This week’s economic events included MBA Mortgage Applications, which is the Mortgage Bankers Association index of loan applications. Based on this new data, loan applications increased 8.5% in last week, WoW (week over week), a large increase from the prior 2.1%. This is very likely due to the historical low mortgage rates, which are currently at 4.88% (30 year fixed). Between government incentive programs and historically low rates, we have seen a recent upswing in the housing and mortgage market. Based on today’s data, there was a 4% increase due to purchases while there was an 11% increase in refinancing, meaning more people with existing homes are simply refinancing at a lower rate, rather than new home buyers entering the market. This can be viewed as positive in the near term, but uncertain in the long term, as the cyclical effects can be a perplexing task to overcome, especially for the big mortgage backed security buyers like the Fed. Nonetheless this is positive for now as it is stabilizing housing prices and giving the consumer more ability to spend. Still, many see this as a cushion for housing to rest, more than a pivot point in the market. With unemployment at 10% and a weary outlook in corporations moving into a hiring phase, along with the increased standards to obtain credit, it is difficult to see a full upswing in the housing market in the near future.
Monthly data on U.S. wholesale inventories was also released this week. The economists’ survey projected a decrease of 0.50% in inventories, but was surprised with an unexpected 0.3% gain (Figure 1). This was the first increase in over a year, which is understood as a good signal for the economy. When analyzing the consensus report, we found that the current inventory to sales ratio is at the lowest point since August 2008. Meaning that the inventories expected turnover, based on month to month sales data, is at its quickest pace since August of 2008. Putting this together with the increase in inventories, we can see that companies are adjusting to the increasing sales levels accordingly, and possibly expecting this trend to continue forward.
U.S. Trade: Balance of Payments
The trade deficit unexpectedly narrowed in October from $35.7bn to 32.9bn, an improvement of 7.6%, due to overseas economic recoveries and a weaker dollar; the trade gap was expected to widen to $36.8bn. Although there was a slight rise in imports, which hints at increasing U.S demand, a plunge in the demand for petroleum kept the gain in check. The figure is primarily attributed to two components: a U.S manufacturing rebound and a flock to U.S assets, a combination of positive gains in the current and capital accounts.
Fueled by increased global demand, particularly China, this has given impetus for U.S firms to keep their inventories high in order to meet increasing demand. Manufacturing in the U.S has expanded in November for a fourth month in a row.
The U.S. dollar still feels the downward pressure gleaning on from pessimistic investors who spurn the safety of the dollar and turn to higher-risk assets such as stocks, since a depreciating dollar makes domestic assets more enticing.
In addition, exports have increased by 2.6% while imports have risen by only 0.4%. Purchases of foreign crude oil have declined to 8.35mn barrels every day, the lowest since January 2000. This decline has offset the demand for all other imports since oil imports have a substantial weight on total imports. Stated by Treasury Secretary Timothy Geithner, “The economy is now growing and growth seems to be gradually strengthening. You see pockets of real strength now in technology and exports and I think they are hopeful signs of progress.”
Retail Sales and Consumer Confidence
November advanced retail sales rose 1.3% MoM, following Octobers 1.1% revised gain. This increase exceeded the 0.8% survey by 0.5%, indicating the economy could be performing better than most economists expect. Retail less automotive sales rose 1.2% for November, also surpassing expectations, which was the biggest gain since January. It is an indication that households are beginning to spend as the holiday season continues and that some of the discounts being offered by retailers may be working. Coupled with the retail numbers, The University of Michigan survey of Consumer Confidence came in better than expected at 73.4, an indication that American households are beginning to feel more optimistic about the future of the economy. This number beat surveyed estimates by 4.6 points. As future expectations become less bleak, economic data is showing that a recovery may be underway. The sustainability of this recovery however, is still in question.
Article submitted by: Alex Tarhini, Alejandro Medina and Robert Belsky of the Capital Markets Lab.