by Calculated Risk on 12/12/2015 05:41:00 PM

A few excepts from a research piece by Goldman Sachs economists Zach Pandl and Jan Hatzius: December FOMC Preview

Next week we expect the FOMC to raise its target range for the federal funds rate to 0.25-0.50%, bringing an end to the seven-year period of near-zero interest rates. With this action essentially priced in, focus will be on the committee’s policy guidance for 2016 and beyond.

If the FOMC raises rates next week the post-meeting statement will require a thorough rewrite. We expect three main changes. First, we expect the committee to upgrade its description of the labor market in light of firmer payroll growth. Second, we expect the statement to remove some of its relatively cautious language on inflation, while continuing to emphasize that inflation will remain a key determinant of the policy outlook. Third, we look for the statement to show a clear baseline for additional rate hikes—it will not signal “one and done”.

Although Fed officials regularly describe the likely pace of rate hikes as “gradual” we do not expect this term to appear in the statement itself. Recent comments suggest some hesitation about adopting “gradual” as official guidance, despite the frequent mentions. That being said, from the press conference guidance and the Summary of Economic Projections (SEP), the gradual message should be all but explicit.

by Calculated Risk on 12/12/2015 08:31:00 AM

The focus this week will be on the FOMC announcement and press conference on Wednesday.

The key economic report this week is November housing starts on Wednesday.

For manufacturing, November Industrial Production will be released on Wednesday, and the December NY, Philly and Kansas City Fed manufacturing surveys will be released this week.

For prices, CPI will be released on Tuesday.

----- Monday, December 14th -----
No economic releases scheduled.

----- Tuesday, December 15th -----
8:30 AM: The Consumer Price Index for November from the BLS. The consensus is for no changed in CPI, and a 0.2% increase in core CPI.

8:30 AM: NY Fed Empire State Manufacturing Survey for December. The consensus is for a reading of -7.0, up from -10.7.

10:00 AM: The December NAHB homebuilder survey. The consensus is for a reading of 63, up from 62 in November.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Wednesday, December 16th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Housing Starts for November.

Total housing starts decreased to 1.060 million (SAAR) in October. Single family starts decreased to 722 thousand SAAR in October.

The consensus for 1.140 million, up from October.

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for November.

This graph shows industrial production since 1967.

The consensus is for a 0.2% decrease in Industrial Production, and for Capacity Utilization to decrease to 77.4%.

During the day: The AIA's Architecture Billings Index for November (a leading indicator for commercial real estate).

2:00 PM: FOMC Meeting Announcement.  The FOMC is expected to raise the Fed Funds rate at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chair Janet Yellen holds a press briefing following the FOMC announcement.

----- Thursday, December 17th -----
8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 270 thousand initial claims, down from 282 thousand the previous week.

10:00 AM: the Philly Fed manufacturing survey for December. The consensus is for a reading of 1.2, down from 1.9.

----- Friday, December 18th -----
10:00 AM ET: Regional and State Employment and Unemployment for November.

11:00 AM: the Kansas City Fed manufacturing survey for December.

by Calculated Risk on 12/11/2015 08:11:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Lower as Markets Grow Anxious Ahead of Fed

Mortgage rates recovered yesterday's losses in many cases, and moved even lower in many other cases. The mortgage sector was one of the tamer performances of the day when it comes to financial markets. Even if we focus solely on the mortgage-backed-securities (MBS) that most directly affect mortgage rates, we see a lot more movement in the marketplace than we see on lender rate sheets.

This dichotomy between market movement and rate sheets is fairly common when volatility increases or on the approach to a significant economic event. That's especially true of Friday afternoons. With a big increase in volatility on this Friday before next week's big Fed announcement, today meets all the conditions.

Still, rates did drop--just not as much as we might like. The most prevalently-quoted conventional 30yr fixed rate moved back down to 3.875% for some of the more aggressive lenders, though most remain at 4.0%. Among the lenders quoting the same rates as yesterday, upfront costs would be slightly lower (or lender credit slightly higher).
emphasis added

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates

by Calculated Risk on 12/11/2015 04:20:00 PM

Another short preview, this one from economists at Nomura:

We believe that the FOMC will raise short-term interest rates at its December meeting as comments from Fed officials in recent months have suggested that the bar for liftoff is low. With liftoff quite likely, the attention is on what happens after liftoff. We think that the FOMC will want to send the signal that we should not expect liftoff to be followed by a series of subsequent rate hikes in rapid succession. We think the Committee will continue to stress that the subsequent rate adjustment will be “gradual” and “data dependent.” In addition to the FOMC statement, we will also receive the Committee’s summary of economic projections and Chair Yellen will hold a press conference. We will play close attention to the FOMC’s projections for the economic and inflation outlook and how it ties this into its expectation of the path of policy.

CR: I'll post an additional preview of the FOMC meeting this weekend.

by Calculated Risk on 12/11/2015 12:16:00 PM

A few excerpts from a research piece by Merrill Lynch economist Michael Hanson: The not-so-dovish hike

With the market pricing in a better than 90% chance the Fed will hike at its December meeting, liftoff expectations are very different than in September. However, it is déjà vu all over again for talk of a “dovish hike” thereafter. We do not expect the Fed will be find the right mix of language, projections, dots and press conference remarks that ratifies current market expectations of a little more than two hikes next year — particularly when the Fed views four as “gradual.” The overall message from the December meeting is likely to be dovish, but probably less than the market hopes. ...

