Economic update for the week ending September 19, 2015
Stocks drop after Fed leaves rates unchanged – Stocks were up this week until the Federal Reserve left rates unchanged. Many investors feared a rate increase because higher rates increase borrowing costs which cut into profits. It has been widely felt that the Federal Reserve would have begun rising rates because the economy was on solid footing. Stocks had dropped over the past couple of months partially on fears on a rate increase; however, stocks dropped further when the Fed announced they were not going to increase rates! The Fed’s statement made investors feel the economy was weaker than the data indicates, fearing that future growth may not materialize as expected. The Dow Jones Industrial Average closed the week at 16,384.79, down from last week’s close of 16,433.09 The S&P 500 closed the week at 1,958.03, almost unchanged from last Friday’s close of 1,961.05. The NASDAQ closed the week at 4,827.23, also just about the same as last week’s close of 4,822.34.
Federal Reserve leaves rates unchanged – The Fed chose to leave rates unchanged. In one sense this was good news for investors that had expected the first rate increase since 2006. However, this decision, and their statement spooked investors. The Fed’s statement included that The U.S. was currently the worlds strongest economy, but the risk to future growth in the economy is very high due to weakness throughout the world. It further ran through a bunch of data that showed why they are concerned. Some included: a drop in exports, inflation well below the 2% target range, a stabilizing housing market, and stagnant wages. Strong employment growth was cited as a positive. They left room to raise rates as soon as the next meeting, but added that with inflation so low that even if they did begin to raise rates they would keep rates lower than “normal levels” for a prolonged period of time due to low inflation which they said could persist for as long as a decade. Many experts took these statements to mean that the economy was not as strong as they thought. Stocks sold off on Thursday and Friday after the report was digested on fears that The Fed fears the economy may weaken. This would affect sales which would affect future corporate profits. All in all, the one thing that investors agreed upon is that the Fed’s decision not to raise rates, which have been at near zero since 2008 to stimulate the economy, creates an environment of uncertainty. Markets fear uncertainty.
Mortgage just under 4% – The 30 year fixed rates ended the week around 3.875% for loans up to $417,000, and around 4.00% for loans over $417,000. The 15 year fixed rate loans are about 3.25% for loans up to $417,000, and around 3.375% for loans over $417,000. The 5 Year-ARM rate is around 2.75% and 1 Year-ARM mortgages are about 2.50%.
Treasury Bond yields slightly lower this week – The 10 year Treasury bond yield closed week at 2.13%, down from 2.20% last Friday. The 30 year treasury bond yield closed Friday at 2.93%, almost unchanged from last week’s close of 2.95%. Mortgage rates follow bond yields so these are closely watched.
California employers add 36,200 non-farm jobs – The state’s unemployment rate dropped to 6.1% in August from 6.2% in July. Unemployment is at its lowest level since January 2008 in California according to the Bureau of Labor Statistics. Since August of 2014 the state has gained 470,000 jobs. That represents an annual growth rate of 3% which has outpaced the national average of 2.1% for the 50 states.
California existing home sales and prices beginning to level – The California Association of Realtors reported that the number of homes sold in August dropped 3.8% on an annualized level from the number of homes sold in July. Sales were still up 9.3% from the annualized number of homes sold last August. This year the number of sales have been much higher than last year which was the lowest number of sales in decades, but those increases did moderate in August. Prices are beginning to level as well, according to The California Association of Realtors. The statewide median price in August was up 1% from July, and up only 2.5% from August 2014. That marks the lowest year over year price increase in 3 1/2 years. Unsold inventory ticked up to a 3.6 month supply from a 3.3 month supply in July. This is still a very low number. A normal market has a 6-7 month supply. It’s unusual to see prices stabilize with such a low number of homes on the market. The assumption is that prices have risen to a level that buyers have pulled back on their home purchases. Either inventory can rise quickly or prices can begin to rise more quickly in this environment. Unfortunately, we won’t know for sure until one or the other happens!