Economic update for the week ending February 17, 2018

Key index shows inflation picking up – The Labor Department reported on Wednesday that the Consumer Price Index rose 0.5% last month. Economists had expected a 0.3% jump. Core CPI, which strips out food and energy as they tend to be more volatile, rose 0.3% in January. Although that was the largest month-over-month increase since last January, the year-over-year increase was just 1.8%. After 10 years of inflation below the target level, this report shows that fears of inflation normalizing may be sound. Low inflation has kept interest rates at historically low levels for a decade. Higher inflation would cause higher interest rates. Bonds and mortgage securities reacted negatively to the report and interest rates rose sharply after the release. The CPI has been so stable for so long, at such low inflation levels, that it’s something we have not been talking about. As inflationary pressure picks up, it is an index we will be paying a lot of attention to.

Stock markets rebound this week – Stocks rebounded from two weeks of steep declines to close the week making up about half of the losses seen in the previous two weeks. Investors, while still fearful of how higher interest rates and labor costs will effect profits, embraced that these factors are a symptom of a more robust economy. They felt that while interest fears are rational, the market oversold and over corrected. Stocks gained about 4.3% for the week, and all major indexes are higher than they were at the start of 2018. The Dow Jones Industrial Average closed the week at 25,219.38, up from last week’s close of 24,190.90. It is up 2% year-to-date. The S&P 500 closed the week at 2,732.22, up from 2,619.55 last week. It’s up 2.2% year-to-date. The NASDAQ closed at 7,239.47, up from 6,874.49 last week. It is up 4.9% year-to-date.

Treasury Bond Yields – The 10-year treasury bond closed the week yielding 2.86%, up from 2.83% last week. The 30-year treasury bond yield ended the week at 3.13%, unchanged from 3.14% last week. We watch bond rates because mortgage rates follow bond rates.Mortgage continues to rise – The February 15, 2018 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.38%, up from last week’s 4.33%. The 15-year fixed was 3.84%, up from 3.77% last week. The 5-year ARM was 3.63%, up from 3.57% last week.

Retail sales weak in January – The Commerce Department reported that retail sales unexpectedly decreased 0.3% in January. Economists had expected a 0.2% increase. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was reported to have increased at a 3.8 percent annualized rate in the fourth quarter. The economy grew at a 2.6 percent pace in the final three months of 2017, and holiday spending in 2017 was 4.9% higher than 2016. After a strong holiday season, the largest decline in retail sales in 11 months took experts by surprise.

California home affordability slightly higher in fourth quarter over third quarter of 2017 – The California Association of Realtors released their housing affordability survey for the fourth quarter of 2017. According to the report, 29% of California homeowners could afford to purchase a $550,990 median priced detached home in the fourth quarter of 2017. That was up from 28% in 3rd quarter, but down from 31% in the fourth quarter of 2016. The minimum income required to qualify for a median priced home was $111,260. The payment was $2,780 a month with a 4.17% mortgage. 37% of California households could afford to purchase a condo, or townhouse. It took a minimum income of $90,810 to qualify for a median price of $449,720, with a mortgage payment of $2,270. The Los Angeles region had a higher affordability rate than the state as a whole. 31% of Los Angeles households could afford to purchase a median priced detached home compared to 29% statewide. Interest rates are higher in the first quarter of 2018, so I’d expect affordability to be even lower now.

Home sales down in numbers, but prices higher in January – The California Association of Realtors reported that existing home sales in California totaled 388,800 in January on a seasonally adjusted basis. This represented a drop of 7.6% from December’s pace, and a drop of 2.9% from last January. We watch year-over-year because January closings are often much lower than December. The statewide median price paid for a home in California was $527,800, up 7.3% from January 2017. The unsold inventory index rose to a 3.6-month supply from just a 2.5-month supply of activity listings in December. It was 3.7 months in January 2017.

Have a great weekend!

Syd