Jobless Claims Fall Slightly

Claims for unemployment benefits have been chopping around the same level for about a month, signaling companies probably increased their hiring only slightly in May.

The number of Americans filing for first-time unemployment benefits fell slightly last week, when about 370,000 people filed for their first week of jobless claims, the Labor Department reported Thursday.

While the data showed that number marked a 2,000 decline, the improvement was entirely cancelled out as the prior week's figure was revised higher by the same amount.

All in all, jobless claims have been bouncing around 370,000 for four weeks.  Claims at that level point to job growth, but not at a pace much faster than in April.

The monthly jobs report, released next week, is expected to show companies added 150,000 jobs in May, according to estimates from several Wall Street economists. That's only a slight pickup from 115,000 jobs added in April. They're expecting the unemployment rate held steady at 8.1%.

"The fact that claims are holding in near 370,000 gives us modest confidence that the labor market is not experiencing a slow down," economists at Deutsche Bank said in a note to clients.

Because initial claims are a volatile number from week to week, economists often prefer to look at an average over a four-week period. That number has fallen for three straight weeks.

Meanwhile, the number of people receiving continuing unemployment benefits fell to 3.26 million for the week ended May 19. That was down 29.000 from a week earlier.

Consumer Confidence Is Rising

Consumer confidence at the end of March reached the second-highest level in four years.

Lower interest rates on mortgages and credit cards were one reason for the more positive view. According to a USA Today analysis, American households paid an average of $8,731 for mortgage interest in 2007. For 2011, the average interest was $5,633.

Low interest rates mean more cash in your pocket.
Three-fourths of the interest savings were from falling interest rates, the rest were from debt reduction.

For the three-week period ending on March 25, The Bloomberg Consumer Comfort Index showed more than 30 percent of households said they had a favorable view of the buying climate. It was the longest stretch since early 2008.

The economic gain for borrowers is greater than other stimulus efforts or even high gas prices. A cut in the Social Security payroll tax, for example, saves households an average of about $70 a month.

Job and income growth are providing consumers with the means to withstand higher fuel costs and are the basis for sales of cars and other expensive items. Economists at the National Automobile Association say even if people aren’t paying attention to their falling interest rates, the money builds up in their checking accounts and especially benefits big-ticket items like cars.

The favorable reduction in household debt shows that many responsible Americans are using the extra cash to pay down credit card balances, which is always a wise move.

Consumer spending is a big factor in U.S. economic growth, so if you need a car or a fridge and can afford it, you’ll perk the economy if you go ahead and buy it.

Future of U.S. Housing Markets Depend Largely on Echo Boomers

The next two decades in housing markets depends largely on the Echo Boomers. That's according to panelists at the "Shifting Demographics and Housing Choice: A Whole New World?" session during the Realtors® 2012 Midyear Legislative Meetings & Trade Expo.

There are approximately 62 million echo boomers in the U.S. Also called "millennials," echo boomers are currently ages 17-31. According to the 2011 National Association of Realtors® Profile of Home Buyers and Sellers, younger home buyers - those ages 18-34 - represent 31 percent of all recent home purchases.

"We know that although many young people may be delaying home purchases in today's economic climate, most of them still aspire to homeownership," said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami. "Realtors® are committed to ensuring that the dream of homeownership can become a reality for generations of Americans to come."

“Demography is destiny," said NAR Chief Economist Lawrence Yun. "In that vein, demographics can provide very useful insights into the future of housing and homeownership, and the results of these reports indicate that certain generational shifts will have a significant impact on the real estate industry over the next two decades."

NAR Economist Selma Hepp identified several key demographic trends on both ends of the housing age spectrum. The demand for affordable, accessible housing will increase as the 65-and-over population grows; at the same time, as seniors leave their homes and move into assisted living and other arrangements, they will add to the current supply of housing. Because of their sheer size, however, echo boomers will significantly impact the next two decades in housing.

"Echo boomers represent a long-term opportunity for a housing market recovery, but they are struggling in the current economic crisis," said NAR's Selma Hepp. "Consequently, demand for rental housing is likely to climb in the near term." 

This Week's Market Commentary

This week brings us the release of five pieces of relevant economic news in addition to the minutes from the most recent FOMC meeting. Two of the economic reports are considered to be highly important to the markets and mortgage rates, while the others carry enough significance to influence mortgage rates if they show a wide variance from forecasts.

