See this week's numbersFriday, February 24, 2017

The hints continue to fall without landing

This week contributed more pieces to the rate puzzle, but the complete picture remains a mystery. Minutes from the February 1 FOMC meeting were released mid-week, providing insight into two days of discussion between the 12 voting members of the Federal Reserve. According to the minutes, many participants agreed it might be appropriate to raise the federal funds rate “again fairly soon.” New data suggesting the labor market and inflation remain in line with or better than the Fed’s expectations would support a decision to raise rates. The committee also could raise rates if progress toward the inflation target comes too quickly. Committee members were most concerned about the uncertainties from proposed tax cuts and fiscal policy changes coming out of Washington. If the changes cause inflation to rise too fast, the Fed may have to respond more aggressively with its interest rate policy. On the other hand, if the stronger dollar pushes inflation lower, the Fed may have to scale back any proposed rate moves. Another concern among members was a possible misunderstanding by the financial markets of the Fed’s more aggressive intentions outlined in December. Considering the bond market reaction after the release of the minutes – bond yields declined three to four basis points – the concern appears justified. The financial markets continue to place less than a 40 percent chance for a rate increase in March.

Other Key Indicators this Week:

Housing – Home sales got off to a good start in January, as housing demand remained strong despite rising mortgage rates. Both existing and new homes sales increased over 3.0 percent during the month, reversing a downturn in December. This was the fourth increase in five months for both categories of homes. The number of contract closings on an annualized basis for existing homes, 5.69 million, was the highest level in almost 10 years. First-time homebuyers accounted for 33 percent of all sales, up from 32 percent. Inventory continues to be low, but remains more pronounced for existing homes. The number of previously owned homes for sale is at a 3.6 month pace. Anything below five months is considered a tight market. The inventory level for new homes held at a 5.7 month pace. There were 265,000 new homes on the market in January, the most since July 2009. The median home price in both categories rose just over 7.0 percent. With the home-buying season fast approaching, potential homebuyers are lining up to secure loans before interest rates move higher. Loan applications to buy a home increased 1.1 percent in February.

A new report from Black Knight Financial Services calculated it now takes 22.2 percent of median income to make a monthly mortgage payment. The monthly payment increased 10 percent in the fourth quarter of 2016, due mostly to rising interest rates. In a separate report from the Mortgage Bankers Association, the delinquency rate on FHA mortgages jumped in the fourth quarter. The rate increased to 9.02 percent from 8.3 percent in the third quarter.

Strategically for Credit Unions:

The Dow Jones Industrial Average Index reached new highs 10 days in a row, for the longest winning streak since 1987. Bond yields, on the other hand, turned lower this week. Despite comments from various Federal Reserve Presidents and the minutes from the last FOMC meeting, the market is having difficulty being convinced of an imminent rate increase. For credit unions, loan demand remains steady despite the increase in rates at the end of the year. Tax returns are starting to show up in deposit accounts, providing much-needed liquidity.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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