by Calculated Risk on 6/19/2014 06:55:00 PM

There are some key questions about inflation right now. Will the recent pickup in inflation continue? Or was it just "noise" (As Fed Chair Janet Yellen said)? This will be important to watch.

Here are some excerpts from an article by Merrill Lynch Global Economist Ethan Harris Inflation: bump up or bust out?

One of the great ironies this year is that even as growth has disappointed to the downside, inflation has surprised to the upside. Most important, in the past three months, core CPI inflation has risen at the fastest rate since before the crisis. Moreover, the pick-up is fairly broad-based. Both goods and services inflation is higher and there appear to be only a couple anomalies—strong apparel price inflation and a huge 41.6% annualized jump in airfares.

Despite the strong numbers, we are reluctant to make significant changes in our inflation call. ... we have incorporated the spring surprises and have raised our sequential forecasts slightly, but that only raises our annual numbers by a few tenths. Why the limited response? To put it simply, the fundamentals don’t support a strong sustained increase. Let’s take a look at the main inflation stories.

Reserved money growth
Since the beginning of the economic recovery, monetarists have argued that with the Fed’s massive balance sheet strong inflation could be just around the corner. Our response has always been: reserves are not money, and unless those reserves stimulate a surge in bank lending and spending, they are not inflationary. ... even with the recent pick up in business lending, overall bank lending is still growing at half the normal pace of a business expansion. ...

Medical mal-pricing?
Another key inflation concern is that special factors have temporarily held inflation in check and are now reversing. There seems to be an element of this in medical inflation. Inflation dipped last year as government payment rates were reduced and as key drugs became generic. Thus the medical PCE price index fell 0.45% in April 2013 and then rose 0.20% this April. That swing alone added more than a tenth to year-over-year core PCE inflation. However, we are reluctant to extrapolate the recent strength going forward. ...

It’s a small world after all
In our view, one of the most underrated factors in recent inflation movements is the impact of global markets. ... In recent months, there have been some signs of a bottoming out of consumer import prices. However, a significant acceleration seems unlikely. The conditions that created the low inflation are still in place: emerging market growth remains low, there is abundant spare capacity in the global economy, the dollar is trending higher and Europe is at risk of sliding into deflation. The main upside risk comes from commodity prices, but usually that takes some time to develop.

Weak wages
While there is a lot of talk about higher wage growth, there is very little evidence. .... In our view, there is still some slack in the labor market; when slack disappears, the rise in wage growth will be very slow, and as Yellen made clear at the press conference, the Fed will welcome the initial rise in wage inflation as a sign of normalization rather than inflation.

... Put it all together, we continue to expect a slow rise in inflation, allowing an equally slow Fed exit.

by Calculated Risk on 6/19/2014 12:55:00 PM

From Freddie Mac: Fixed Mortgage Rates Down Slightly

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates reversing course and moving slightly lower for the week.

30-year fixed-rate mortgage (FRM) averaged 4.17 percent with an average 0.6 point for the week ending June 19, 2014, down from last week when it averaged 4.20 percent. A year ago at this time, the 30-year FRM averaged 3.93 percent.

Click on graph for larger image.

Here is a graph of 30 year fixed mortgage rates - according to the PMMS® - for 2013 (blue) and 2014 (red).

Mortgage rates jumped to 4.46% in late June 2013, and it is possible that rates will be lower year-over-year soon (currently 4.17%).

Note: Looking at daily rates from Mortgage News Daily, it is likely mortgage rates will be down year-over-year tomorrow. The MND data is based on actual lender rate sheets, and is mostly "the average no-point, no-origination rate for top-tier borrowers with flawless scenarios". (this tracks the Freddie Mac series very well).

by Calculated Risk on 6/19/2014 10:00:00 AM

From the Philly Fed: June Manufacturing Survey

The diffusion index of current general activity increased from a reading of 15.4 in May to 17.8 this month. The index has remained positive for four consecutive months and is at its highest reading since last September. The current new orders and shipments indexes also moved higher this month, increasing 6 points and 1 point, respectively.
...
Indicators also suggest improved labor market conditions this month. The employment index remained positive for the 12th consecutive month and increased 4 points. [to 11.9].
emphasis added

This was above the consensus forecast of a reading of 13.0 for June.

Click on graph for larger image.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through June. The ISM and total Fed surveys are through May.

The average of the Empire State and Philly Fed surveys is at the highest level since 2011, and this suggests stronger expansion in the ISM report for June.

by Calculated Risk on 6/19/2014 08:30:00 AM

The DOL reports:

n the week ending June 14, the advance figure for seasonally adjusted initial claims was 312,000, a decrease of 6,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 317,000 to 318,000. The 4-week moving average was 311,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 250 from 315,250 to 315,500.

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

The previous week was revised up from 317,000.

The following graph shows the 4-week moving average of weekly claims since January 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 311,750.

