Financial Market Affects January, 11th 2016

Like a broken record, investors continue to focus on the impact of slower economic growth and falling equity markets in China as China’s Shanghai Index fell into bear-market territory with a 20% decline.

A slowing Chinese economy also results in less demand for oil, and lower consumption of crude oil in China coupled with the current global oversupply is a recipe for lower oil prices, a weaker stock market, and a more fragile junk bond market.  Crude prices continued to fall with a decline below $30 to close at $29.70 per barrel on Friday and this is weighing on the debt of energy companies.

The Wall Street Journal is reporting that as many as one-third of all U.S. oil and gas producers could be in danger of declaring bankruptcy by the middle of 2017 if crude oil doesn’t soon rebound to at least $50 per barrel.  A number of investment banks have said crude oil could continue lower to near $20 per barrel before eventually moving higher.

Should crude oil continue on its journey toward $20 per barrel, it would continue to put a huge strain on a junk bond market that holds a substantial amount of debt from independent oil and gas companies.  The junk bond ETFs, the SPDR® Barclays High Yield Bond ETF and the iShares iBoxx High Yield Corporate Bond ETF, both traded to multi-year lows on Friday.

Historically, the junk bond market has acted like a canary in a coal mine as far as the stock market is concerned.  Declines in the junk bond market often warn of an impending selloff in the stock market.  Below is a November 2015 chart comparing junk bonds to the NASDAQ Composite (from Bloomberg).  The divergence seen between junk bonds and stocks posed a somber warning to equity investors who took a look at this.  As we now know, divergences such as these do not end well.

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In a back-loaded week of economic news, the Producer Price Index, the N.Y. Empire State Manufacturing Index, Retails Sales, Industrial Production, and Consumer Sentiment were all reported on Friday.

The Producer Price Index (PPI), which measures inflation before it reaches consumers, fell 0.2% in December after a 0.3% increase in November.  Over the past 12 months, the PPI has declined 1%.  When excluding volatile food and energy costs, the so-called Core PPI crept 0.1% higher in December.  Over the past 12 months, the Core PPI is up a miniscule 0.3%.  This absence in inflationary pressures may delay future Fed rate hikes.

The Federal Reserve Bank of New York released a disaster of a manufacturing survey for the New York Region.  The N.Y. Empire State Manufacturing Index plunged to -19.4 in January indicating manufacturing production in the region has contracted rather severely, and calls into question the health of the economy.  The index has been below zero since July and this reading is the lowest since the last recession in March 2009.

Retail Sales fell a seasonally adjusted 0.1% during December to $448.1 billion after having grown by a solid 0.4% during November.  The consensus forecast called for a +0.1% increase in sales. For the entire year, Retail Sales recorded a modest 2.1% gain, its lowest gain since 2009.

Industrial Production declined 0.4% in December compared to an expected reading of -0.2%.  The decline was attributed to cutbacks in mining and utilities.  For the fourth quarter, Industrial Production declined at a 3.4% annual rate.  Meanwhile, Capacity Utilization for December was reported at 76.5% and was lower than the consensus forecast of 76.9%.fell more than expected, declining for the third month in a row in connection with the unusually warm temperatures and low commodity prices.

The University of Michigan’s Consumer Sentiment Index rose to a greater than expected reading of 93.3 in January from 92.6 in the preliminary January reading as lower inflation lifted consumer spending plans.  The consensus had been for a reading of 92.6.  The Current Conditions sub-index dropped 3 points possibly pressured by China’s gloomy outlook.  The survey showed consumers expected the lowest wage gains in a year, but this was offset by expectations of a lower inflation rate.

Elsewhere, the Mortgage Bankers Association released their latest Mortgage Application Data for the two weeks ending January 1 showing the overall seasonally adjusted Market Composite Index increased 21.3%.  On an unadjusted basis, the Composite Index increased by 76% week over week.  The seasonally adjusted Purchase Index increased 18.0% from the prior reporting period while the Refinance Index increased 24.0%.  Overall, the refinance portion of mortgage activity increased to 55.8% of total applications from 55.4%.  The adjustable-rate mortgage segment of activity increased to 5.1% of total applications from 4.7%.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 4.20% to 4.12%.

For the week, the FNMA 3.5% coupon bond gained 7.8 basis points to end at $104.00 while the 10-year Treasury yield decreased 7.8 basis points to end at 2.037%.  Stocks ended the week with the Dow Jones Industrial Average falling 358.37 points to end at 15,988.08.  The NASDAQ Composite Index dropped 155.22 points to close at 4,488.42, and the S&P 500 Index lost 41.70 points to close at 1,880.33.

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 8.99%, the NASDAQ Composite Index has lost 11.56%, and the S&P 500 Index has lost 8.70%.  This past week, the national average 30-year mortgage rate decreased to 3.84% from 3.94% while the 15-year mortgage rate fell to 3.12% from 3.19%.  The 5/1 ARM mortgage rate decreased to 3.05% from 3.07%.  FHA 30-year rates fell to 3.50% from 3.63% while Jumbo 30-year rates decreased to 3.68% from 3.75%.

 Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.00, +7.8 bp) traded within a 77 basis point range between a weekly intraday high of 104.19 and a weekly intraday low of $103.42 before closing at $104.00 on Friday.

After a monthly coupon re-pricing on Monday, the bond stepped its way higher throughout the rest of the week culminating in an upward gap or “rising window” opening on Friday as panic selling gripped the stock market.  The bond then traded above resistance at the 23.6% Fibonacci retracement level located at $104.15 before pulling back.  The pull-back from Friday’s intraday high price created a “shooting star” candlestick, a potential reversal signal indicating lower prices in the near future.  Support is now located at the 200-day moving average at $103.75.

The slow stochastic oscillator is showing the bond is “overbought” and susceptible to a turn lower in price.  Unless the stock market continues to sell-off this coming week, we could see bonds pull back toward support as traders lock in some profits.  Should this happen, we could see mortgage rates edge slightly lower.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of January 18, 2016

The economic calendar provides us the latest insight into the housing sector with the release of the NAHB Housing Market Index on Tuesday; the MBA Mortgage Index, Housing Starts, and Building Permits on Wednesday; and Existing Home Sales on Friday.  Of particular interest to the markets will be the Consumer Price Index and Crude Oil Inventories reports on Wednesday and the Philadelphia Fed Manufacturing Index on Thursday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – We Can Have Anything We Want!

By Daniel Blanchard

We can have anything we want, if we want it bad enough, and are willing to pay the price.  That’s great news, isn’t it?  So the world is our oyster after all, right?  This is awesome!  So let’s go get what we want!

Wait.  Hold on a minute.  This sounds too good to be true, doesn’t it?  If we can have anything we want, then why don’t more of us already have what we want?  Well, after some pondering I think the real issue here is that most of us haven’t really figured out what we truly want.

You see the challenge here is that we all have been programmed to think and live our lives in a certain way by others from the moment we are born until the moment we die.  Please think about this for a moment.  We’re brought into this world and if we aren’t crying loud enough then someone slaps our little behinds to make us cry out louder.  As we grow up our parents tell us what to do and what we should want followed by our siblings telling us.  Next, our teachers, coaches, friends, and eventually our spouses and then the needs of our own children vastly influence what we should think and want.

In retrospect, combine the above influences with the bombardment of messages we get from Hollywood and Wall Street and sadly, most of us haven’t really been given a chance yet to discover who we truly are and what we truly want.

We all need to reprogram ourselves more to our own liking.  We need to find out what we truly want. After we have figured out for ourselves what we want, then we should WANT to do almost anything to get to that special place.

Now tweens, teens and parents, go learn, lead, and lay the way to a better world for all of us. Remember, we can have anything we want, if we want it bad enough, and are willing to pay the price.  And once again, thanks in advance for all that you do, and all that you will do…

Award-winning author, speaker and author Dan Blanchard wants to you to get what you really want. For more secrets to success be sure to visit Dan’s website at: http://www.GranddaddysSecrets.com.

Financial Market Affects December 28, 2015

This past week continued to be characterized by lower trading volumes heading into the New Year’s celebration and holiday on Friday.  The financial markets continued to trade in tandem with crude oil.  As the crude oil market goes, so apparently does the stock market and indirectly, the bond market.  While the stock market tends to trade in the same direction as crude oil, the bond market has recently been trading in the opposite direction, so a drop in oil prices lends support for the bond market.

On Monday, crude oil prices were a negative for stocks as West Texas Intermediate fell 3.39% to trade below $37 per barrel at $36.81.  The bond market benefited from the weakness in stocks to post moderate gains.

Tuesday, the stock market continued to trade in tandem with oil.  Crude oil bounced 2.93% higher to $37.89 per barrel and global stock markets rose right along with it to the detriment of the bond market.

In housing, the Case-Shiller 20-City Index for October increased by 5.5% year-over-year in October, just beating the consensus forecast for 5.4% growth.  The Index also gained 5.5% year-over-year in September.  The 10-City Index climbed 5.1% year-over-year in October.  The national index increased 5.2% year-over-year, up from an increase of 4.9% in September.  The cities recording the best year-over-year gains were Denver, Portland, and San Francisco, all with robust 10.9% increases in home prices.  Those cities in the 20-City Index faring the worst were Cleveland (-0.4%), Chicago (-0.7%), San Diego (-0.3%), and Washington, D.C. (-0.3%).

Wednesday, the bond market made a technical bounce higher as the stock market struggled once more with falling crude oil prices and perhaps a little profit taking.  Crude oil prices fell after the Energy Information Administration (EIA) reported Crude Oil Inventories increased by 2.6 million barrels in the latest week, compared with analysts’ expectations for a drawdown of 1.0 million barrels.  The build in oil inventory maintained a total crude oil inventory of 487.4 million barrels, near an 80 year high.

Furthermore, the National Association of Realtors’ (NAR) reported Pending Home Sales fell 0.9% month-over-month in November while the consensus forecast had been calling for a slight increase to 0.5%.  The November reading is up 2.7% year-over-year.  The NAR is forecasting Existing Home Sales to close 2015 at about 5.25 million with the national median home price expected close to $220,700.

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Thursday marked the final trading day of the year and the stock market was subjected to disappointing economic news and saw some last minute selling.  For once, the crude oil market wasn’t the culprit for the weakness seen in stocks as oil moved 2.30% higher to reach $37.30 per barrel.  The bond market posted a moderate advance while stocks struggled.

For the week, the FNMA 3.5% coupon bond gained 23.5 basis points to end at $103.19 while the 10-year Treasury yield increased 2.7 basis points to end at 2.27%.  Stocks ended the week with the Dow Jones Industrial Average falling 127.14 points to end at 17,425.03.  The NASDAQ Composite Index dropped 41.08 points to close at 5,007.41, and the S&P 500 Index lost 17.04 points to close at 2,060.99.

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 2.28%, the NASDAQ Composite Index has gained 5.42%, and the S&P 500 Index has lost 0.73%.  This past week, the national average 30-year mortgage rate decreased to 4.09% from 4.10% while the 15-year mortgage rate fell to 3.28% from 3.30%.  The 5/1 ARM mortgage rate increased to 3.03% from 3.00%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.92% from 3.93%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.19, +23.5 bp) traded within a narrower 47 basis point range between a weekly intraday high of 103.22 and a weekly intraday low of $102.75 before closing at $103.19 on Thursday.

