by Calculated Risk on 12/20/2018 08:36:00 AM

The DOL reported:

In the week ending December 15, the advance figure for seasonally adjusted initial claims was 214,000, an increase of 8,000 from the previous week's unrevised level of 206,000. The 4-week moving average was 222,000, a decrease of 2,750 from the previous week's unrevised average of 224,750.
emphasis added

The previous week was unrevised.

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 decreased to 222,000.

This was lower than the consensus forecast. The low level of claims suggest few layoffs.

by Calculated Risk on 12/19/2018 07:07:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 221 thousand initial claims, up from 206 thousand the previous week.

• At 8:30 AM, the Philly Fed manufacturing survey for December. The consensus is for a reading of 17.5, up from 12.9.

by Calculated Risk on 12/19/2018 05:27:00 PM

Some brief excerpts from research notes by economists at Merrill Lynch and Goldman Sachs …

From Merrill Lynch:

The Fed hiked rates while signaling a lower path, as we expected. ... We think Fed Chair Powell delivered a clear message: when the Fed has reached the neutral target range, there is a need for greater caution and policy to become ever more data dependent. This means that the threshold to bring rates into restrictive territory - above the neutral rate - is high. The Fed would need to see convincing data including a further decline in the unemployment rate, above target inflation with inflation expectations shifting higher and cooperative financial markets.

We are changing our call for the Fed. We now expect the Fed to hike just two more times in 2019 with no additional hikes in 2020. This would leave the terminal rate of the cycle to be 2.75 - 3.0% and shaves 50bp off our previous path of the Fed. The market has already shifted and is not even pricing in a full hike in 2019 with cuts in 2020. In our view, the Fed is too optimistic about the terminal rate but the market is too pessimistic. In addition, consistent with our forecast for fewer Fed hikes, we lower our US interest rate forecasts across the curve, with the 10yr ending at 3%.

From Goldman:

The FOMC raised the funds rate target range to 2¼% -2½%, as widely expected. The median dot in the Summary of Economic Projections now shows a 2-1 baseline for rate hikes in 2019-2020, compared to 3-1 in September, but the average dot declined significantly, a dovish surprise suggesting broad endorsement of the new baseline. Changes to the post-meeting statement were generally dovish as well. While the growth characterization was more upbeat than we had expected, the policy guidance was a bit more dovish than we had expected.

by Calculated Risk on 12/19/2018 03:47:00 PM

Statement here.

Powell press conference video here.

On the projections, growth was revised down slightly, and inflation was softer.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2018	2019	2020
Dec 2018	3.0 to 3.1	2.3 to 2.5	1.8 to 2.0
Sep 2018	3.0 to 3.2	2.4 to 2.7	1.8 to 2.1
Jun 2018	2.7 to 3.0	2.2 to 2.6	1.8 to 2.0

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.7% in November. So the unemployment rate projection for 2018 was unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2018	2019	2020
Dec 2018	3.7	3.5 to 3.7	3.5 to 3.8
Sep 2018	3.7	3.4 to 3.6	3.4 to 3.8
Jun 2018	3.6 to 3.7	3.4 to 3.5	3.4 to 3.7

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of October, PCE inflation was up 2.0% from October 2017.  PCE inflation projections were revised down for 2018, 2019, and 2020.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2018	2019	2020
Dec 2018	1.8 to 1.9	1.8 to 2.1	2.0 to 2.1
Sep 2018	2.0 to 2.1	2.0 to 2.1	2.1 to 2.2
Jun 2018	2.0 to 2.1	2.0 to 2.2	2.1 to 2.2

PCE core inflation was up 1.8% in October year-over-year. Core PCE inflation was revised down slightly for 2018.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2018	2019	2020
Dec 2018	1.8 to 1.9	2.0 to 2.1	2.0 to 2.1
Sep 2018	1.9 to 2.0	2.0 to 2.1	2.1 to 2.2
Jun 2018	1.9 to 2.0	2.0 to 2.2	2.1 to 2.2

by Calculated Risk on 12/19/2018 03:40:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

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 maximum employment objective and its symmetric 2 percent inflation objective. 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

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles
emphasis added

by Calculated Risk on 12/19/2018 12:15:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: Run of positive billings continues at architecture firms

Architecture firm billings growth expanded in November by a healthy margin, according to a new report today from The American Institute of Architects (AIA).

AIA’s Architecture Billings Index (ABI) score for November was 54.7 compared to 50.4 in October. With the strongest billings growth figure since January and continued strength in new project inquiries and design contracts, billings are closing the year on a strong note.

