November 14th, 2013 12:23 PM by Mel Samick
The market is tired of guessing which direction the employment data would point and the ensuing tapering talk. Yes, this last Friday's employment data showed that 204,000 new jobs were added despite the government shutdown which then sent the bond markets looking for cover. And for those who don't know it yet, the cheapest gasoline at some pumps is available at below $3. At least along somewhat expected lines, Marvel's new blockbuster, "Thor: The Dark World", hammered the box office with a whopping global collection of $325 MM during its first 10 days. The imaginary "World of Asgard" seems to be working for Thor's producers. Of course, everything in that world seems unusual.
There is little evidence that the Government shutdown in October has slowed the U.S. economy, according to the employment report and the key business surveys for October--the ISMs, Philly, and Chicago--all surprised on the upside. Is it the market resilience or that Government doesn't matter that much? On Friday, the Labor Department reported that employers added 204,000 new jobs in October, vs. expectations of only 120,000.The GDP report likewise showed acceleration to 2.8 percent in the third quarter. Few economists feel that growth is likely to pick up to a 3 percent-3.5 percent rate in 2014.
Let's have boring but important tapering talk. Although, the forecast has long been that the first hike in the funds rate will not occur until early 2016, there is growing expectation that the FOMC will soon reduce its formal 6.5 percent threshold for the first hike to 6 percent. This shift is based on two new Fed working papers by authors including William English and David Wilcox, who respectively head up the research divisions for monetary policy and domestic macroeconomics. The most likely point of tapering is when it is clear that the economy has shifted to above-trend growth, and this is expected in the first quarter of 2014, which might point to tapering at the March meeting. However, an earlier move either in January or perhaps even December is still possible. Those still wondering why this is important may look at recent events. Markets, especially bonds, are gyrating on tapering expectations.
It's neither gold, nor backed by any Central Bank. Bitcoin has been surging to new highs as investors, especially those in China, become increasingly optimistic about the digital currency's potential growth. The price of one bitcoin hit a record high of $395 on Saturday on the Mt. Gox exchange, Japan. The virtual currency trades 24/7 on exchanges around the world. It has also gained popularity since Baidu, China's leading search engine, announced plans to accept Bitcoin as payment for some services. Bitcoin was created anonymously in 2010 as an experimental form of money that exists only online. It is not managed by any central authority and is "mined" by solving complex math problems using powerful computers. There is also a finite amount for the number of bitcoins that will ever be in circulation. The Chicago Fed concluded that while mainstream use of Bitcoins is still limited, the online currency is a "remarkable conceptual and technical achievement" that could eventually be used by banks and governments.
Speaking of unusual success, Twitter shares soared Thursday as investors scrambled to get a piece of what they hope will be the next blockbuster social-media company after Facebook. The shares opened at $45.10, almost 74 percent above the IPO price of $26 a share. Now the value of the company is more than $31 billion, which compares with Facebook's market capitalization of $120 billion and LinkedIn's $26 billion. Not sure if this is an extended period of optimism for these social media companies or the fact that we should expect the unexpected in the future.
In an unusual twist, lenders are offering rates on jumbo mortgages that are more than a quarter of a percentage point lower than those on the conforming loans backed by Fannie Mae and Freddie Mac. According to the Mortgage Bankers Association, historically banks charged higher rates on jumbo loans - 0.25 percentage points more. However, the fortunes on jumbo loans have turned. One big reason jumbo rates are so low is because lenders want to attract wealthy clients and cross-sell other products to them. This may be helping the Government's intention to increase private market participation, but is still a significant challenge to launch on a large scale.
Economists at Goldman Sachs are optimistic on housing. The recent weakness in home sales and starts, coupled with relatively downbeat commentary from the major homebuilders in their third-quarter earnings calls, suggests that the around 1.2 percent increase in 30-year mortgage rates from May to September is taking its toll on housing demand. According to economists, the slowdown will ultimately be limited. The lags between interest rates and housing starts are typically only 2-3 quarters, which suggests that we should be close to the peak impact, barring another surge in mortgage rates. And the longer-term supply-demand story is still positive. The U.S. population is growing by about 2.5 million per year, and the average household size stands at just over 2.5. This implies household formation of about 1 million per year if household size stays constant and perhaps 1.3 million per year if average household size trends down slightly as it has over longer-term history. Add to this a demolition rate of perhaps 300,000 per year, and the trend demand for homes is in the 1.3-1.6 million range, far above the current pace of housing starts of 900,000. We hope that their prophecies turn out sooner than expected.
Information Provided by NYCB Capital Markets