The bond rang in the New Year by gapping higher at the Open on Thursday in a “rising window” that should provide some short-term technical support.  Thursday’s trading action propelled the bond above the 38.2% Fibonacci retracement level at $103.16 and also provided a challenge to resistance at the 25-day moving average at $103.22.  The slow stochastic oscillator is showing a new buy signal and remains “oversold,” so if the stock market continues to struggle next week we could see a continuing move higher in mortgage bonds with a slight improvement in mortgage rates.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of January 4, 2016

The economic calendar provides us with the latest reading on the labor market with the ADP Employment Change report for December on Wednesday and the Labor Department’s December Employment Situation Summary highlighted by Nonfarm Payrolls, the Unemployment Rate, and weekly Hourly Earnings on Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – A force awakened: why so many find meaning in Star Wars

BY Patti McCarthy, Visiting Assistant Professor, Department of English/Film Studies, University of the Pacific

After witnessing the overwhelming popularity of Star Wars, director Francis Ford Coppola told George Lucas he should start his own religion.

Lucas laughed him off, but Coppola may have been onto something.

Indeed, the Star Wars saga taps into the very storytelling devices that have structured myths and religious tales for centuries.  And with every new film, fans are able to reinforce their unique communities in a world that has grown, in many ways, increasingly isolated.

A universal hero

Lucas freely admits he based his Star Wars epic on the “hero’s quest” that mythologist Joseph Campbell, in his 1949 book Hero with a Thousand Faces, argued underscores many myths and religious tales.

According to Campbell, hero quests have similar trajectories: the hero leaves his ordinary world and ventures to a place of supernatural wonders.  He faces a series of trials to prove his mettle, survives a supreme ordeal, is granted some sort of boon or treasure and returns home to share his knowledge or treasure with those he left behind.

Following this formula, Lucas substituted his own characters for the heroes, villains, and saviors of earlier hero quests.

Take Star Wars: Episode IV – A New Hope: the hero (Luke Skywalker) leaves his ordinary world (Tatooine) after receiving “a call to adventure” (Princess Leia’s hologram message) and learns he has the special talents of a Jedi.  A supportive mentor (Obi Wan Kenobi) offers supernatural aid (light saber) and guidance.  Then Luke faces a series of trials to prove his mettle (storm troopers, Jabba the Hutt), survives a supreme ordeal (Death Star, Darth Vader) and returns home wiser and victorious.

According to Lucas:

I became fascinated with how culture is transmitted through fairy tales and myth.  Fairy tales are about how people learn about good and evil…it’s the most intimate struggle that we cope with – trying to do the right thing and what’s expected of us by society, by our peers, and in our hearts.

These stories typically appear during times of doubt and can help viewers reclaim the goodness and innocence in themselves, reminding them they can overcome the evil they see in the world.  When Lucas set out to create Star Wars – against the backdrop of Vietnam, Watergate and the assassinations of the Kennedy brothers and Martin Luther King, Jr – he had his work cut out for him.

Lucas acknowledges he wrote Star Wars because he believed our society was in dire need of fairy tales, myth and fantasy – a “new myth” would provide a “New Hope” for an audience that had grown cynical and demoralized.

Today’s anxieties are just as acute.  Exhausted by the wars in the Middle East, faced with global terrorism and beset with economic woes, the American people yearn for a mythic narrative that will reaffirm their view of the world, with a traditional American hero who will triumph over evil and ensure “everything will turn out okay.”

Looking into the mirror

Lucas is sometimes accused of promoting escapism.  But he’s actually tapping into some key facets of the human condition.  After all, it’s in the telling of mythic or religious stories that we attempt to answer fundamental questions like “Who am I?” and, ultimately, “What does it all mean?”

It’s no wonder, then, that in an increasingly secularized society, many find themselves gazing away from the pulpit, instead finding meaning in the stories playing out on screens in living rooms and movie theaters across the country.

Film is sometimes described as a “dream screen” – a mirror, when held in front of an audience, reflects both the personal and collective subconscious of our culture.  It’s a place where all our hopes, fears and desires find expression.

Considering Star Wars’ mythic foundation, it’s not surprising that it packs such a powerful, emotional punch, stirring the hearts of passionate fans yearning to see the next chapter of the Star Wars universe.

Myths are about creating meaning, reinforcing connections between the I and Thou, and mending the rift between the sacred and profane.  They give us heroes we can identify with, who allow us to eventually realize that divinity is not outside the self, but within. In the beginning, Luke might be the character you wanted to pretend to be.  With time “playing Luke” helps you become the person you always wanted to be.

Transcending the screen

If all roads of the hero’s journey lead inward, then film, as a shared cultural artifact, begs us to take the first step.

Unlike a simple, standalone artifact (such as a piece of pottery), film is a shared experience. For the audience, the story, its characters and unique props (like the lightsaber) become stored in an emotional and psychological cache.  Filed into memory, they become part of the viewer’s personal history and identity.

Rather than Star Wars existing as something outside of viewers, it takes root within.  Many were exposed to the Star Wars films as children.  Some acted out scenes at home and at school, investing time and creative energy into a fictional universe and characters who became like an extended family.  For them, their “best birthday ever” became indistinguishable from the experience of playing with friends, the cutting of the cake – and their new Star Wars action figures.

In this way, Star Wars no longer remains just a film; it becomes much more.

Even subtle challenges to a narrative we’ve created about the world and ourselves can be stressful.  In response, we’re prone to cling even more tightly to our beliefs.

For this reason, minor changes in the Star Wars narrative can unnerve fans.  Denying that Han Solo shot first is like finding out you’re adopted; it’s akin to changing your fundamental understanding of the truth.

Forging connections to the past

Star Wars has further transcended the screen in the form of t-shirts, action figures, theme parks, and in cosplay and fan fiction.

As powerful as any holy relic (which, among believers, can provide affirmation and emotional support), buying and collecting Star Wars merchandise can trigger memories of the past. Accessing positive memories and tapping into nostalgia have been shown to be a critical component of forming a meaningful personal narrative, and the simple act of picking up a toy light saber can return fans to childhood, to a time when they felt happy and secure.

Even if someone didn’t have the rosiest childhood, he or she can still escape to the Star Wars universe, creating an alternate reality where cherished friends, caring mentors and happily-ever-afters await.

Situated in an advertising and media landscape that often overpromises and under delivers (“Buy this and you will be happy”), the world of Star Wars helps fans create meaning when they might otherwise be unfulfilled.

Cosplaying for community

Watching a Star Wars film or buying Star Wars memorabilia doesn’t only remind us of the “good old days.”  It serves a more meaningful purpose: it builds community in a world that has grown increasingly isolated, that has traded the physical for the virtual.

If the decline of social capital in public life (which includes religion) is partially responsible for this phenomenon, the rise of technology is equally at fault.

Even when surrounded by people, our attention is diverted – we are distracted, disembodied, absent – existing everywhere but in the present.  The connections made through social media are often frayed, and can even lead to heightened feelings of isolation or loneliness.

On the other hand, Star Wars, via play – whether it’s cosplay or swinging a light saber with a friend – demands social interaction, communication and engagement. (Some theorists have even argued that play served as the seed from which all human culture, including religion, evolved.)

Waiting in line for days to buy tickets, wearing your favorite Star Wars t-shirt to school and dressing up as your favorite character at a convention are all social touchstones – icebreakers that facilitate a sense of community and belonging.

It is in this shared storytelling space where history lives and meaning dwells.  As cultural critic Lewis Hyde writes, meaningful stories can induce a “moment of grace, a communion, a period during which we too know the hidden coherence of our being and feel the fullness of our lives.”

Once upon a time, we gathered around fires to tell stories.  Today we assemble in movie theaters to watch with wonder and awe the flicker of our stories on the screen.

Star Wars is, of course, different from religion in a number of ways.  But it still allows us to transcend the everyday and enter a sacred realm – a place where we can glimpse the Holy Land of our better selves and become the heroes we want to be.

 

Financial Market Affects December 14, 2015

The financial markets experienced an increase in volatility during the past week with traders focusing on sharp fluctuations in the crude oil market and the Federal Reserve’s first interest rate hike since 2006.

This past week, West Texas Intermediate crude oil fell to a multi-year low by trading down to $34.37 per barrel over concerns of a global oil glut before fluctuating around $35 per barrel.  The volatility in the oil market not only takes a toll on the stock market, it also affects the bond market as Treasuries tend to selling off when oil rallies.  Also, the persistent weakness in oil prices has been raising anxieties about high-yield debt in the Junk Bond market and this in turn has made equity traders a bit edgy.

As expected on Wednesday, the Fed’s Open Market Committee bumped up the Fed Funds rate by 25 basis points to maintain a funds target range of 25-50 basis points from the existing target range of 0-25 basis points.  The vote was unanimous.  In the accompanying policy statement, the FOMC said “economic activity has been expanding at a moderate pace.”  While the unemployment rate of about 5% met one of the Fed’s stated criteria for a rate hike, inflation is well below its 2% to 2.5% target due to low energy and commodity costs plus a strong dollar.

The Fed stated their future decisions regarding rate increases will depend on how the economy evolves.  Both the stock and bond markets initially reacted to the Fed announcement by moving higher as a veil of market uncertainty was lifted.  By most accounts, it appears the Fed intends to raise rates four times by 25 basis point increments during the next year with a prediction the ending 2016 Fed funds rate will hit 1.375%.  However, a number of other analysts are predicting a stagnant or declining economy for 2016 that will thwart the Fed’s efforts to raise rates.

In housing, the National Association of Home Builders (NAHB)/Wells Fargo housing market index for December fell by one point from a reading of 62 in November to 61.  This reading was a little lower than the consensus forecast of 63.  The current sales conditions sub-index also fell a point in December to 66 while the sub-index estimating prospective buyer traffic fell from 48 to 46.  The sales expectations sub-index dropped two points from 69 to 67.

Of note, Housing Starts were reported at 1.173 million units, annualized, while Building Permits came in at 1.289 million for the month of November.  Both housing numbers exceeded consensus forecasts of 1.135 and 1.150 million respectively and suggest the housing market remains in decent shape.

The Mortgage Bankers Association released their latest Mortgage Application Data for the week ending December 11 showing the overall Market Composite Index decreased 1.1%.  The seasonally adjusted Purchase Index decreased 3.0% from a week earlier while the Refinance Index increased 1.0% from the prior week.  Overall, the refinance portion of mortgage activity increased to 60.7% of total applications from 58.7%.  The adjustable-rate mortgage segment of activity decreased to 6.0% of total applications from 6.2% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance remained unchanged at 4.14%.

For the week, the FNMA 3.5% coupon bond lost 25.0 basis points to end at $103.25 while the 10-year Treasury yield increased 7.2 basis points to end at 2.20%.  Stocks ended the week with the Dow Jones Industrial Average falling 136.66 points to end at 17,128.55.  The NASDAQ Composite Index dropped 10.39 points to close at 4,923.08, and the S&P 500 Index lost 6.82 points to close at 2,005.55.

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 4.05%, the NASDAQ Composite Index has gained 3.80%, and the S&P 500 Index has declined 2.66%.  This past week, the national average 30-year mortgage rate increased to 4.02% from 3.98% while the 15-year mortgage rate rose to 3.25% from 3.23%.  The 5/1 ARM mortgage rate decreased to 2.97% from 3.02%.  FHA 30-year rates increased to 3.75% from 3.65% while Jumbo 30-year rates increased to 3.84% from 3.82%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.25, -25.0 bp) traded within a 69 basis point range between a weekly intraday high of 103.41 and a weekly intraday low of $102.72 before closing at $103.25 on Friday.

During the week, the bond traded in a deep “V-shaped” pattern while bouncing higher off of a support level at $102.78.  This action completed a three-day Morning Star candlestick pattern from Tuesday through Thursday, which is a moderately strong buy signal.  On Friday, the bond gapped open higher to power above nearest resistance at the 38.2% Fibonacci retracement level at $103.16.  This level now becomes closest technical support.  The next level of resistance is found at the 25-day moving average at $103.30.  The bond is well positioned to challenge this level this week as the slow stochastic oscillator turned higher and is showing a new buy signal from a positive stochastic crossover.

