreLogic index back to February 2004.

In real terms, house prices are back to early 2004 levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to August 2003 levels, the Composite 20 index is back to May 2003 levels, and the CoreLogic index is back to August 2003.

In real terms, and as a price-to-rent ratio, prices are back to late 2003 and early 2004 levels - and the price-to-rent ratio maybe moving a little more sideways now.