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.