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Economic Calendar – for the Week of December 21

The economic calendar features the third estimate for third quarter GDP as well as reports on housing, inflation, and jobless claims.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – Will you gain weight this Christmas?

By Rebecca Charlotte Reynolds, Nutrition lecturer, The University of New South Wales, Australia

For most of us, Christmas and its festivities revolve around consuming tasty food and drinks with colleagues, friends and family.  Between work Christmas parties, Christmas lunch or dinner, edible presents and New Year’s Eve, it can be an effort not to gain weight.

Seasonal variations in body weight

The human body can be quite remarkable in its ability to maintain a stable weight over the long term.  One small American study reported average fluctuations of just 0.5 kg throughout a year.  Weight peaked in winter, which may be due to poorer weather and lower physical activity, but returned to normal. Others, however, gradually gain weight over the years.  A study of 120,000 Americans found weight gain averaged 3.35 lb. (1.52 kg) over four-year periods. The good news is that reducing your energy intake by around 100 calories (418 kilojoules) per day can prevent such weight gain.  This could equate to not having that extra biscuit, or walking more each day.

Are we likely to gain weight over Christmas?

We often don’t follow our normal routines during the holidays.  Therefore our lifestyle behaviors and body weight can change.

Yet another study reported a weight change of around 0.4 kg in non-obese Swedish adults over a two- to three-week Christmas break.  Obese participants, however, reported highly variable changes in weight, from a gain of 6.1 kg to a loss of 8.8 kg.

This difference between people of contrasting starting weights was also found in another American study of 94 college students.  Over a two-week Thanksgiving period, the overweight/obese students gained an average of 1.0 kg, while those with a normal body mass index (BMI) gained just 0.2 kg.

Some studies reported no weight gain, but an increase in body fat over the holidays.

However, other studies found no change in either body weight or body fat over festive periods, even if there were changes to eating and physical activity patterns.

What’s to blame?

In the large study of 120,000 American adults, the foods associated with weight increase over four-year periods include potato chips, potatoes, sugar-sweetened beverages and unprocessed and processed red meats.

Foods that were associated with lower weight included vegetables, whole grains, fruits, nuts and yogurt. Other lifestyle behaviors were also associated with weight gain: physical inactivity (including television watching), alcohol intake and sleeping less than six or more than eight hours each day. It’s not hard to imagine these factors at play in someone’s Christmas holidays.  Potato chips, soft drinks and alcohol might fill the table at the work Christmas party.

Hangovers and too little or too much sleep might mean that you indulge excessively in fast food burgers while binge-watching Netflix. There aren’t many high-quality studies that look at body weight and fat changes over the Christmas period, but the studies that have been done report conflicting results.

A 2009 American study of 195 adults over the six- to eight-week winter holiday reported an average weight increase of 0.37 kg. Another study of 26 English adults over a two-week Christmas holiday found they gained an average of 1 kg, even though five were sick (and three lost weight).  The maximum weight gain was 4.4 kg.

Five tips to avoid a belly like Santa’s

1) Choose foods that have been associated with healthier body weights in the longer term and increased satiety in the shorter term, such as fruits and vegetables, and leaner foods that are higher in fiber and protein.

So choose:

  • salads (including fruit, green, potato and quinoa ones) over white bread
  • oat slices or biscuits over shortbread biscuits
  • roasted nuts over potato chips
  • turkey breast over salami
  • shrimp and other seafood over sausages.

2) Eat intuitively: try to listen to your hunger and fullness.  This will help with the feeling of sickness that can come at the end of Christmas day due to overconsumption.

Choose smaller plates, as these are associated with reduced food intake compared to larger plates – even if you have a level of intuitive eating.

Put a smaller variety of foods on your (smaller) plate – and don’t go back for seconds.  If you have a large variety of foods, you are more likely to eat more – something called sensory-specific satiety.

3) Self-monitor!  One study reported that systematically recording what you eat, drink and how much you move during holiday periods were associated with improved weight.  Use goal-setting and self-monitoring sheets or apps to help regulate the amount of alcohol or potato chips you consume each day.

4) Go for walks or swims if the weather allows, and avoid spending the whole break binge-watching television.

5) Avoid soft drinks and excessive alcohol every day.  When you do drink alcohol, choose a soda mixer with a piece of fresh lime to have with your spirits and drink water in between each alcoholic drink.

Keep it in perspective

At the end of the silly season, you may still have gained some weight.  But keep it in perspective: it might have been due to quite pleasurable activities and it’s unlikely to be a problem in the long term, if you get back to your usual balanced exercise and eating routine.

It’s fine to indulge every now and then, even if it means going back for seconds of Christmas pudding on Christmas day.  Just don’t indulge every other day of the holidays, too.

Financial Market Affects November 23, 2015

There was a significant amount of economic news released during the Thanksgiving holiday-shortened trading week.  Overall, the economic data was strong enough to support the idea the Federal Reserve will likely pull the trigger on the first rate hike in nine years when the next rate decision is released on December 16.

The week began with a report on home sales when the National Association of Realtors (NAR) reported Existing Home Sales declined 3.4% on a sequential basis in October, to a seasonally adjusted annualized rate of 5.36 million homes.  However, Existing Sales were still 3.9% above the year-earlier figure.  The consensus forecast had called for an annualized sales rate of 5.50 million homes.  Overall, the median price of an existing home increased 5.8% to $219,600.

NAR chief economist Lawrence Yun remarked “As long as solid job creation continues, a gradual easing of credit standards even with moderately higher mortgage rates should support steady demand and sales continuing to rise above a year ago.”

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Additionally, the latest S&P/Case Shiller 20-city Home Price Index increased 5.5% year-over-year in September at the fastest rate in 13 months as a lower inventory of houses for sale has forced buyers to bid up available properties.  The consensus forecast had called for a 5.2% rise.  Overall, home sales have risen 3.9% in the past 12 months while the number of available homes has declined 4.5%.

Furthermore, the Census Bureau and the Department of Housing and Urban Development reported New Home Sales increased to a seasonally adjusted annual rate of 495,000 in October, an increase of 10.7% from a downwardly revised September rate of 447,000 and an increase of 4.9% compared with the October 2014 rate of 472,000.  The consensus forecast had called for a rate of 504,000.  The Census Bureau also reported the median sales price for new homes sold in October fell by more than $15,000 from $296,900 in September to $281,500, and the average sales price rose by about $2,000 to $366,000.  At the end of October, the number of new homes for sale totaled 226,000 to represent a supply of 5.5 months at the current sales rate.

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As for mortgages, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 21 showing the overall Market Composite Index decreased 3.2%.  The Refinance Index decreased 5.0% from the prior week, while the seasonally adjusted Purchase Index decreased by 1.0% from a week earlier.  Overall, the refinance portion of mortgage activity decreased to 58.7% of total applications from 58.6%.  The adjustable-rate mortgage segment of activity increased to 6.4% of total applications from 6.3% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance fell from 4.18% to 4.14%.

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to end at $103.44 while the 10-year Treasury yield decreased 4.2 basis points to end at 2.22%.  Stocks ended the week with the NASDAQ Composite gaining 22.61 points to close at 5,127.53.  The Dow Jones Industrial Average fell 25.32 points to end at 17,798.49, and the S&P 500 increased fractionally, 0.94 of a point, to close at 2,090.11.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 7.63%, the Dow Jones Industrial Average has lost 0.138%, and the S&P 500 has added 1.49%.  This past week, the national average 30-year mortgage rate was unchanged at 4.00% while the 15-year mortgage rate edged higher to 3.25% from 3.24%.  The 5/1 ARM mortgage rate increased to 3.00% from 2.97%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates increased to 3.84% from 3.83%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.44, +12.5 bp) traded within a narrower 36 basis point range between a weekly intraday high of 103.50 and a weekly intraday low of $103.14 before closing at $103.44 on Friday.

As projected last week, the bond traded mostly in a sideways direction between technical support located at the 38.2% Fibonacci retracement level at $103.16 and technical resistance located at the 100-day moving average at $103.71.  The ascending lower trend line remains intact while the slow stochastic oscillator indicating market momentum has made a slight positive crossover while remaining far from “overbought” and this is a positive outcome.  If the week’s employment data supports a December rate hike by the Federal Reserve we could see mortgage rates improve slightly.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 30

The economic calendar is heavily weighted with reports on the labor sector highlighted by the November Employment Situation Summary on Friday, December 4.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – So when should you book that flight? The truth on airline prices

By Yuriy Gorodnichenko, Associate Professor of Economics, University of California, Berkeley and Volodymyr Bilotkach, Senior Lecturer in Economics, Newcastle University

How airlines price tickets is a source of many myths and urban legends.  These include tips about the best day of the week to buy a ticket, last-minute discounts offered by the airlines, and the conspiracy theories suggesting that the carriers use cookies to increase prices for their passengers.  None of these three statements is entirely true.

Studies have suggested that prices can be higher or lower on a given day of the week – yet, there is no clear consensus on which day that is.  Offered prices can in fact drop at any time before the flight, yet they are much more likely to increase than decrease over the last several weeks before the flight’s departure.  Further, the airlines prefer to wait for the last-minute business traveler who’s likely to pay full fare rather than sell the seat prematurely to a price conscious traveler.  And no, the airlines do not use cookies to manipulate fare quotes – adjusting their inventory for a specific customer appears to be beyond their technical capabilities.

What is true about pricing in the airline industry is that carriers use complex and sophisticated pricing systems.  The airline’s per passenger cost is the lowest when the flight is full, so carriers have incentive to sell as many seats as possible.  This is a race against time for an airline and, of course, no company wants to discount its product more than it has to.  Hence, the airlines face two somewhat contradictory goals: to maximize revenue by flying full planes and to sell as many full-fare seats as possible. This is a process known in the industry as yield or revenue management.

Airlines and their bucket lists

Here is how yield management works.  For each flight or route (if we are talking about multi-segment itineraries), the airline has a set of available price levels – from the most expensive fully refundable fare to the cheapest deeply discounted non-refundable price. The industry jargon for these prices is “buckets.”  Then, seats can be interpreted as balls that are allocated among these buckets.

Initial allocation of seats between the price buckets is determined by historical data indicating how well a certain flight sells.  For example, fewer deeply discounted seats will be offered on a flight on Thanksgiving week than on the same flight during the third week of February.  As the seats on a flight sell, yield managers monitor and adjust the seat allocation.  If, for instance, the sales are slower than expected, some of the seats might be moved to lower-priced buckets – this shows up as a price drop.  As noted above, such price drops can occur at any time before the flight.  However, the general trend of price quotes is upward starting from about two to three weeks before the flight departure date.

Of course, an average traveler wants to know when he or she should buy the tickets for the next trip.  Another important question is where to buy this ticket.  Airlines distribute their inventory on their own websites and on several computer distribution systems, meaning that prices can sometimes differ depending on where one looks.  We are not entirely sure what precipitates this phenomenon – likely explanations include differences in contracts between the airlines and the distribution systems/travel agents, implying that different travel agents may not have access to the airline’s entire inventory of available prices.

When to book

The airlines’ yield managers start looking at flight bookings about two months before the departure date.  This implies that it generally does not pay to book more than two months in advance: studies show that initially the airlines leave the cheapest price buckets empty, and yield managers may move some seats into those buckets if a couple of months before the departure date the flight is emptier than expected.  Between two months and about two to three weeks before the flight date, the fare quotes remain mostly flat, with a slight upward trend.  However, and perhaps paradoxically, there is a good chance of a price drop during this period.  We tend to monitor prices for several days – sometimes up to a week – hoping for a potentially lower quote.  It does not always pay off, but sometimes we do manage to save a considerable amount of money.