“Despite some concerns about a potential economic downturn, architecture firms continue to report strong billings, inquiries, and new design contracts,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “For the coming year, concerns about the economy among architecture firm leaders tend to be balanced by their concerns about a lack of qualified employee prospects.”
...
• Regional averages: Northeast (56.8), Midwest (53.1), South (50.5), West (49.0)

• Sector index breakdown: commercial/industrial (53.8), mixed practice (53.8), multi-family residential (51.2), institutional (50.8)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 54.7 in November, up from 50.4 in October. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index has been positive for 14 consecutive months, suggesting a further increase in CRE investment in 2019.

by Calculated Risk on 12/19/2018 11:19:00 AM

Earlier: NAR: Existing-Home Sales Increased to 5.32 million in November

Two key points:

1) The key for the housing - and the overall economy - is new home sales, single family housing starts and overall residential investment. Overall this is a reasonable level for existing home sales, and the recent weakness is no surprise given the increase in mortgage rates.

2) Inventory is still low, but was up 4.2% year-over-year (YoY) in November. This was the fourth consecutive month with a year-over-year increase in inventory, and the largest YoY increase since late 2014.

Click on graph for larger image.

The current slight YoY increase in inventory is nothing like what happened in 2005 and 2006. In 2005 (see red arrow), inventory kept increasing all year, and that was a sign the bubble was ending.

Although I expected inventory to increase YoY in 2018, I also expected inventory to follow the normal seasonal pattern (not keep increasing all year).

Also inventory levels remains low, and could increase much more and still be at normal levels. No worries.

The second graph shows existing home sales Not Seasonally Adjusted (NSA).

Sales NSA in November (406,000, red column) were below sales in November 2017 (425,000, NSA), but were the third highest since the housing bubble (behind 2016 and 2017).

Sales NSA through November (first eleven months) are down about 2.3% from the same period in 2017.

This is a small YoY decline in sales to-date - it is likely that higher mortgage rates are impacting sales, and it is possible there has been an impact from the changes to the tax law (decreasing property taxes write-off, etc).

by Calculated Risk on 12/19/2018 10:08:00 AM

From the NAR: Existing-Home Sales Increase for Second Consecutive Month

Existing-home sales increased in November, according to the National Association of Realtors®, marking two consecutive months of increases. Three of four major U.S. regions saw gains in sales activity last month.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.9 percent from October to a seasonally adjusted rate of 5.32 million in November. Sales are now down 7.0 percent from a year ago (5.72 million in November 2017).
...
Total housing inventory at the end of November decreased to 1.74 million, down from 1.85 million existing homes available for sale in October. This represents an increase from 1.67 million a year ago, however. Unsold inventory is at a 3.9-month supply at the current sales pace, down from 4.3 last month and up from 3.5 months a year ago.
emphasis added

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in November (5.32 million SAAR) were up 1.9% from last month, but were 7.0% below the November 2017 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 1.74 million in November from 1.85 million in October.   Headline inventory is not seasonally adjusted, and inventory usually decreases to the seasonal lows in December and January, and peaks in mid-to-late summer.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory was up 4.2% year-over-year in November compared to November 2017.  

Months of supply was at 3.9 months in October.

For existing home sales, a key number is inventory - and inventory is still low, but appears to have bottomed. I'll have more later ...

by Calculated Risk on 12/19/2018 07:00:00 AM

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

Mortgage applications decreased 5.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 14, 2018.

... The Refinance Index decreased 2 percent from the previous week. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index decreased 10 percent compared with the previous week and was 2 percent higher than the same week one year ago.
...
“Despite mortgage rates falling across the board last week to their lowest levels in three months, mortgage applications also declined, as more potential borrowers likely stayed away because of ongoing financial market volatility and economic uncertainty,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Purchase applications decreased almost seven percent over the week and refinances decreased around two percent, led by a larger decline in government refinances compared to conventional refinances.”

Added Kan, “With rates continuing to slide lower, refinance borrowers with larger loan balances seemed more apt to take action. The average loan balance for refinance loans increased to its highest level since September 2017.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) decreased to its lowest level since September 2018, 4.94 percent, from 4.96 percent, with points decreasing to 0.43 from 0.48 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index since 1990.

Refinance activity will not pick up significantly unless mortgage rates fall 50 bps or more from the recent level.

The second graph shows the MBA mortgage purchase index

According to the MBA, purchase activity is up 2% year-over-year.

by Calculated Risk on 12/18/2018 05:02:00 PM

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, Existing Home Sales for November from the National Association of Realtors (NAR). The consensus is for 5.19 million SAAR, down from 5.22 million.

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

• At 2:00 PM, FOMC Meeting Announcement. The FOMC is expected to increase the Fed Funds rate 25 bps at this meeting.

• At 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.

• At 2:30 PM, Fed Chair Jerome Powell holds a press briefing following the FOMC announcement.