Update 6/6/14

Interest Rate and Employment Update

Mortgage applications in the U.S. fell last week as a decline in borrowing costs to almost a one-year low failed to boost purchases or refinancing activity. The Mortgage Bankers Association said that applications for new mortgage loans declined 3.1% in the week ending May 30th which included the Memorial Day holiday. Applications for loans to finance new purchases dropped 3.6%, and refinancing applications declined 2.9%. The national average rate for a conventional 30 year fixed rate loan declined 5 basis points (0.05%) last week to 4.26%, while the average rate for a 15 year loan eased 3 basis points to 3.39%.  It will be interesting to follow these numbers going into summer, when a large number of sellers tend put their homes on the market.

Dallas Fed President Richard Fisher said that he would like to see the central bank’s bond-buying program end in October, but also said he doesn’t expect any hike in rates until next year. Fisher said the “odds are slim” that the Fed will raise rates just after ending its bond-buying program. “I don’t expect we’ll raise short-term rates this year,” said Fisher, who is a voting member of the Fed’s policy-setting committee. He said the timing of a rate hike “depends on developments in the economy,” such as inflation and jobs growth. “I am not going to focus on raising rates until we have completed the wind-down,” he said.

The U.S. economy added 217,000 jobs last month as the unemployment rate remained steady at a six-year low of 6.3%. The increase put total employment beyond its peak of 138.4 million reached in January 2008.  During the recession the economy lost 8.7 million jobs but has since recovered 8.8 million.  The participation rate, which measures the share of working-age people in the labor force, held steady at 62.8%, the lowest level since March 1978. The so-called underemployment rate, which includes those who have given up looking for work and those who are working part-time but would prefer full-time employment, dipped to 12.2% from 12.3%.

European Central Bank Action

European Central Bank President Mario Draghi announced unprecedented measures on Thursday and reaffirmed the ECB’s commitment to stave off deflation and strengthen economic growth in the Eurozone.  The ECB will cut its deposit rate to minus 0.1 percent, becoming the first major central bank to take one of its main rates negative. In a bid to get credit flowing to parts of the economy that need it, the ECB also opened a 400-billion-euro ($542 billion) liquidity channel tied to bank lending, commonly referred to as Targeted Longer Term Refinancing Operations (TLTRO).  From March 2015 to June 2016, on a quarterly basis, Eurozone banks will be able to borrow as much as three times the amount of their net lending to euro-area companies, above a threshold set by the ECB. While conceding that rates are at the lower bound “for all practical purposes,” the ECB president signaled policy makers will act again if needed.

Draghi also set the stage for continued stimulus efforts and did not rule out the possibility of further accommodation in the form of asset purchases (similar to our Quantitative Easing (QE) programs in the United States).  Instead of buying U.S. government debt like the Federal Reserve did, the ECB will most likely purchase asset-backed securities based on bank loans.  That measure could help smooth lending by helping banks manage risk. 

Automakers Trying to get out of Black Cloud of Recalls

Automakers in May posted their strongest sales month since before the 2008 recession, as transaction prices remained strong and discounts did not increase.  Despite the black cloud hanging over the industry right now due to all the recent recalls, industry sales rose 11.3% to an annualized pace of 16.77 million vehicles, the strongest pace since February 2007.  Total U.S. sales for 2013 were 15.6 million.  GM’s sales jumped 12.6%, well above consensus estimates, boosted by strong demand for full-size sport utility vehicles and pickups. Chrysler’s sales rose 16.7%, and Ford’ s sales climbed 3%. Foreign automakers posted even stronger gains as Toyota’s sales rose 17% and Nissan reported an 18.8% increase in sales. “Industry sales in May soared as consumer confidence improved and demand for new vehicles continued to strengthen,” said Bill Fay, group vice president of Toyota Motor Sales USA.  While these signs point to an improving market, May is typically a good month for automakers and was also aided by having five weekends this year.

U.S. Manufacturing Regaining Momentum

Orders at U.S. factories rose for a third consecutive month in April, adding to evidence that manufacturing is regaining momentum after a harsh winter. The Commerce Department said that orders increased 0.7% in April, buoyed by a surge in demand for military hardware. April’s gain followed a 1.5% increase in March and a 1.7% gain in February. Economists expect factory activity will strengthen in coming months, helped by rising consumer demand and a rebound in U.S. export sales. The strength in manufacturing is one factor that should help boost U.S. growth to a better than 3% pace in the second quarter.

Our view is that U.S. GDP will bounce back in the second half of 2014.  Productivity and job growth should follow suit and we anticipate GDP readings in the range of 3.8 to 4.0 annualized growth rates later in the year.  Job gains and warmer weather should boost consumer spending and we expect increases in business spending on acquisitions and capital expenditures.  


Apple (AAPL) is expected to split their shares seven-for-one at the close of market today and the new stock price should be reflected on Monday.  The company announced this split in April with hopes that a lower stock price will make the stock more accessible to a greater number of investors.  At today’s market price of approximately $645/share the stock should trade around $92/share on Monday.


This publication is provided as a service to our clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.