Two to three weeks before the flight date, the price quotes start increasing.  This is the time when business travelers start booking.  While price drops are still possible, a chance of a price increase is much higher if you wait to book within this time period. This is also the time when one can find significant differences between price quotes, depending on where one looks and what contract they have with the airlines.

Thus, if we book a trip earlier than three weeks before the flight date, we tend not to delay the purchase.  At the same time, we check quotes from multiple travel agents, or go directly to a site that allows for a quick comparison of prices (such as kayak.com or skyscanner.net).  Or check the airline itself.

As for answering the original question we posed, here are some simple tips.  First, if you have to travel during a peak period, such as Thanksgiving week, it is generally best not to delay buying that ticket.  Otherwise, it might pay to monitor the offered prices for some time before committing.  The best strategy for booking within the last couple of weeks before the flight, however, is not to delay the purchase, but to try getting quotes from several agents, which is easy to do in the internet age.

Financial Market Affects November 9, 2015

There was continuing turmoil in the financial markets this past week generated from the better than forecast employment numbers in the October Employment Situation Summary released on November 6.  There is growing sentiment that the Federal Reserve will act to raise interest rates on December 16 for the first time in a decade due to the better employment data.

There is little doubt now that the Fed will pull the trigger on a 0.25% rate hike unless the next jobs report, due out on December 4, is a complete downside disaster.  The 30-day Fed Funds Futures are currently showing a 70% probability for a December rate hike, a 74% probability for a January rate hike, and a 33.1% probability for a second rate hike in March.

This past Friday, U.S. Treasuries and mortgage bonds rallied on weak U.S. economic data, lower crude oil prices, and a selloff in the stock market.  Retail Sales, Core Retail Sales, the Producer Price Index, and the Core Producer Price Index all missed consensus forecasts.

The Commerce Department reported Retail Sales rising just 0.1% during October after being unchanged in September.  The consensus forecast had called for Retail Sales increasing 0.3% after a previously reported 0.1% increase in September.  A surprising 0.5% decline in automobile sales led to the lower retail sales figure, suggesting there could be a slowdown in consumer spending that could reduce expectations for a stronger advance in fourth quarter economic growth.  However, the Retail Sales data is unlikely to alter expectations that the Federal Reserve will raise interest rates in December following October’s strong employment report.

Additionally, the Labor Department reported the Producer Price Index (PPI), a measure of wholesale costs, fell -0.4% in October when the consensus forecast had been for a +0.1% increase.  The PPI has now been either flat or lower for four consecutive months leading to a record 1.6% decline over the past year.

When excluding the volatile categories of food, energy and trade, the Core PPI declined by a smaller -0.3% but well below the consensus forecast of +0.1%.  It seems inflationary pressure at the wholesale level within the U.S. economy is difficult to find, but the Fed sounds ready to raise interest rates anyway as early as December 16 because they expect inflation to accelerate when the effects of cheaper gas prices and a strong dollar decline.

In housing, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 6 showing the overall Index fell 1.3%.  The Refinance Index dropped 2.0% from the prior week, while the seasonally adjusted Purchase Index increased by 0.1% from a week earlier.  Overall, the refinance portion of mortgage activity increased to 59.8% of total applications from 59.7%.  The adjustable-rate mortgage segment of activity decreased to 6.6% of total applications from 6.7% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 4.01% to 4.12%, its highest level since August 2015.

For the week, the FNMA 3.5% coupon bond lost 10.9 basis points to end at $103.19 while the 10-year Treasury yield decreased 5.1 basis points to end at 2.27%.  Stocks ended the week with the NASDAQ Composite losing 219.24 points to close at 4,927.88.  The Dow Jones Industrial Average fell 665.09 points to end at 17,245.24, and the S&P 500 dropped 76.16 points to close at 2,023.04.

Year to date, and exclusive of any dividends, the NASDAQ Composite has declined 3.89%, the Dow Jones Industrial Average has lost 3.35%, and the S&P 500 has fallen 1.77%.  This past week, the national average 30-year mortgage rate decreased to 4.03% from 4.04% while the 15-year mortgage rate decreased to 3.24% from 3.27%.  The 5/1 ARM mortgage rate increased to 3.00% from 2.95%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.84% from 3.85%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.19, -10.9 bp) traded within a narrower 49 basis point range between a weekly intraday high of 103.30 and a weekly intraday low of $102.81 before closing at $103.19 on Friday.

The bond made a solid move higher on Friday, confirming a couple of trend reversal signals appearing last Tuesday and Thursday.  Friday’s trading action carried the bond higher for a challenge of technical resistance located at the 38.2% Fibonacci retracement level at $103.16.

The slow stochastic oscillator is continuing to gain upward momentum while still being “oversold” so there is considerable upside potential for a continuing move higher, especially if the stock market continues to falter between now and the Thanksgiving holiday as a number of market analysts are predicting.  As a result, we should see a slight improvement in mortgage rates this coming week.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 16

The economic calendar features a couple of manufacturing reports, the weekly Initial Jobless Claims report, and the Consumer Price Index in addition to the Fed’s FOMC Minutes from their October 28 meeting.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – What Does A Perfect Credit Score Look Like? – Habits of High Credit Score Consumers Analyzed

By Nikitas Tsoukalis

The average credit score in the US is around 692 points.  There are many people with bad credit, whose scores can go as low as 350 points.  And then, on the other end, are those few with perfect and near perfect credit, who have scores from the high 700s to 800 or more.  One half of one percent of consumers have a perfect 850.  What distinguishes these few from the pack?

They Don’t Miss Payments. Ever.

Missing payments is the one thing that will do more damage to your credit than any other action.  People who attain and keep high scores do so, in part, by making sure that their payment history is flawless.

To keep your credit score climbing, make sure that every bill is paid on time every month.  Know how much you earn and where it goes so that a bill never surprises you.  Keep an emergency fund so that, if a bill is larger than expected, you have the funds to keep payments up to date.

They Exercise Restraint

Have you ever looked at the latest shiny electronic, a new dress, or any other thing you wanted and thought that you could just put it on a charge card and pay it off later?  This is the sort of thinking that, if done too often, can kill your credit score.  People with high credit scores never charge anything they can’t pay off in full.  They view credit as a tool they use, rather than a crutch.  On average, they only use 7% of their revolving credit.

They Have a Mix of Credit Types

Creditors want to see that you can be responsible with both revolving credit and installment loans. By having a mix that includes car loans, credit cards and a mortgage, they maximize their scores.

If you are trying to increase your score and need a new vehicle, consider getting an auto loan.  These are relatively easy to get, and they can be refinanced as your credit improves.  Pay the loan on time every month, otherwise it counts against you instead of in your favor.

They Started Early

The older the oldest entries on your credit report, the higher your record.  People with high credit scores, on average, have accounts that are 25 years old or more.

While you can’t go back and change your personal history, you can make positive changes going forward.  Many people mistakenly believe that they can raise their credit scores by closing unused accounts.  However, what this really does is shorten your available credit history.  Make sure that you keep old accounts active by using those cards on a regular basis.

We recommend charging a regular payment, such as your cell phone bill or a health club membership, to your oldest card.  Set up automatic payments so that you never forget to pay the bill. This way, you keep the card active without increasing your expenses, and, you make sure that it never goes overdue.

By emulating the people with the top credit scores, you can increase your score and get access to better opportunities.  For more information on how to help increase your scores go to www.keycreditrepair.com.

Financial Market Affects October 26, 2015

Equity investors mostly took a pause this past week from a “stocktoberfest” rally that has seen the S&P 500 Index rise by 10.3%, the Nasdaq Composite Index increase by 10.7%, and the Dow Jones Industrial Average climb 10.3% over the past four weeks.  Meanwhile, the bond market underwent a sharp two-day correction on Wednesday and Thursday following the Federal Reserve’s interest rate decision and policy statement on Wednesday.  The bond market then rebounded on Friday in reaction to disappointing economic news.

The Fed’s rate decision resulted in a Fed funds target rate of 0-0.25% as expected, but the accompanying policy statement surprised investors when it directly referenced its next meeting in December as a time when a rate hike would come into play.  The Fed also inferred the global economy is less of a concern for them than it was a couple of months ago.

The policy statement included the following: “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and two percent inflation.”  This was a more hawkish view than was largely anticipated by investors and prompted selling in both bonds and stocks.  In reaction, the Fed Funds Futures contract showed an increase in the implied probability for a rate hike at the next FOMC meeting on December 16 to 50% from 34% prior to the statement.

There were several economic reports from the housing sector during the week.  The Commerce Department stated New Home Sales fell 11.5% to a seasonally adjusted annual rate of 468,000 units, the lowest level since November 2014.  The consensus forecast had called for a reading of 550,000 units.  Additionally, August’s New Home Sales rate was revised downward to 529,000 units from the previously reported 552,000 units.  The September decline in New Home Sales was led by a dramatic 61.8% plunge in sales in the Northeast Region.  September inventory grew to 5.8 months of supply from 4.9 months in August at the current sales pace, the highest level since July 2014.  The median new home price increased 2.7% month-over-month to $296,900 and is 13.5% higher from the same period a year ago.

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Although this report was disappointing, September housing data on existing home sales, homebuilder confidence, and housing starts was rather strong and offers a more robust picture of the housing sector.  Plus, New Home Sales, which account for only 7.8% of the housing market, tend to be more volatile on a month-to-month basis because they are obtained from a small sample.  Daniel Silver, an economist at JPMorgan, had this to say… “The September report does little to alter our view that the housing market is continuing to recover.  We view the new home sales data as unreliable and many other more reliable housing indicators have been sending upbeat signals lately.”

Also, the S&P/Case-Shiller U.S. National Home Price Index posted a slightly higher year-over-year gain with a 4.7% annual increase in August 2015 versus a 4.6% increase in July 2015.  The 10-City Composite Index increased 4.7% in the year to August compared to 4.5% in the prior month.  The 20-City Composite’s year-over-year gain was 5.1% versus 4.9% in the year to July.

Furthermore, the National Association of Realtors (NAR) Pending Home Sales Index fell 2.3% in September to a seasonally adjusted reading of 106.8, the second-lowest level of the year.  Economists had predicted a +0.6% rise in September sales.  The NAR ascribed the latest decline to a shortage of home listings having limited buyer options, particularly at the lower end of the market.  Also, stock market volatility in August, may have unsettled prospective buyers.

In mortgage news, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending October 24 showing the overall Index fell 3.5%.  The Refinance Index dropped 4.0% from the prior week, while the seasonally adjusted Purchase Index decreased by 3.0% from a week earlier.  Overall, the refinance portion of mortgage activity was unchanged at 59.5% of total applications.  The adjustable-rate mortgage segment of activity decreased to 6.6% of total applications from 6.9% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 3.95% to 3.98%.