This was close to the consensus forecast of 313,000.  The 4-week average is now at normal levels for an expansion.

by Calculated Risk on 6/18/2014 10:03:00 PM

From Jon Hilsenrath at the WSJ: Fed Keeps Rates Unchanged, Sees Eventual Rise in 2015, 2016

The Fed also said it would reduce monthly purchases of mortgage and Treasury bonds by another $10 billion next month to $35 billion.  ....With the job market gradually improving, the Fed is taking away that support and slowly turning its attention to the timing and pace of short-term interest rate increases. It has kept short-term rates near zero since December 2008 and isn't planning to start raising them until next year.

From Robin Harding at the Financial Times: Fed sets the stage for lower volatility this summer

The most revealing bit of Fed analysis at the June meeting was the change that did not take place: there was almost no movement in the Fed’s expectations for inflation. Indeed, its forecasts for 2014, 2015 and 2016 were almost entirely unchanged – with inflation below target in every year.

That was something of a surprise given that the consumer price index – admittedly not the Fed’s preferred measure – is up by more than 2 per cent on a year ago. “The CPI index has been a bit on the high side,” said chairwoman Ms Yellen, “but I think the data that we’re seeing is noisy.”
excerpt with permission

From Goldman Sachs: FOMC Stays the Course

Today's FOMC meeting was a touch more dovish than we expected. ... Chair Yellen downplayed the recent firmer inflation data and signaled some willingness to let inflation overshoot the 2% target if the employment side of the mandate continues to disappoint.

Our forecast for the first hike in the funds rate remains early 2016, about six months later than the FOMC's own projections and the market consensus. ...

The risks relative to our forecast are, however, tilted towards an earlier hike. One reason is that recent inflation news has been firmer than expected. Another is that financial conditions no longer appear tighter than "appropriate."

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 313 thousand from 317 thousand.

• At 10:00 AM, the Philly Fed manufacturing survey for June. The consensus is for a reading of 13.0, down from 15.0 last month (above zero indicates expansion).

by Calculated Risk on 6/18/2014 06:51:00 PM

Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in May.

Lawler notes that Orlando is one of a few markets in Florida where foreclosure share of sales up a decent amount from year ago.

On distressed: Total "distressed" share is down in all of these markets, mostly because of a sharp decline in short sales.

Short sales are down in all of these areas.

Foreclosures are down in most of these areas too, although foreclosures are up a little in a couple of areas.

The All Cash Share (last two columns) is mostly declining year-over-year.

As investors pull back, the share of all cash buyers will probably continue to decline.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share		All Cash Share
	May-14	May-13	May-14	May-13	May-14	May-13	May-14	May-13
Las Vegas	7.9%	31.8%	9.1%	10.3%	17.0%	42.1%	40.2%	57.9%
Reno**	11.0%	27.0%	6.0%	7.0%	17.0%	34.0%
Phoenix	3.9%	12.3%	6.7%	9.7%	10.7%	22.0%	29.5%	38.9%
Sacramento	7.0%	22.5%	8.3%	7.5%	15.3%	30.0%	20.5%	33.6%
Minneapolis	3.9%	6.8%	12.1%	19.9%	16.0%	26.7%
Mid-Atlantic	5.2%	8.2%	8.1%	7.2%	13.3%	15.5%	17.2%	16.7%
Orlando	9.2%	22.1%	24.7%	19.0%	34.0%	41.2%	43.8%	53.9%
California *	6.0%	11.3%	6.9%	15.0%	12.9%	26.3%
Bay Area CA*	4.7%	10.4%	3.1%	6.5%	7.8%	16.9%	22.9%	27.6%
So. California*	6.6%	15.7%	5.8%	10.9%	12.4%	26.6%	25.8%	32.6%
Hampton Roads					21.3%	26.3%
Northeast Florida					36.5%	37.8%
Toledo							36.6%	33.8%
Wichita							24.3%	23.0%
Des Moines							17.5%	17.3%
Tucson							31.3%	32.8%
Omaha							19.4%	14.1%
Pensacola							32.6%	32.1%
Georgia***							26.0%	NA
Peoria							19.6%	21.7%
Georgia***							26.0%	NA
Spokane
Houston			4.5%	9.4%
Memphis*			15.9%	21.5%
Birmingham AL
*share of existing home sales, based on property records **Single Family Only ***GAMLS

by Calculated Risk on 6/18/2014 03:48:00 PM

From housing economist Tom Lawler:

Based on local realtor/MLS reports across the country, I estimate that US existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.81 million in May, up 3.4% from April’s preliminary estimate (which I believe was too low – see below), but down 6.6% from last May’s pace. Folks who track local realtor reports and look at YOY declines in unadjusted data might be surprised by a May estimate showing a decent-sized monthly pickup in seasonally adjusted sales, as the YOY decline in unadjusted sales in May appears to be similar to (or even a tad larger) than that in April. However, (1) seasonally adjusted sales last May were 3.2% higher than last April; and (2) there was one fewer business day this May compared to last May, and business-day count affects the NAR’s seasonal adjustment factor.