The challenge for Yellen will be to find the right balance between “gradual” and “data dependent.” ... the Fed does not want to suggest that it will pre-commit to any particular policy path. Several Fed officials have noted that “gradual” is a forecast, not a promise. As long as the data behave largely in line with the FOMC’s projections, a gradual pace of rate hikes is likely. But Yellen’s ability to explain this nuance to a market that would like a clear sign that the Fed is going to go even more slowly in 2016 may well be tested.

From CR: It seems that the Fed will raise rates next week. For 2016, several key analysts are forecasting 4 rate hikes (every other meeting), however the market is only pricing in about 2 rate hikes in 2016.

by Calculated Risk on 12/11/2015 10:00:00 AM

The preliminary University of Michigan consumer sentiment index for December was at 91.8, up from 91.3 in November.

"While the preliminary December reading was largely unchanged from last month, consumers evaluated current economic conditions more favorably and expected future prospects less favorably. In a repeat of last month's findings, all of the early December gain was recorded among households with incomes in the bottom two-thirds (+2.7%), while the Sentiment Index among consumers with incomes in the top third declined (-4.4%). Importantly, the survey recorded persistent strength in personal finances and buying plans, while the largest loss was in how consumers judged prospects for the national economy during the year ahead. Overall, the Sentiment Index has averaged 92.9 during 2015, the highest since 2004, with only 10 higher yearly averages in the past half century. The data continue to indicate that real consumer expenditures will grow by 2.8% in 2016 over 2015. "
emphasis added

This was slightly below the consensus forecast of 92.0.


Click on graph for larger image.

by Calculated Risk on 12/11/2015 08:39:00 AM

On a monthly basis, retail sales were up 0.2% from October to November (seasonally adjusted), and sales were up 1.4% from November 2014.

From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $448.1 billion, an increase of 0.2 percent from the previous month, and 1.4 percent above November 2014. ... The September 2015 to October 2015 percent change was unrevised from +0.1 percent.

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline increased 0.3%.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales ex-gasoline increased by 3.7% on a YoY basis (1.4% for all retail sales including gasoline).

The increase in November was below expectations of a 0.3% increase.   This was a a somewhat weak headline report, however sales ex-gasoline are still up a decent 3.7% YoY.

by Calculated Risk on 12/10/2015 07:05:00 PM

Thursday:
• At 8:30 AM ET, the Producer Price Index for November from the BLS. The consensus is for no changed in prices, and a 0.1% increase in core PPI.

• Also at 8:30 AM, Retail sales for November will be released. The consensus is for retail sales to increase 0.3% in November, and to increase 0.3% ex-autos.

• At 10:00 AM, Manufacturing and Trade: Inventories and Sales (business inventories) report for October. The consensus is for a 0.1% increase in inventories.

• Also at 10:00 AM, University of Michigan's Consumer sentiment index (preliminary for December). The consensus is for a reading of 92.0, up from 91.3 in November.

Sacramento: During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For a few years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In November, total sales were up  11.5% from November 2014, and conventional equity sales were up 13.9% compared to the same month last year.

In November, 8.3% of all resales were distressed sales. This was up from 7.0% last month, and down from 11.5% in November 2014.  Distressed sales happen all year, but equity sales have a seasonal pattern - so this pushed up the percent of distressed sales in the Winter.

The percentage of REOs was at 3.7% in October, and the percentage of short sales was 4.6%.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales. Distressed sales are so small, the font doesn't fit.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes decreased 28.4% year-over-year (YoY) in October.  This was the seventh consecutive monthly YoY decrease in inventory in Sacramento (a big recent change).

Cash buyers accounted for 20.2% of all sales (frequently investors).

Summary: This data suggests a more normal market with fewer distressed sales, more equity sales, and less investor buying.

by Calculated Risk on 12/10/2015 01:23:00 PM

The Federal Reserve released the Q3 2015 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth decreased in Q3 compared to Q2:

The net worth of households and nonprofits fell to $85.2 trillion during the third quarter of 2015. The value of directly and indirectly held corporate equities decreased $2.3 trillion and the value of real estate rose $482 billion.

Household net worth was at $85.2 trillion in Q3 2015, down from $86.4 trillion in Q2.  The decline was due to the decline in the stock market in Q3.

The Fed estimated that the value of household real estate increased to $21.8 trillion in Q3 2015. The value of household real estate is still $0.7 trillion below the peak in early 2006 (not adjusted for inflation).

Click on graph for larger image.

The first graph shows Households and Nonprofit net worth as a percent of GDP.  Household net worth, as a percent of GDP, is higher than the peak in 2006 (housing bubble), and above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was increasing gradually since the mid-70s, and then we saw the stock market and housing bubbles.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2015, household percent equity (of household real estate) was at 56.7% - up from Q2, and the highest since Q2 2006. This was because of an increase in house prices in Q3 (the Fed uses CoreLogic).

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 50+ million households with mortgages have far less than 56.7% equity - and several million still have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt increased by $48 billion in Q3.

Mortgage debt has declined by $1.27 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q3, and  is somewhat above the average of the last 30 years (excluding bubble).

by Calculated Risk on 12/10/2015 08:37:00 AM

The DOL reported:

In the week ending December 5, the advance figure for seasonally adjusted initial claims was 282,000, an increase of 13,000 from the previous week's unrevised level of 269,000. The 4-week moving average was 270,750, an increase of 1,500 from the previous week's unrevised average of 269,250.

There were no special factors impacting this week's initial claims.

The previous week was unrevised at 269,000.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 270,750.

This was above the consensus forecast of 270,000, and the low level of the 4-week average suggests few layoffs.