For the week, the FNMA 3.5% coupon bond lost 26.6 basis points to end at $104.11 while the 10-year Treasury yield increased 6.3 basis points to end at 2.15%.  Stocks ended the week with the NASDAQ Composite gaining 21.89 points to close at 5,053.75.  The Dow Jones Industrial Average increased 16.84 points to end at 17,663.54, and the S&P 500 added 4.21 points to close at 2,079.36.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 6.29%, the Dow Jones Industrial Average has declined 0.90%, and the S&P 500 has risen 0.98%.  This past week, the national average 30-year mortgage rate increased to 3.90% from 3.83% while the 15-year mortgage rate increased to 3.19% from 3.11%.  The 5/1 ARM mortgage rate increased to 2.94% from 2.91%.  FHA 30-year rates increased to 3.75% from 3.50% while Jumbo 30-year rates increased to 3.71% from 3.62%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.11, -26.6 bp) traded within a wider 91 basis point range between a weekly intraday high of 104.69 and a weekly intraday low of $103.78 before closing at $104.11 on Friday.  Friday, the bond traded down to within 8 basis points of the low on September 25 ($103.70) before bouncing higher on weak economic news.  The upward reversal resulted in a challenge of a triple layer of technical resistance formed from the 50-day moving average at $104.07, the 200-day moving average at $104.12, and the 23.6% Fibonacci retracement level at $104.15.  If the bond can break above this layer of resistance in the coming week, we could see mortgage rates improve slightly.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 2

The economic calendar features several reports focusing on the labor sector highlighted by the Employment Situation Summary for October (Jobs Report) on Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – Vaccines back in the headlines – here’s what the experts say

By Jessie Schanzle, Editor, The Conversation

The Conversation is funded by the Gordon and Betty Moore Foundation, Howard Hughes Medical Institute, the Knight Foundation, Robert Wood Johnson Foundation, Alfred P Sloan Foundation and William and Flora Hewlett Foundation.

September 16th’s Republican debate put vaccines back in the headlines, when Ben Carson, a former neurosurgeon, was asked to comment on Donald Trump’s statements linking vaccinations to autism.  Carson said:

We have extremely well-documented proof that there is no autism associated with vaccinations, but it is true that we’re giving way too many in way too short a time and a lot of pediatricians recognize that.

This has sparked a flurry of reminders from physicians, scientists and others that vaccines are safe and that vaccines do not cause autism.

This is a discussion that we have covered again and again and again at The Conversation.

Yet these messages don’t seem to have counteracted misinformation about vaccines. That’s because these explanations often repeat the very falsehoods they are trying to correct.  As Norbert Schwarz and Eryn Newman from the University of Southern California write:

Media reports that intend to correct false information can have the unfortunate effect of increasing its acceptance.  Using anecdotes and images makes false information easier to imagine – and by highlighting disagreement, they distort the amount of consensus that actually exists.

A better strategy, they say, is to stick to the facts.

Kristin S Hendrix, a professor of pediatrics at the Indiana University School of Medicine, examined the research on parent-provider conversation about vaccines.  She writes:

What is clear from existing research is that respectful, tailored communications and recommendations to immunize coming directly from the health-care provider are associated with increased vaccination uptake.

Before the measles vaccine was introduced in the US in the 1960s, we thought of measles as a “mild” illness, even though it killed 400-500 Americans a year.  Today, suggesting that measles is benign is controversial.  And that is because vaccines change how we think about the disease they prevent.  As Emory historian Elena Conis writes:

Vaccines shine a spotlight on their target infections and, in time, those infections – no matter how “common” or relatively unimportant they may have seemed before – become known for their rare and serious complications and defined by the urgency of their prevention.

Marcel Salathé, now a professor at École polytechnique fédérale de Lausanne, points out everyone who can be vaccinated, should be vaccinated, to help protect those who are too young or too ill to receive the vaccine.  Tony Yang, a professor of health administration at George Mason University, looked at the impact vaccine exemption polices have on outbreaks of vaccine-preventable diseases.  And Michael Mina, an MD/PhD candidate at Emory, explained how the introduction of the measles vaccine in Europe prevented deaths from other diseases.

Speaking of other diseases, just over a year ago, news that a handful of people in the United States had contracted Ebola was dominating the headlines.  William Moss, an epidemiologist at Johns Hopkins, pointed out that Americans should worry less about Ebola and more about the measles.

Financial Market Affects October 5, 2015

Economic news was rather light this past week with few reports available to assist traders in determining market direction.  Generally, the week’s economic data favored the notion the Federal Reserve will elect to leave interests rates unchanged for the remainder of the year.

Specifically, the Commerce Department reported the nation’s Balance of Trade showed a wider trade gap for the month of August of -$48.3 billion when the consensus forecast had been for a narrower deficit of -$44.5 billion.  This was an increase of 15.6% over July’s narrower than usual deficit of -$41.8 billion.

The imbalance stemmed from a three-year low in exports, largely due to a strong U.S. dollar, while imports increased with a hefty influx of consumer electronics including $2.1 billion worth of the latest Apple iPhones and Samsung Galaxy cellphones.  This report exemplifies the U.S. economy’s weaknesses to a strong dollar and weak demand in foreign markets and could influence Federal Reserve officials to delay the timing of an interest rate hike.

Further, the Labor Department reported overall Import Prices fell -0.1%, which was better than estimates of -0.5%.  Year-over-year, Import Prices are down -10.7%.  Export Prices fell -0.7%, which was lower than the 0.2% expected.  Year-over-year, Export Prices have fallen -7.4%.  These figures suggest inflation is not yet threatening the nation’s economic recovery.  A number of traders believe the absence of inflation will make it more difficult for the Federal Reserve to rationalize an interest rate hike, especially given ongoing global economic weakness.

In housing, CoreLogic released its latest Home Price Index (HPI) showing home prices increased 1.2% in August 2015 compared with July 2015.  On a year-over-year basis, home prices nationwide, including distressed sales, increased by +6.9% in August 2015 compared with August 2014.  CoreLogic is forecasting home prices to increase by 4.3% on a year-over-year basis from August 2015 to August 2016 and remain unchanged month-over-month from August 2015 to September 2015.

In mortgage news, the Mortgage Bankers Association released their Mortgage Application Data for the week ending October 2.  Overall the Index increased 25.5%.  The Refinance Index increased 24.0% from the prior week, while the seasonally adjusted Purchase Index soared by 27.0% from a week earlier.  Overall, the refinance portion of mortgage activity decreased to 57.4% from 58.0% of total applications the previous week.  The adjustable-rate mortgage segment of activity increased to 7.6% of total applications from 6.9% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance fell to 3.99% from 4.08% the prior week.

For the week, the FNMA 3.5% coupon bond lost 28.1 basis points to end at $104.31 while the 10-year Treasury yield gained 9.9 basis points to end at 2.09%.  Stocks ended the week with the NASDAQ Composite gaining 122.69 points to close at 4,830.47.  The Dow Jones Industrial Average increased 612.12 points to end at 17,084.49, and the S&P 500 added 63.53 points to close at 2,014.89.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 1.95%, the Dow Jones Industrial Average has declined 4.32%, and the S&P 500 has fallen 2.18%.  The national average 30-year mortgage rate increased to 3.89% from 3.77% while the 15-year mortgage rate increased to 3.16% from 3.06%.  The 5/1 ARM mortgage rate increased to 2.95% from 2.91%.  FHA 30-year rates increased to 3.50% from 3.40% while Jumbo 30-year rates increased to 3.68% from 3.55%.

 Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.31, -28.1 bp) traded within a narrower 42 basis point range between a weekly intraday high of 104.59 and a weekly intraday low of $104.17 before closing at $104.31 on Friday.

The week’s trading demonstrated market indecision among traders.  The bond is slowly trending lower to test support at the 200-day moving average at $104.14.  The slide lower this week is also reflected in a gradually lower trending slow stochastic oscillator that remains “overbought.”

Technical signals continue to show weakness suggesting a test of key support.  Should a breach of this support level take place, we would see slightly higher mortgage rates.  However, a bounce higher off of this support level would likely lead to marginally improved mortgage rates.

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Economic Calendar – for the Week of October 12

The economic calendar strengthens this coming week with a greater number of reports having a potential market impact.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – Chip-enabled cards may curb fraud, but consumers will be picking up the tab

By Benjamin Dean, Fellow for Internet Governance and Cyber-security, School of International and Public Affairs, Columbia University

Most of us have by now received new credit cards in the mail embedded with “EMV” (Europay-MasterCard-Visa) chips.  Merchants across the country have been hastily investing large amounts of money in new EMV-compliant terminals.

This is because October 1 marks the moment that retailers become liable for fraud that occurs in their stores if they haven’t upgraded their old credit card readers to the new payments standard – an inducement intended to hurry along the transition.

This shift is commonly thought to be speeding us toward a more secure and less fraudulent future.  But who really benefits – and who bears the costs – of this step in the transition to a cashless society is not as clear cut as it seems.

 EMV comes to America, almost

EMV is a standard for payment cards and terminals in which the data are stored on integrated circuits (the chip) rather than on a magnetic stripe.  In most countries that have adopted EMV, a personal identification number (PIN) is used to verify payment rather than a signature.  For the time being, a less-secure signature will be used in the US.  With compatible terminals, they also allow contactless payments (through so-called near-field communication), which require no authentication up to a certain monetary limit.

The technology is not new.  France was one of the earliest adopters of the standard way back in 1992 and since then, over 200 countries have joined in.  The United States has been very late to the party, but it’s finally making the switch.

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EMV adoption has swept across much of the globe, except in the US.

A key milestone in this transition is occurring today: the liability shift.

From today onward, the liability for fraud committed at the point of sale (POS) on a non-EMV compliant terminal will no longer be borne by the card issuer but, instead, by the merchant.  One estimate puts the total cost for the EMV rollout at US$8.65 billion.  The very strong financial incentive of shifted liability is why merchants are willing to adopt the terminals at such great expense.

 An imperfect security upgrade

EMV-enabled payments are supposed to reduce fraud due to certain security features.  In some countries, they do away with the signature-based method of authentication in favor of a PIN code.  The merchants do not retain the PIN entered at the point of sale by the consumer.  They use cryptographic algorithms to authenticate the cardholder and transaction.

As with any security system, EMV is a long way from perfect.  A number of different ways to hack EMV have been known for some time.

Researchers at the University of Cambridge, for example, have shown that the card-reader terminals can be hacked to accept any PIN the criminal inputs.  In a practice called ATM-skimming, thieves can install a fake PIN pad on an ATM to trick consumers into providing card information, including their PIN, which can then be used to commit fraud.

The near-field communications (NFC) feature allows card users to pay by tapping their card against a reader.  The unencrypted card number and expiration date, which emit from the chip, can be intercepted with a remote RFID device and subsequently used to commit fraud.  It’s a bit like pickpocketing in the digital age.

Given the enormous cost of this transition, and the imperfect security of EMV, we need to ask: how large are the benefits from EMV in terms of curbing fraud?

 A race to the bottom

Evidence from other countries suggests that card-present fraud (face-to-face transactions) goes down following EMV adoption, as the charts below on the UK and the Single Euro Payments Area (SEPA) show.

However, the graphs also show a “race to the bottom” as fraudsters migrate to cross-border and “card-not-present” fraud (via the internet, phone or mail), considered much easier because EMV’s security measures, like entering a PIN, don’t work online.  For an idea of the scale, in the SEPA, 66% of all fraud resulted from card-not-present payments in 2013, compared with just 46% in 2008.

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This broad pattern has been repeated in almost all developed EMV markets, including Australia and Canada.

So if EMV has proven to be an imperfect standard and merely migrates fraud from one category to another, why then push to adopt it at such an enormous cost?

 Who gains from EMV

Card issuers and banks will benefit from a likely drop in card-present fraud of 15% to 35% over the next three years if the pattern of declines in other countries following the switch holds.  Considering that such fraud was $2.2 billion in 2012, savings could be $342 million to $797 million a year.

This may be offset by the shift in fraud to card-not-present payments, which increased 40% to 100% in the three years following EMV implementation in Australia, Canada and the UK.  Such fraud in the US was $1.6 billion in 2012, so we could see anything from $624 million to $1.6 billion more in the next few years.  Given that the fraud is simply reallocated from card-present transactions though, a lower-bound estimate of $624 million is the more likely outcome.

