Economic Reports Matter Again

Over the last couple weeks, all eyes in financial markets have been glued to the daily events surrounding tariffs.  That is still continuing but markets appear to have remembered that there are economic reports coming out and are reacting more as we would expect given the results.  Durable Goods Orders, Existing Home Sales data, and news from the Fed point to weak economic growth which was good for rates.  New Home Sales was a bit of a bright point in the week.  Next week will be action packed and could see volatility in the rate markets depending on the results.

There has been a great deal of talk in media about the US losing its currency reserve status around the world.  The IMF (International Monetary Fund) shows that the US Dollar makes up 58% of all foreign exchange reserves with the Euro being at 20%, the Japanese Yen at 5%, and the Chinese Yuan at 2.2%.  It doesn’t appear that there is a likelihood of the Yuan replacing the Dollar anytime soon. 

President Trump has blasted the Fed (Federal Reserve) for its hesitancy to cut rates faster in an attempt to stimulate the economy.  He points to the fact that the Fed was late in raising rates which significantly contributed to the inflation felt over the past couple years.  Whether the Fed is in the same situation in reverse again won’t be known until economists can look back on the history.  Many current economists, like Lacy Hunt, think the Fed should be preemptively cutting rates to prevent a recession.  Lacy Hunt also see long-term Treasuries and Mortgage Rates lower in the future.  That is good news for us!

Chicago Fed President, Austan Goolsbee, stated that preemptive cuts are on the table but “it’s a very large table and there are many things on it.”  Cleveland Fed President, Beth Hammack, confirmed that she enters every meeting with an open mind on rate cuts.  She explained that the Fed can be preemptive with cuts once the economy’s direction is more clear, emphasizing that they can move quickly (even outside of a meeting).  She even stated that there could be a scenario that the Fed would add temporary liquidity.  The Fed’s Beige Book added more clarity this week by showing out of 12 districts, 5 saw little growth, and the other 7 showed flat or declining growth.  The next Fed meeting is May 7^th, around the corner.

New Home Sales for March, which is signed contracts for new construction homes, rose 7.4%, stronger than estimates.  Even February was revised higher to 3.1%.  March’s lower rates likely spurred on demand and created the buyer activity.  There were 503,000 new homes for sale at the end of March, the highest number since November 2007.  Out of that number only 119,000 are completed and 112,000 haven’t broken ground.  Based on completed homes, that is a 2 month supply, which is low.

Existing Home Sales for March fell 5.9% to 4.01M units.  The markets expected a drop of 3% so this was even lower.  Since this report measures actual closings vs contracts, this represents buyers shopping in January and February when rates were higher.  There were also lower numbers in the West which could have been impacted by the fires.  Inventory rose 8/1% to 1.33M units and is up 20% YoY.  This seems like a crazy high number but we are still near the lowest point in the past 26 years.  There is a 4-month supply but it is still lower than the “Balanced” supply of 4.6 months.  Realtor commissions were also down and this gets plugged into GDP.

Durable Goods Orders is an important report as it contains several components that get plugged into GDP. Core Shipments was down 0.9% and will contribute to GDP.  Core Durable Goods was reported at 0.1%, lower than expectations.  Also, headline Durable Goods rose 9.2% which seems to be fantastic.  It was all due to a 139% rise in “nondefense aircraft” orders.  When you take out transportation, the reading falls to 0.0%, which is weaker than expectations.  Overall, a very weak report that points to lower GDP.

Next week will have multiple highly important reports:

Tuesday: Case Shiller Home Price Index, FHFA (Federal Housing Finance Agency) Home Price Index, JOLTS (Job Openings and Labor Turnovers)

Wednesday: Q1 GDP (our first official look), PCE (Personal Consumption Expenditures-The Fed’s favorite inflation gauge). Pending Home Sales

Thursday: Initial Jobless Claims

Friday: BLS (Bureau of Labor Statistics) Jobs Report