The first important piece of data this week is April’s Retail Sales, which will be released at 8:30 AM ET Tuesday. It is an extremely important report for the financial markets since it measures consumer spending. Consumer spending makes up over two-thirds of the U.S. economy, so this data can have a pretty significant impact on the markets. Current forecasts are calling for a 0.2% increase in sales from March to April.

A weaker than expected level of sales should push bond prices higher and mortgage rates lower Tuesday morning as it would signal that economic activity may not be as strong as thought. However, a larger increase could fuel fears of economic growth that would lead to stock buying and bond selling that would push mortgage rates higher.

April’s Consumer Price Index (CPI) will also be posted at 8:30 AM ET Tuesday. It is similar to last week’s PPI report, but measures inflationary pressures at the more important consumer level of the economy. These results will be watched closely and could lead to significant volatility in the bond market and mortgage pricing if they show any surprises. Current forecasts are calling for no change in the overall index and a 0.2% rise in the core data reading. The core data is the more important of the two readings because it excludes more volatile food and energy prices, giving analysts a more stable and reliable measurement of inflation.

Wednesday has three reports scheduled, starting with April’s Housing Starts at 8:30 AM ET. This data measures housing sector strength and mortgage credit demand by tracking newly issued permits and actual starts of new home construction. It is expected to show an increase in new starts from March’s readings. Since this report is not considered to be of high importance to the bond market, it likely will have little impact on mortgage rates unless it varies greatly from forecasts.

The second report of the day is April’s Industrial Production at 9:15 AM ET. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.5% increase in production, indicating that manufacturing activity is growing. A smaller than expected increase in output would be good news for the bond market and mortgage rates because it would indicate that the manufacturing sector is not as strong as thought. This report is just a bit more important to the markets as the earlier housing report, so they both will likely need to show unexpected strength or weakness for them to cause movement in mortgage rates.

Wednesday’s third release is the minutes of the last FOMC meeting. Market participants will be looking for how Fed members voted during the last meeting and any comments about inflation concerns in the economy and economic growth. The goal is to form opinions about the Fed being able to wait until late 2014 to make a move to either boost economic activity or slow growth to ease inflation concerns. Since the minutes will be released at 2:00 PM ET, if there is a market reaction to them it will be evident during afternoon trading Wednesday.

The last data of the week comes late Thursday morning with the release of April’s Leading Economic Indicators (LEI). This Conference Board report attempts to measure economic activity over the next three to six months. It is expected to show a 0.2% increase from March’s reading, meaning that economic activity is likely to strengthen slightly over the next few months. A decline would be good news for the bond market and mortgage rates, while an increase could cause mortgage rates to inch higher Thursday.

Overall, it looks like we may see the most activity Tuesday with the two most important reports of the week scheduled. Wednesday could also be active while Friday is the best candidate for calmest day unless something unexpected happens. However, sizable gains or losses in the major stock indexes could influence bonds and mortgage rates more than a good part of this week’s economic data can. Therefore, please maintain contact with your mortgage professional if still floating an interest rate.

Producer Prices Drop, Giving Fed More Space

Producer prices unexpectedly fell in April as energy costs dropped by the most in six months, a sign of easing inflation pressures that could give the Federal Reserve more room to help the economy should growth weaken.

The Labor Department said on Friday its seasonally adjusted producer price index dropped 0.2 percent last month. That was the first drop of the year and the biggest decline since October.

"Looking ahead consumer prices should remain contained," said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. "The Fed shouldn't be worried about inflation."  A rise in gasoline prices last year pinched consumers and fueled higher inflation, but the Fed has maintained that the spike would be temporary. A report on consumer prices due next week is expected to give further signs that inflation is ebbing.

Still, the annual inflation rate targeted by the Fed continues to hover around the central bank's 2 percent goal, and Friday's price data did not appear to change investor's views on the outlook for monetary policy.

Futures for U.S. stocks held at lower levels, depressed by a revelation from JPMorgan that it suffered a trading loss of at least $2 billion. U.S. Treasury yields fell as uncertainty over Greece's political future underpinned demand for safe-haven debt.