Who will pay the price for this increased card-not-present fraud?  The onus is on the card issuer or bank to prove that the merchant did not take the necessary measures to secure the transaction.

But to meet this standard, merchants will have to implement an additional layer of security, at an indirect cost to sales, provided by the payment service providers, called a 3D Secure protocol program.  If a fraudulent card-not-present transaction gets through that, the issuer or bank carries the liability.

For all the billions of dollars in additional security investment, overall fraud levels will likely remain pretty stable.  So why are we doing it?

 The fraud sideshow

A deeper look reveals an interesting aspect to the card payments industry.  For all the attention paid to rising fraud losses borne by banks, it turns out we already cover the cost, as consumers, with or without EMV.

An “interchange fee” is imposed on every transaction that takes place with a card, typically 1% to 2%, and is used to cover fraud losses, reward programs and other processing costs.  Merchants pay the fee, but typically pass it on to consumers in the form of higher prices.

A rough estimate places total interchange fee revenue at $45 billion to $90 billion in the US in 2012 (based on the $4.5 trillion in debit, credit and prepaid card transactions that year).  For comparison, total fraud, across all categories, in the US was $6.4 billion – about a tenth of the fee revenue.

So why are merchants (in effect, consumers) paying billions of dollars to shift to a new card standard when they are already forking over tens of billions to issuers and banks to cover the costs of fraud?  Add to that, the total amount of fraud following EMV basically stays the same.

It’s particularly odd, given the operating margins of MasterCard and Visa hover around 54% and 65%, respectively, suggesting they have plenty of breathing room to make this hefty investment in fraud-prevention themselves.

In other countries, interchange fees were cut to encourage merchants to adopt EMV terminals.  But thus far, this doesn’t appear to be happening in the US.  And since two companies, Visa and MasterCard, control 75% of the market, there’s little incentive for them to cut this lucrative revenue stream.

 Questions for our brave new digital world

While the convenience of technological advances like electronic payments, and security from standards like EMV, cannot be denied, it’s important that we give thought to – and are properly informed of – the price that we pay.

The upgrade to EMV and its touted benefits, including reduced fraud, are not as compelling as we’re led to believe.  In the end, the cost for this upgrade is being footed by merchants and, ultimately, consumers, through opaque fees and higher prices, while the limited benefits accrue to the card issuers and banks.

The EMV transition costs – and the interchange fee – hint at the problem of information asymmetry – banks and card issuers know more than we do – which allows one party to take advantage of the other.  This information asymmetry is typical of the complex and bewildering technical changes that, ironically, characterize the “information age.”  So when you’re at the cash register, about to slip your chip-enabled card into the new reader, think about the costs and benefits of this new technology and ask yourself: is it worth it?

Financial Market Affects September 28, 2015

Movement in the bond market this past week was characterized by choppy trading that took prices mostly in a sideways to lower direction.  After falling on Monday, bonds traded higher on Tuesday then moved sideways until a decline on Friday.

Monday, the National Association of Realtors reported Existing Home Sales declined 4.8% in August to a seasonally adjusted annual rate of 5.31 million, the lowest level since April.  The consensus forecast had been for 5.50 million annualized sales.  The August annualized sales level was lower than a downwardly revised 5.58 million in July, which was the highest in more than eight years.  This suggests the decline was likely just normal market volatility rather than a change in trend.  Tight inventory levels and rising prices were cited as reasons for the sales decline.

Tuesday, bond prices rebounded from Monday losses in response to a global equity sell-off triggered by a report from the Asian Development Bank (ADB) that lowered emerging market growth forecasts for 2015 and 2016 based upon declining economic growth prospects for China and India.  The Federal Housing Finance Agency (FHFA) reported home prices increased 0.6% month-over-month during July.  Compared with July 2014, the house price index has gained 5.8%.  The 0.2% index increase reported for June was unchanged.  The index remains 1.1% below its March 2007 peak and is approximately at the level it was seen in November 2006.

Wednesday, the Mortgage Bankers Association released their Mortgage Application Data for the week ending September 18.  Overall the Index increased 13.9%.  The Refinance Index rose 18.0% from the prior week, while the seasonally adjusted Purchase Index increased by 9.0% from a week earlier.  The adjustable-rate mortgage segment of activity increased to 6.9% of total applications from 6.8% in the prior week.

Thursday, the U.S. Census Bureau and the Department of Housing and Urban Development reported New Home Sales increased to a seasonally adjusted annual rate of 552,000 in August, the highest rate in more than seven years.  This was an increase of 5.7% from an upwardly revised July rate of 522,000 and a year-over-year increase of 21.6% compared with the August 2014 rate of 454,000.  The consensus estimate called for a rate of 515,000.  The median sales price in August increased almost $12,000 to $292,700 while the average sales price was $353,400.  The number of new homes for sale at the end of August totaled 216,000 representing a 4.7 month supply at the current sales rate.  Overall, this was a very strong New Home Sales report.

Friday, bond prices fell (yields rose) in response to a speech by Fed Chair Janet Yellen on Thursday after market close.  Yellen said the FOMC still expects to raise interest rates by the end of this year followed by a gradual pace of tightening thereafter.

For the week, the FNMA 3.5% coupon bond dropped 28.1 basis points to end at $103.81 while the 10-year Treasury yield gained 3.2 basis points to end at 2.17%.  Stocks ended the week with the NASDAQ Composite losing 140.73 points to close at 4,686.50.  The Dow Jones Industrial Average fell 70.12 points to end at 16,314.67, and the S&P 500 dropped 26.74 points to close at 1,931.34.

Year to date, and exclusive of any dividends, the NASDAQ Composite has dropped 1.06%, the Dow Jones Industrial Average has declined 9.25%, and the S&P 500 has fallen 6.60%.  The national average 30-year mortgage rate moved to 3.97% from 3.93% while the 15-year mortgage rate increased to 3.24% from 3.20%.  The 5/1 ARM mortgage rate increased to 3.03% from 2.95%.  FHA 30-year rates increased to 3.70% from 3.65% while Jumbo 30-year rates increased to 3.78% from 3.74%.

 Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.81, -28.1 bp) traded within a 50 basis point range between a weekly intraday high of 104.20 and a weekly intraday low of $103.70 before closing at $103.81 on Friday.

The bond ended the week with a downward gap below the 25-day moving average support line located at $103.81.  This level now becomes technical resistance with support now at the 50-day moving average at $103.62.  The slow stochastic oscillator also appears to be making a turn lower from a near overbought position indicating a loss of momentum to go along with a new sell signal.

Technical signals will take a back seat to next Friday’s employment report.  If the employment data is reported better than expected, the bond market would likely sell-off resulting in slightly higher mortgage rates.  A worse than expected report would likely result in slightly lower mortgage rates.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of September 28

The economic calendar expands this week with a number of key economic reports headlined by the Employment Situation Summary for September including Nonfarm Payrolls, Nonfarm Private Payrolls, the Unemployment Rate, Hourly Earnings, and the Average Workweek.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – The Federal Reserve is losing credibility by not raising rates now

By Alex Nikolsko-Rzhevskyy, Associate Professor of Economics, Lehigh University

So the results are in: the Federal Reserve decided to keep interest rates at around zero, delaying any increase in its target for at least six more weeks.  The move did not come as a surprise to Wall Street – which was betting 3-to-1 against the hike.  But that’s not because investors didn’t think the US economy was ready for a rates “liftoff.”  Rather, it shows that markets did not believe the Fed has the will and power to raise rates for the first time since June 2006.

Unfortunately, they guessed right.  The economy is ready if not eager for a liftoff and a return to a normal rates environment.  Investors and businesses know this.  It’s time the Fed recognized this too.

Ready for liftoff

The data clearly show that the US economy hasn’t looked stronger in a very long time – a sharp improvement from earlier this year when I wrote that it wasn’t ready for an increase in interest rates.  While the labor market may not have experienced strong growth in wages yet, joblessness has plunged to 5.1%, reaching what is known as the “natural rate” of unemployment (also called “full employment”).  That’s significant because achieving maximum employment is one of the Fed’s two primary mandates, and anything below the natural rate risks fueling inflation.

And inflation, its other main policy goal, is also in range of its target of 2%.  Indexes of consumer prices, both including and excluding volatile energy prices, and personal spending are forecast to be right in that sweet spot of 1.5% to 2% next quarter.  Furthermore, the US economy grew a stronger-than-forecast 3.7% in the second quarter, much better than the previous three-month period and signaling the recovery is on a pretty sound footing.

The output gap – or difference between what an economy is producing and what it is capable of – remains negative at about 3%, and deflation is still a threat.  But regardless of what the Fed does now and in coming months, its target short-term rate will remain well below the long-term “normal” level of about 4% for years to come, so there is little risk a small increase will drag down growth.

 Why the Fed didn’t act

According to the Federal Open Market Committee statement, the main factors that persuaded the Fed to delay liftoff are the weakening global economy, “soft” net exports and subdued inflation.

Granted, developing economies, especially China and Russia, are indeed weak as are global financial markets and that could spill over into the US.  And the devaluation of the yuan in China and the recession in Canada (the US’ two largest individual trading partners) – coupled with loose monetary policy in Europe – are causing the dollar to appreciate, making US exports decline and imports rise.

It is important to understand that all of these factors except inflation are outside the Fed’s jurisdiction and its dual mandate of maintaining full employment and stable prices. If these factors matter at all to US monetary policymakers, it should only be through their effects on the US economy, in terms of inflation, labor markets and GDP.  And while an appreciating dollar and low oil prices can indeed create deflationary pressures (and reduce US GDP), the data indicate that US prices nevertheless continue to rise, if slowly.

Furthermore, a higher interest rate and stronger dollar make US assets even more attractive to global investors, thus spurring more investment, while low oil prices stimulate consumer spending.  Both of these factors boost economic activity and at least partially offset any decline due to lower net exports caused by a strong dollar.

What’s at stake

What’s more important is that the impact of a small rate hike has been with us for some time.  Capital is already fleeing developing economies, and the dollar has been strong for a while.  Hence, the direct marginal economic effects of a 0.25 percentage point increase in the target rate on the US economy would be negligible at best.  What was really at stake was repairing the Fed’s credibility in terms of successfully shaping US monetary policy and sending a powerful signal that the US economy is in strong shape.

Hoping to avoid previous bungled attempts to adjust monetary policy in recent years that led to significant market volatility, this time the Fed spent at least half of the year updating the language in its statements and gradually preparing the world for a hike. And since it did not deliver, this tells the world that the Fed is unable or unwilling to go against market expectations.

As a result, the central bank will have to either delay the liftoff until the next meeting, slowly reshaping market expectations to be consistent with a hike at that point, or risk a financial panic if it decides on an unexpected policy shift sooner.  Delaying the timing further would mean losing precious time in normalizing monetary policy, necessary so that the Fed again has the tools it needs to fight future economic downturns.  There’s also the increased risk that the economy will overheat and cause inflation to spiral out of control.

There is never a perfect time to start down this path; it is always possible to find reasons to delay.  But each postponement requires even stronger data to justify an eventual liftoff the next time.  The problem is that with the hesitant Fed sending mixed signals to the economy, that imaginary perfect day might not ever come.

Financial Market Affects September 7, 2015

In a holiday-shortened week, the stock market moved modestly higher while the bond market saw a minor price decline with yields moving slightly higher.  Tuesday, global stock markets moved higher on expectations the Chinese government will employ additional monetary stimulus measures and on news that China’s exports fell less than expected.