Trying to use publicly-available realtor/MLS reports to project the NAR’s inventory estimate is very challenging in the spring. As I’ve written about before, the NAR inventory number from March to April always shows a substantially larger increase than realtor/MLS reports (or listings data) would suggest, while the April to May change is always lower than realtor/MLS reports (or listings data) would suggest. I’m not sure why, but I’m guessing it is related to differences in the “pull dates” of the NAR reports and the publicly-released reports. Realtor/MLS reports for May, however, clearly indicate that national listings showed a higher YOY increase in May than in April, and my “best guess” in that the NAR’s existing home inventory for May will be about 2.32 million, up 7.9% from last May.

Finally, I estimate that the NAR will estimate that the median existing SF home sales price in May was up by about 3% from last May.

Flipping back to April, local realtor/MLS reports strongly suggest that the NAR’s estimate for existing home sales in April – 4.65 million (SAAR) – was too low, with all of the understatement coming from the South region. I have local realtor/MLS reports from across the South region for April covering a total of over 108,000 sales, and these reports suggest that home sales in the South in April were unchanged from the previous April on an unadjusted basis. The NAR, in contrast, estimates that existing home sales in the South in April were down 4.9% YOY (NSA). I’ve been using local realtor/MLS reports to project NAR data (national and by region) for many years, and I’ve never seen such a huge “gap.” To be sure, some of the publicly-available realtor/MLS reports may be wrong. By the same token, some of the official “NAR” reports may be wrong. Also, I know that a few MLS in the South changed MLS vendors and delayed their release of home sales reports in April, which could have impacted NAR estimates (though probably not by that much). While I have no clue as to whether the NAR will revise its April estimate, I feel pretty confident that the NAR’s April estimate was too low, probably by 100,000 (SAAR) or so, and I would urge the NAR to “double-check” their April numbers.

CR Note: The NAR is scheduled to release the May existing home sales report on Monday, June 23rd.

by Calculated Risk on 6/18/2014 02:14:00 PM

Statement here ($10 billion in additional tapering as expected).

As far as the "Appropriate timing of policy firming",  participant views were mostly unchanged (12 participants expect the first rate hike in 2015, and 3 in 2016 - so one participant moved from 2015 to 2016).

The FOMC projections for inflation are still on the low side through 2016.

Yellen press conference here.

On the projections, GDP for 2014 was revised down significantly, the unemployment rate was revised down again, and inflation projections were increased slightly.  Note: These projections were submitted before the most recent CPI report.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2014	2015	2016
June 2014 Meeting Projections	2.1 to 2.3	3.0 to 3.2	2.5 to 3.0
Mar 2014 Meeting Projections	2.8 to 3.0	3.0 to 3.2	2.5 to 3.0

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 6.3% in May. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2014	2015	2016
June 2014 Meeting Projections	6.0 to 6.1	5.4 to 5.7	5.1 to 5.5
Mar 2014 Meeting Projections	6.1 to 6.3	5.6 to 5.9	5.2 to 5.6

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

As of April, PCE inflation was up 1.6% from April 2013, and core inflation was up 1.4%.  The FOMC expects inflation to increase in 2014, but remain below their 2% target (Note: the FOMC target is symmetrical around 2%). 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2014	2015	2016
June 2014 Meeting Projections	1.5 to 1.7	1.5 to 2.0	1.6 to 2.0
Mar 2014 Meeting Projections	1.5 to 1.6	1.5 to 2.0	1.7 to 2.0

Here are the FOMC's recent core inflation projections:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2014	2015	2016
June 2014 Meeting Projections	1.5 to 1.6	1.6 to 2.0	1.7 to 2.0
Mar 2014 Meeting Projections	1.4 to 1.6	1.7 to 2.0	1.8 to 2.0

by Calculated Risk on 6/18/2014 02:00:00 PM

Not much change ... another $10 billion reduction in asset purchases.

FOMC Statement:

Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. 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. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward 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 developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.
emphasis added

by Calculated Risk on 6/18/2014 10:12:00 AM

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

From AIA: Three Point Jump for Architecture Billings Index

On the heels of consecutive months of decreasing demand for design services, the Architecture Billings Index (ABI) has returned to positive territory. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 52.6, up sharply from a mark of 49.6 in April. This score reflects an increase in design activity (any score above 50 indicates an increase in billings). The new projects inquiry index was 63.2, up from the reading of 59.1 the previous month.

The AIA has added a new indicator measuring the trends in new design contracts at architecture firms that can provide a strong signal of the direction of future architecture billings. The score for design contracts in May was 52.5.

“Volatility continues to be the watchword in the design and construction markets, with firms in some regions of the country, and serving some sectors of the industry, reporting strong growth, while others are indicating continued weakness,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “However, overall, it appears that activity has recovered from the winter slump, and design professions should see more positive than negative numbers in the coming months.”

• Regional averages: South (58.1), Midwest (51.3), Northeast (47.6) , West (46.9) [three month average]
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 52.6 in May, up from 49.6 in April. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion during 17 of the last 22 months.

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.  The index has been moving sideways near the expansion / contraction line recently.  However, the readings over the last year suggest some increase in CRE investment in 2014.