A number of Fed officials appear loath to take further action to help the economy, with some arguing the central bank needs to get ready to being withdrawing its extraordinary stimulus. The Fed has maintained since January that it expects economic conditions to warrant holding overnight interest rates near zero through at least late 2014.

The report on producer prices for April showed wholesale prices 1.9 percent higher in April than a year earlier, the weakest reading since October 2009.

Market Commentary

There are only three pieces of relevant economic data scheduled for release this week that may affect mortgage rates, in addition to two important Treasury auctions. The two most important reports will be posted Friday, meaning the markets will have to rely on factors other than economic news for direction most of the week.

There is no relevant economic data due until Thursday, so expect the stock markets to be a big influence on bond trading and mortgage rates until then.

The Treasury will hold a 10-year Note sale Wednesday and a 30-year Bond sale Thursday. Results of the auctions will be posted at 1:00 PM ET each day. If they are met with a strong demand from investors, we could see bond prices rise enough during afternoon trading to cause downward revisions to mortgage rates. However, lackluster bidding in the sale, meaning longer-term securities are losing their appeal, could lead to higher mortgage pricing those afternoons.

March’s Goods and Services Trade Balance report will be released early Thursday morning. This report gives us the size of the U.S. trade deficit but likely will not have much of an impact on the bond market or mortgage pricing. It is expected to show a $49.9 billion trade deficit, but it is the least important of this week’s data and likely will have little influence on Thursday’s mortgage rates.

Friday has the remaining two reports. April’s Producer Price Index (PPI) is the first at 8:30 AM ET. It helps us measure inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, indicating inflation is not a concern at the producer level, we should see the bond market rally. The overall index is expected to show no change, while the core data that excludes more volatile food and energy prices has been forecasted to rise 0.2%. A decline in the core data would be ideal for mortgage shoppers because inflation is the number one nemesis for long-term securities such as mortgage-related bonds.

The last report of the week is May’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment. This index measures consumer willingness to spend, which relates to consumer spending. If consumers are more confident of their own financial situations, they are more apt to make large purchases in the near future. This report usually has a moderate impact on the financial markets though, because it is not exactly factual data. It is expected to show a reading of 76.2, which would be a small decline from last month’s final reading. If it shows a large decline in consumer confidence, bond prices could rise and mortgage rates would move slightly lower because waning confidence means consumers are less apt to make a large purchase in the near future. That is assuming the PPI does not give us a significant surprise though. The PPI is much more important to the bond market than the sentiment index is, so look for it to be the biggest influence on Friday’s mortgage pricing.

Overall, it likely will be a moderately active week for mortgage rates. Besides the week’s economic news, look for the stock markets to be a major influence on trading. The most important day of the week is Friday with the PPI report on the agenda, but Wednesday’s 10-year Note auction could also heavily sway bond trading. It appears we will likely see the most movement in mortgage rates the latter part of the week unless the stock markets post sizable gains or losses the first part.

Fed’s Williams “Increasingly Hopeful” on Recovery

A top Federal Reserveofficial painted an improving picture of the U.S. economy on Friday but said lofty unemployment, a festering crisis in Europe, and the year-end expiration of stimulative tax cuts make continued easy monetary policy a must.

"Substantial risks remain that could cause the economy to perform worse than I expect," San Francisco Federal Reserve Bank President John Williams said at an annual California bankers' meeting at a Ritz-Carlton coastal resort about an hour's drive from Los Angeles. "Under these circumstances, it's crucial that we continue our highly accommodative monetary policy."

After his speech, he told reporters he's still a member of the "2014 camp," a reference to the Fed's projection that it will need to keep interest rates low through late 2014 to help the recovery.  His remarks came just hours after a U.S. government report showed employers cut back on hiring in April, and that the jobless rate fell to 8.1 percent.  Williams said the data does not change his projection that people will crowd back into the workforce as growth spurs jobs. But, he said, data over the next "many months" could force him to reconsider that view, in turn changing his views on policy.

While "increasingly hopeful that the recovery has entered a phase of self-sustaining growth," Williams expects only a small improvement in the labor market this year, forecasting the unemployment rate at around 8 percent by year's end and "a little below that" next year.

Often labeled a dove because of his strong support for employment-boosting monetary policy measures, Williams has used his vote on the Fed's policy-setting committee this year to support continued monetary easing.