China also stimulated their stock market by eliminating personal income taxes on dividends for shareholders who hold stocks for more than a year and by cutting taxes in half on dividends for those shareholders holding positions between a month and a year.  Bond prices retreated when investors left safe-haven assets in favor of riskier stock market investments.

On Wednesday, the JOLTS Job Openings report for July caught investor attention by showing an increase of 430,000 job openings to 5.753 million, a record high.  This was a rise of 3.9% from the 5.249 million openings reported in June.  However, the hiring rate fell to 3.5% from 3.7% in June.  The quits rate remained at 1.9%.  The slower rate of hiring suggests employers could be having difficulties finding qualified workers and this in turn could eventually lift wages.  Also, there was a substantial drop in the number of unemployed job seekers per open job to a record low ratio of 1.44 from 1.56 in June.  Bottom line, the data in this JOLTS report could draw the attention of the Federal Reserve’s FOMC members during their monetary policy meeting this coming week.

In mortgage news, the Mortgage Bankers Association released their Mortgage Application Data for the week ended August 28.  Overall the Index fell 6.2%.  The Refinance Index dropped 10.0% from the prior week, while the seasonally adjusted Purchase Index fell decreased by 1.0% from a week earlier.  However, Purchases on a year-over-year basis are 41% higher.  Overall, the refinance portion of mortgage activity decreased to 56.9% from 58.7% of total applications the previous week.  The adjustable-rate mortgage segment of activity decreased to 6.9% of total applications from 7.5% in the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance increased to 4.10% from 4.08%.

Thursday was characterized by some choppy trading when both stocks and bonds opened lower.  However, after struggling to find direction in the early going, stocks gained strength and firmed up heading into afternoon trading while bond prices continued to pull back.  The day’s economic data was mostly seen as a positive for the economy.

The Labor Department reported weekly Initial Jobless Claims fell to a seasonally adjusted 275,000 last week to match the consensus forecast.  Jobless Claims have now remained below 300,000, the level typically associated with a strengthening labor market, for more than six months.  Continuing Jobless Claims edged higher to 2,260,000 during the week ended August 29 from 2,259,000 in the prior week.  The consensus estimate was for 2,257,000 continuing claims.

Further, U.S. Import Prices excluding oil declined by 0.4% percent in August, indicating persistent downward inflation pressure that may have an effect on the Fed’s decision to lift interest rates.  Export Prices excluding agriculture fell 1.3% during August.

On Friday, the stock market opened to the downside then slowly strengthened to end up in positive territory at the close of trading while bond prices opened slightly higher and then improved on economic news.  Traders received a couple of noteworthy economic reports.  First, the Producer Price Index (PPI) for August was reported unchanged after rising 0.2% in July.  This was slightly higher than the consensus forecast of -0.1%.

When excluding volatile food and energy prices, the Core PPI increased 0.3% month-over-month after a similar rise in July.  This exceeded the consensus forecast of 0.1% and was attributed to widening profit margins at clothing retailers.  Year-over-year the PPI is -0.8% while the Core PPI is +0.9%.  The data suggests there is benign inflation pressure that could influence the Federal Reserve’s decision on monetary policy during this coming week’s FOMC meeting.

Further, the University of Michigan’s preliminary Consumer Sentiment Index for September was reported at 85.7, below consensus expectations for 91.5 and down from the August reading of 91.9.  This is the lowest recording of the Consumer Sentiment Index since it reached 84.6 in September 2014.  The overall decline in the Consumer Sentiment Index is a likely outcome from the sharp decline in stock prices that began at the end of August.

Overall, investors have seemed to reduce their expectations the Fed will raise interest rates due to stock market turmoil originating from concerns over slowing Chinese and global economic growth.  If Fed officials do not raise rates on Thursday, they could still suggest a rate increase remains on the table for its October or December FOMC meetings.

For the week, the FNMA 3.5% coupon bond lost 35.9 basis points to end at $103.63 while the 10-year Treasury yield gained 5.5 basis points to end at 2.19%.  Stocks ended the week with the NASDAQ Composite gaining 138.42 points to close at 4,822.34.  The Dow Jones Industrial Average rose 330.71 points to end at 16,433.09, and the S&P 500 added 39.83 points to close at 1,961.05.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 1.79%, the Dow Jones Industrial Average has dropped 8.46%, and the S&P 500 has fallen 4.99%.  The national average 30-year mortgage rate moved to 3.99% from 3.97% while the 15-year mortgage rate increased to 3.25% from 3.24%.  The 5/1 ARM mortgage rate increased to 2.99% from 2.98%.  FHA 30-year rates increased to 3.75% from 3.70% while Jumbo 30-year rates increased to 3.81% from 3.79%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.63, -35.9 bp) traded within a 53 basis point range between a weekly intraday high of 104.00 and a weekly intraday low of $103.47 before closing at $103.63 on Friday.  Mortgage Bonds had their monthly coupon rollover Thursday evening after market close and the effect of this rollover was -32 basis points.  The candlestick formed on the technical chart for Thursday due to this reset has to be discounted.  Due to the coupon rollover reset, our technical support and resistance levels are reassigned as follows:  primary support is defined by the 100-day moving average at $103.60 while resistance becomes the 25-day moving average at $103.76.

The bond slipped lower during a holiday-shortened week to trade around technical support levels as traders employed a cautious approach ahead of the weekend and the Federal Reserve’s pending FOMC meeting that takes place on Wednesday and Thursday.  We should expect to see the financial markets continue to trade in a very restrained manner until the rate decision and accompanying commentary is released next Thursday afternoon.  This coming week the technical picture for bonds will take a back seat to the FOMC meeting.  If the bond market responds favorably to the FOMC meeting, we should see mortgage rates improve while a negative reaction could result in worsening mortgage rates.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of September 14

The economic calendar increases in importance this week with several potential market-moving reports and events.  The Consumer Price Index (CPI) and Core CPI on Wednesday will take on added significance as these will be the last inflation measures before Thursday’s FOMC interest rate decision.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – Want worker wages to rise? End the corporate income tax

By Laurence J Kotlikoff, Professor of Economics at Boston University

Workers’ wages have stagnated, even as the unemployment rate has plunged to a seven-year low and the economy is bounding ahead.  Some people propose raising the federal minimum wage and bolstering labor unions to address slow growth in wages.

One great way to lift pay that is not discussed often enough would be to end the corporate income tax.  Not just cut it, kill it, but not in a way that’s a sop to the rich.

Sound extreme?  Here’s why it’s a smart and progressive idea that would raise wages, lower employment, boost investment and give the economy enough vim so that the Federal Reserve’s Janet Yellen can increase interest rates without restless nights.  And it would eliminate the incentive for companies to move their tax homes abroad (such as by doing corporate inversions) and encourage more businesses to establish their headquarters here.

Time is ripe

First off, the timing is good.  Corporate tax reform is one of the few areas where we might see some legislation supported by the Republican Congress and the Democratic president.  The latter may not be quite ready to go for the elimination of corporate taxes, but he should think about it.

Second, the US may have the highest marginal rates of any developed country, ranging from 23% to 35% depending on who you ask.

The actual average or effective rate companies pay on their profits, however, is about 13%, because so much of it is sitting overseas and untaxed – in addition to the many loopholes and deductions that employ small armies of accountants and lawyers.  In 2013, the tax produced revenue equal to only 1.8% of GDP, a pittance compared with 8.1% for personal federal income taxes.

Where the corporate tax ax falls hardest

One of the problems in reforming corporate taxes is that in the popular imagination it is a levy on companies and their owners.  But many economists, going back to David Bradford in 1978 and including myself, have concluded that the tax may actually fall hardest on workers – not the owners of corporations, which, truth be told, includes workers via their holdings of stock in their 401(k)s.

That’s primarily because while workers are relatively immobile and are unlikely to travel far for a job, capital is not and is generally free to roam far and wide in search of a better home – that is, one with less regulation and with less tax.  When the capital flees, workers lose their jobs, and wages decline.  Ireland was a beneficiary of this during the so-called Irish Miracle in the late 1980s when a 75% cut in its corporate tax rate led to a massive inflow of capital, the establishment of more than 1,000 corporate headquarters, and dramatic increases in workers’ wages.

The same thing would happen here

I’ve been working with colleagues through the Fiscal Analysis Center to create a large-scale computer simulation model of the United States economy to show how it interacts over time with other nations’ economies.  We then used the model to see how it reacts to eliminating the US corporate income tax in conjunction with raising personal income taxes.  The findings make a strong, worker-based case for reform.

The model shows that ending the corporate income tax creates rapid and dramatic increases in investment, GDP and real wages, which help self-finance the lost revenue. The rest of the money the US Treasury would lose could be replaced with higher personal income tax rates, leading to a huge short-run inflow of capital.  US capital stock – machines and buildings – would increase 23%, output would climb 8% and wages would go up 12%.

Benefits also accrue if the tax is just trimmed, down to 9%, and loopholes eliminated – a revenue-neutral corporate tax base broadening.  In that case, the capital stock would increase 17%, output would grow 6% and wages would rise 8%.

A boon for the future

Both policies, eliminating and trimming, create gains in welfare for all Americans, but especially for today’s youth and future workers.  If other countries followed the US lead and cut their rates as well, the benefits would be smaller, but still significant.

Another way to eliminate the corporate income tax, which I’ve previously proposed, would be to force shareholders to pay income taxes on their companies’ profits as they accrue.  This gives companies no tax-related reason to leave the US, while ensuring shareholders rather than workers make up for any revenue losses.

Either way, getting rid of the tax may be a difficult political pill to swallow.  It sounds like a giveaway to corporate interests, but nothing could be further from the truth.  Rather, doing so would give the economy and workers a tremendous boost, just what it needs to achieve escape velocity.

Laurence J Kotlikoff is president of Economic Security Planning, Inc. and director of The Fiscal Analysis Center.

Financial Market Affects August 31, 2015

For most of the week, the financial markets traded in response to economic and financial news from China.  On Monday, the Great Wall of China turned into the Great Fall of China as the Shanghai Composite Index fell off of a cliff in overnight trading to lead global stock markets significantly lower.  The Shanghai Composite’s 8.5% nose dive was its worst decline since 2007, and resulted in multiple trading halts in our S&P 500 Index and Nasdaq 100 Index futures markets before our stock market’s opening bell.  Once the opening bell did arrive, the Dow Jones Industrial Average plunged 1,080 points, the NASDAQ fell 413 points, and the S&P 500 Index dropped 103 points within a few minutes.

The stock market then spent the rest of the session reversing higher from its intraday lows.  The panic-driven financial markets resulted in safe-haven U.S. Treasuries rallying with the 10-year yield tumbling to an intraday low of 1.94% before pulling back up to close at 1.998% as widespread fears of a China-led economic slowdown circulated around the globe.

China remained in the headlines on Tuesday as their central bank, the People’s Bank of China, cut their primary lending rate by 25 basis points to 4.6%, their banking system’s reserve requirement ratio by 50 basis points to 18% and one-year deposit rates by 25 basis points in an effort to stimulate their weakening economy.  The announcement from China’s central bank took sent U.S. stock index futures sailing to new pre-market highs and stocks did trade higher for most of the day before selling off hard in the last hour of trading.

Tuesday’s economic reports were generally supportive for the stock market.  Of particular interest, the Census Bureau reported New Home Sales for July came in at 507,000 annualized units.  While just shy of the consensus forecast of 511,000 units, this was an increase of 5.4% from the downwardly revised June rate of 481,000 and an increase of 25.8% compared with the July 2014 rate of 403,000.  The median sales price for new homes sold in July fell to $285,900 and the average sales price was $361,600.  At the end of July, the number of new homes for sale totaled 218,000 and represented a supply of 5.2 months at the current sales rate.

