A look behind at the November 18 week sees the economic data took a backseat to the FOMC meeting minutes and comments from Fed officials. In part that is due to the fact that the data generally wasn’t very interesting. Most of the numbers turned in a performance that was in alignment with market expectations and of similar tone to recent reports. There was no significant alteration in the economic outlook. With that in mind, markets were focused on is just how serious and united policymakers are on pausing on further rate cuts after the last FOMC meeting.
The minutes of the October 29-30 meeting suggested that the reasons were varied, but on the whole the FOMC was in agreement that it was time to pause on further rate cuts to allow the three in place time to work their monetary policy magic. The lagged effects of monetary policy mean that if there is an impact on assisting inflation to come in closer to the Fed’s 2% target, it may be another month or two before it is evident. There are risks in providing too much accommodation to lift inflation while the labor market remains solid and a recession increasingly appears avoidable. The tone of the minutes should help cement expectations for no cut at the December 10-11 meeting. Policymakers’ comments in the November 11 and 18 weeks reinforced that if data and developments change to the downside, the Fed will act appropriately. In the meantime, arguments for further policy accommodation are harder to make.
Another interesting point in the minutes was the ongoing review of the monetary policy framework. There has been nothing firmly decided yet. However, the minutes made it clear that the FOMC has effectively removed negative interest rates from the toolbox and placed them in storage. This is likely to be an unpopular decision with the Trump Administration. President Trump has been vocally demanding lower and even negative rates as a competitive response to other central banks’ interest rate policy. However, FOMC participants widely believe that these are neither necessary in light of other, better responses to an economic downturn, nor suitable to the financial structure.
Even though the discussion took place over three weeks earlier, it is going to be read as a rebuke to President Trump after he summoned Chair Jerome Powell to the White House on Monday to meet with him and Treasury Secretary Mnuchin. Although the meeting was termed “cordial” in a subsequent tweet from President Trump, it is clear that Powell maintained the independence of the central bank and its data-dependent and balanced approach to monetary policy. It is also clearer why the Federal Reserve may have felt it necessary to issue a statement after the meeting to ensure that the minutes were not misconstrued.
Data released during the week were mainly for the housing market and manufacturing sector.
If some of the numbers in housing were a bit softer, it does not change the fundamentals that low mortgage interest rates have spurred activity in housing. Rates were at a near-term peak in November 2018 of about 4.87%. If rates in November 2019 are a bit higher than in the summer at around 3.70% for a 30-year fixed rate, these are still sufficiently low to attract homebuyers into the market while sellers are having to make price concessions. Supplies of homes in the more sought-after sizes and locations are limited, but there are also opportunities to purchase into a more expensive market while affordability is improved by low rates.
The NABH/Wells Fargo Housing Market Index for November showed homebuilders’ optimism remained quite high at 70 after 71 in October. If sales are seen as slightly softer in the present, expectations for sales firmed to their highest in a year-and-a-half. Buyer traffic was not much changed and was the strongest in just over a year.
Starts of new homes in October were up a solid 3.8% month-over-month, both in the bellwether single-family category (up 2.0%) and the more volatile multi-units (up 8.6%). Demand for new housing pushed permits up 5.0% in October and will help keep activity going into the early cold months. In spite of some month-to-month fluctuations, the underlying pace of starts and permits is good.
Sales of existing homes in October were up 1.9% to 5.46 million units (SAAR), the median price edged down 0.2% to $270,000, and the supply of homes on the market fell to 3.9 months’ worth. The bottom line is that homes under contract are going to settlement, consumers are driving hard bargains to keep the price down in spite of limited housing stock to choose from. In fact, some of this may be that in order to sell homes in less popular sizes and/or pricier locales, sellers are making concessions.
Two regional surveys of manufacturing for November pointed to continued soft conditions for the factory sector. The Philadelphia Fed’s Manufacturing Business Outlook registered an increase for its general business conditions index at 10.4 in November after 5.6 in October. However, this reflects sentiment about activity. It appears that manufacturers in the District are feeling less uncertain about the outlook, but that doesn’t mean that the outlook is particularly rosy. The details in the report were less positive. The Kansas City Fed’s Manufacturing Index held at -3 in November and hasn’t had a positive reading since May.
The activity index in the New York Fed’s Business Leaders Survey for November rose to 2.9 after -4.3 in October. Conditions for the region’s service sector are struggling in a difficult business climate but remain narrowly expansionary overall.
The data on state and regional unemployment rates and payroll changes in October reinforced what the Employment Situation had to say about resource slack in the labor market. States with the largest share of the labor force continued to run unemployment rates at or near the 3.6% national number. Payroll employment was widely up except in the states that were most affected by the UAW strike at GM and those numbers will recover in the November data now that the strike is settled.
Initial jobless claims in the week ended November 16 were unchanged at 227,000 and for a second week were running at levels not seen since June and certainly not routinely seen since January 2018. We are coming up on the final month of the year in which businesses typically adjust payroll sizes in advance of the new year. Slightly higher levels for coming weeks should not immediately be read as a deterioration in the labor market. Claims are still a far cry from a pace that could be construed as a notable softening in conditions. The insured rate of unemployment will be a counterweight to any noise in claims if it continues to run at the 1.2% that has lasted nearly a year-and-a-half will only the briefest of exceptions.
The data on e-commerce sales for the third quarter didn’t have anything to tell about the pace of retail activity overall. However, it did confirm that consumers’ liking of the shopping experience offered on-line still has upward momentum. It wouldn’t be a surprise if e-commerce topped the pace of previous fourth quarters, but it will be of interest to know if the share of retail activity has another leap higher this year.
The final University of Michigan Consumer Sentiment Index for November was revised a trifle higher to 96.1 after the preliminary report and was also up from 95.5 in October. At present consumers’ sentiment about the economy is built on solid confidence about the labor market and business conditions. While the news cycle may cause some up-and-downs, the underlying trend is for a fairly rosy outlook.
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