Dow dropped 61, advancers over decliners 4-3 & NAZ was off 5. The MLP index crawled up to the 219s & the REIT index was up 1+ to the 416s. Junk bond funds fluctuated & Treasuries were little changed. Oil was off 1+ to 90 & gold fell 4 to 1732.
AMJ (Alerian MLP index tracking fund)
Private payroll job growth slowed markedly in Aug, suggesting that companies are pulling back on hiring amid growing fears of an economic slowdown, according to the ADP National Employment Report (ADP). Companies added just 132K jobs last month, sharply missing the 288K gain that had been predicted. That is also below the 270K gain recorded in Jul & is the lowest since May, when employers hired just 128K workers. "Our data suggests a shift toward a more conservative pace of hiring, possibly as companies try to decipher the economy’s conflicting signals," said ADP chief economist Nela Richardson. "We could be at an inflection point, from super-charged job gains to something more normal." The ADP report has been paused for 2 months as the company reworked the methodology for the jobs data & started collaborating with the Stanford Digital Economy Lab. The changes are largely technical, as ADP previously faced criticism for struggling to accurately predict the employment count in the Labor Dept's more closely watched job report. But the report now includes data on wages, which showed that annual pay climbed 7.6% in Aug – a concerning development as consumers continue to confront the hottest inflation in close to 4 decades.
US companies sharply miss job expectations in August
Cleveland Federal Reserve Pres Loretta Mester said she sees interest rates rising considerably higher before the central bank can ease off in its fight against inflation. Mester, a voting member this year of the rate-setting FOMC, sees benchmark rates rising above 4% in the coming months. That's well above the current 2.25-2.5% for the federal funds rate. Markets currently are pricing in only a 1-in-3 chance of the funds rate climbing above 4% next year. “My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there,” she said. “I do not anticipate the Fed cutting the fed funds rate target next year.” In line with that, Mester said rates will remain elevated “for some time,” a phrase used in recent days by both Fed Chairman Jerome Powell & New York Fed Pres John Williams. She said real rates, or the difference between the fed funds rate & inflation, will need to “move into positive territory.” The Fed this year has raised rates 4 times for a total of 2.25 percentage points. Markets are pricing in a 3rd consecutive 0.75 percentage point increase at the Sep meeting & looking for rate cuts to start in the fall of 2023. Mester anticipates the rate increases to slow economic growth, which she sees as running “well below 2%” while the unemployment rate rises & financial markets remain volatile. She expects inflation to fall to 5-6% this year & then get closer to the Fed's target in subsequent years. In one concession to those looking for lower rates, she said she does not think the Fed necessarily will have to keep raising rates until inflation hits the central bank's 2% goal. But she added that policymakers must remain vigilant. “It would be a mistake to declare victory over the inflation beast too soon. Doing so would put us back in the stop-and-go monetary policy world of the 1970s, which was very costly to households and businesses,” she said.
Fed’s Mester sees benchmark rate above 4% and no cuts at least through 2023
After falling back earlier this month, mortgage rates began rising sharply again to the highest level since mid-Jul. That caused mortgage demand to pull back even further. Total mortgage application volume fell 3.7% last week compared with the previous week, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index. Volume was 63% lower than the same week one year ago. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647K or less) increased to 5.80% from 5.65%, with points rising to 0.71 from 0.68 (including the origination fee) for loans with a 20% down payment. That rate was 3.11% one year ago. “Mortgage rates and Treasury yields rose last week as Federal Reserve officials indicated that short-term rates would stay higher for longer. Mortgage rates have been volatile over the past month, bouncing between 5.4 percent and 5.8 percent,” said Joel Kan, MBA's associate VP of economic & industry forecasting. As a result, refinance demand, which is highly sensitive to weekly rate moves, fell another 8% for the week & was 83% lower than the same week one year ago. The refinance share of mortgage activity decreased to 30.3% of total applications from about 66% a year ago. Mortgage applications to purchase a home dropped 2% for the week & were 23% lower than the same week one year ago. “Purchase applications have declined in eight of the last nine weeks, as demand continues to shrink due to higher rates and a weaker economic outlook,” Kan added. “However, rising inventories and slower home-price growth could potentially bring some buyers back into the market later this year.”
Mortgage demand falls even further, as rates shoot back up to July highs
Dreary economic news keeps coming. While short of terrible, it's not good & it seems like a low grade recession is already here. High interest rates are supposed to slow the economy. That's happening already. Sep has been traditionally been the toughest month for stocks. That may play out next month.
Dow Jones Industrials
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