Also in housing news, the S&P/Case-Shiller home price index and the Federal Housing Finance Agency house price index for June were both reported.  The S&P/Case-Shiller home price index for June increased by 5.0% year-over-year for the 20-city composite index and by 4.6% for the 10-city composite index.  The national index rose 4.5% year-over-year, compared with a 4.4% gain in May.  The consensus estimate for the year-over-year 20-city index called for growth of 5.1%.

The Federal Housing Finance Agency house price index edged 0.2% higher in June.  Although slightly below a low-end forecast for 0.3%, it was still a decent gain.  Annualized price growth was reported at 5.6%, while prices in the second quarter increased 5.4% compared to the second quarter of 2014.  Sales rates are taking place at about twice the rate of price growth, a disparity suggesting future price acceleration given how thin inventories are right now in the housing sector.

Wednesday appeared to be a day of déjà vu as the markets traded very similar to Tuesday with the exception stocks held onto their gains rather than selling off during the last hour of trading.  China’s government injected a new round of stimulus into their markets by lowering interest rates by another 25 basis points and the reserve requirement ratio (RRR) for the largest banks by an additional 50 basis points.  Like Tuesday, the stock market rejoiced over the China monetary easing news and opened significantly higher while the bond market came under selling pressure.  Bonds then came under additional selling pressure following a weak 5-year Treasury note auction in the afternoon.

Helping the stock market were public comments made by New York Fed President William Dudley when he said “At this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”  However, he left the door open to raising rates during the September 16-17 FOMC meeting when he went on to say an initial rate hike “could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and international financial market developments, all of which are important to shaping the U.S. economic outlook.”  Dudley, a known “dove” on the FOMC and a close ally of Fed Chair Janet Yellen, was likely inferring that the economic slowdown in China and corresponding upheaval in the financial markets could influence the Fed’s monetary policy.

Also on Wednesday, the Mortgage Bankers Association released their Mortgage Application Data for the week ending August 22.  Overall the Index increased +0.2%.  The Refinance Index decreased 1.0% from the prior week, while the seasonally adjusted Purchase Index increased by 2.0% from a week earlier.  Overall, the refinance portion of mortgage activity fell to 55.3% from 55.5% of total applications the previous week.  The adjustable-rate mortgage segment of activity decreased to 6.8% of total applications from 6.9% in the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance dropped from 4.11% to 4.08%.

Thursday, bond prices continued lower with benchmark yields reaching one-week highs as a recovery in global stock markets saw some follow-through from Wednesday’s robust rally.  Resilient economic data led by a surprisingly strong revision to second-quarter GDP fueled selling in government debt.  The Commerce Department reported gross domestic product (GDP) grew at a 3.7% annual rate during the second quarter, and at faster pace than the 2.3% rate initially reported.  The consensus forecast had called for 2nd Quarter GDP to be revised higher to 3.2%.

The stock market continued its rally on good economic data, overnight signs of market stability in China, and after New York Federal Reserve President William Dudley said yesterday that the prospect of a September rate hike “seems less compelling to me than it was a few weeks ago” due to the recent chaos in global markets.  Following up on Dudley’s comments, Kansas City Fed President Esther George told Fox Business Network that the Fed should take a “wait and see” approach on hiking rates, while a top Chinese central bank official told Reuters the Federal Reserve would harm the global economy if it were to raise rates prematurely.

Housing remained an encouraging sector Thursday as the National Association of Realtors reported Pending Home Sales Index increased 0.5% in July to 110.9 from an upwardly revised June reading of 110.4.  The index has now risen for six of the past seven months, and July recorded the third highest reading for 2015 to date.  The consensus forecast called for a month-over-month increase of 1% for Pending Sales.  An index reading of 100 equals the average level of contract signings during 2001 and the index has now been above 100 (the “average” reading) for 11 straight months.  The national median existing-home price for all housing in 2015 is expected to increase around 6.3% to $221,400, down by $500 from the June projection.  Total existing-home sales this year are forecast to increase 7.1% to around 5.29 million, about 25% below the prior peak of 7.08 million reached in 2005, but up from a total of 5.27 million projected in June.

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Friday, the financial markets acted rather restrained, perhaps exhausted after enduring all of the volatility that took place over the prior four trading days.  Signs of market stability in China seemed to have calmed global equity markets as the Shanghai Composite Index gained more than 4.0% for a second consecutive day.  Chinese officials announced pension funds managed by local governments will start investing 2 trillion yuan or $313.05 billion as soon as possible in stocks and other assets and this seemed to provide a boost to investor sentiment.

The day’s economic news was mostly aligned with consensus estimates.  Personal Income increased +0.4% in July, while Personal Spending rose 0.3%.  Personal Income matched the consensus forecast while Spending was estimated at a slightly higher 0.4%.  The Core PCE Price Index crept up just 0.1% higher matching expectations.  The Core PCE Index, the Fed’s favorite inflation measure, indicates inflation is not yet becoming a problem and this may be helping investor sentiment today.

Furthermore, the final reading of the University of Michigan’s Consumer Sentiment Index was reported at 91.9 for the month of August, which was slightly weaker than the consensus forecast of 93.0, but still a strong value.

For the week, the FNMA 3.5% coupon bond lost 34.4 basis points to end at $103.75 while the 10-year Treasury yield climbed 13.9 basis points to end at 2.18%.  Stocks ended the week with the NASDAQ Composite gaining 122.29 points to close at 4,828.33.  The Dow Jones Industrial Average added 183.26 points to end at 16,643.01, and the S&P 500 increased 17.98 points to close at 1,988.87.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 1.91%, the Dow Jones Industrial Average has dropped 7.09%, and the S&P 500 has fallen 3.52%.  The national average 30-year mortgage rate moved to 3.98% from 3.93% while the 15-year mortgage rate increased to 3.25% from 3.19%.  The 5/1 ARM mortgage rate rose to 2.98% from 2.96%.  FHA 30-year rates rose to 3.75% from 3.60% while Jumbo 30-year rates increased to 3.80% from 3.72%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.75, -34.4 bp) traded within a 108 basis point range between a weekly intraday high of 104.66 and a weekly intraday low of $103.58 before closing at $103.75 on Friday.

Volatility reigned supreme with the bond trading within wide intraday swings during the week.  After rocketing well above the 200-day moving average resistance level located at $104.12 to reach an intraday high of $104.66 on Monday, the bond pulled back late in the session to close at $104.22 in a sign of internal market weakness.  The bond then spent the rest of the week testing converging support levels from the 100-day and 25-day moving averages located at $103.72 and $103.65 respectively.

A new sell signal was generated as a result of last Tuesday’s trading from a negative stochastic crossover in the slow stochastic oscillator which is now trending lower indicating a slowing in market momentum.  Overhead technical resistance continues at the 200-day moving average which has proven in the past to be an extremely tough ceiling since the beginning of June.

As long as the dual layer of support from the 100 and 25-day moving averages hold, the bond should be range-bound in the coming week between support and resistance levels with little overall change in mortgage rates.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of August 31

The economic calendar focuses on the latest labor and employment data this week highlighted by the ADP Employment Change for August on Wednesday; the August Challenger Job Cuts and Initial Jobless Claims reports on Thursday; and the Labor Department’s Employment Situation Summary for August on Friday.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – How a Chinese slowdown will hit global growth

By Linda Yueh, Fellow in Economics/Adjunct Professor of Economics at University of Oxford

As China’s markets fall and drag down global equities, the underlying concern is undoubtedly how much a slowdown in the Chinese economy will affect the rest of the world.  Since the 2008 global financial crisis, China has notably emerged as one of the twin engines of world growth.

China has contributed as much to world GDP growth as the US in the past decade and a half, and even more than the world’s biggest economy since the 2008 financial crisis, according to the IMF.  Indeed, the IMF projects that China will generate around double what the US contributes to world output until the end of the decade.  Together, the US and China are expected to generate as much world output as the rest of the world put together.

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Prior to China integrating with the world economy, the US was the biggest and sole engine of global growth as it accounted for nearly a quarter of world GDP, based on market exchange rates.  So, it’s the rapid growth of China, which rose from accounting for a mere 2% of world GDP in 1995 to around 15% now, that helped the world economy grow so quickly in the 2000s.

As China slows from the nearly 10% growth rate that it clocked in the first three decades of its reform period, which began in 1979, to what is thought to be a more sustainable 7% or so, the world economy is likely to slow with it.  The main areas where the impact will be felt would include not only commodities, but also consumer goods, including luxury goods.

China’s re-balancing of its economy means that consumption (what consumers buy) will become a bigger part of the domestic economy than investment, and services will become a more important driver of growth than manufacturing.  As a result, a Chinese slowdown will affect not just commodities and capital goods, but also global consumer demand and thus the profits of multinational companies in America and Europe.  Here’s a breakdown of the most affected:

  1. Commodities exporters

The countries most affected by a Chinese slowdown are still likely to be those that export a great deal to China, notably commodity exporters such as Australia.  As Chinese demand for raw materials and commodities decline, there will be a knock-on effect in terms of their economic growth.

For Australia, China accounts for around one-third of all exports.

For Sub-Saharan Africa, China is the largest trade partner, accounting for around one-eighth of all trade.  But the impact will be concentrated since five countries account for three-quarters of all of Africa’s exports to China: Angola, the Democratic Republic of the Congo, Equatorial Guinea, Republic of Congo, and South Africa.

China has surpassed the US as the most important trading partner for Latin America, which has traditionally been seen as America’s backyard and therefore most susceptible to the economic fortunes of its northern neighbor.  But that is no longer the case.  Latin American exports to China have risen to account for a record 2% of the GDP of the region.

As China’s growth slows, its imports have fallen by 8% from a year ago, as seen in the latest data for July, following a similarly sizeable 6% drop in June.  The slowdown has been felt in the commodity price falls seen throughout the summer that has led to tens of thousands of job losses by oil and coal companies globally, as well as others.

  1. Europe

But, it’s not just commodities.  Capital goods imports have also fallen, which will affect countries like Germany where exports to China account for around 2% of GDP. Germany itself accounts for the bulk of EU exports to China so the largest country in Europe, which has recovered on the back of exports, will also feel the impact.

Indeed, the European Union is China’s largest trading partner, and China is the second-largest trading partner of the EU after only the US.  So, a slowdown in China will affect Europe, which is also felt in the profit warnings issued by European companies such as Burberry and BMW as their sales in China slow.

  1. The USA

Exports from the US to China, by contrast, are less than 1% of GDP.  That stands in contrast to Japan where exports to China amount to a large 3% of GDP.

But that doesn’t mean that American multinationals will be unaffected.  For instance, the world’s most valuable company, Apple, sells more iPhones in China than the US, and its CEO has reassured markets more than once that the Chinese slowdown won’t negatively affect their business.

  1. Financial markets

Finally, the Chinese slowdown has been most visibly seen in financial markets.  China’s stock market is largely closed to outside investors so does not have a direct impact on global investors.  But, despite rebounding from their initial fall, equities markets are certainly reacting to the impact of a Chinese slowdown.

The UK’s FTSE will feel this most acutely, as it has a large portion of commodity stocks and around half are multinational companies, making it one of the most open bourses in the world.  No wonder UK stocks experienced their worst one-day fall since the 2008 financial crisis when China’s market tanked.

Undoubtedly it’s unusual for the world’s second-largest economy to be a middle-income country that is not entirely market-driven.  Given the importance of China to the world economy, it’s time to get used to monitoring China as well as the US even more closely and becoming accustomed to the greater ups and downs that are likely to be seen in the global economy as a result.