Financial markets had a calmer week this week, following the equity market swoon into mid-October. Equity prices trended higher and bond yields followed, though the yield on 10-Year Treasury bonds is still quite low at 2.24 percent as of Friday morning. The euro resumed losing value against the dollar in anticipation of the ongoing divergence of monetary policy between the Federal Reserve and the European Central Bank.
Inflation metrics are attracting attention lately as energy prices dip while the Federal Reserve contemplates interest rate lift-off. Crude oil prices were relatively stable through the week, but Friday morning is showing downside pressure with WTI at $80.54, matching the lows from June 2012.
Headline CPI was up by 0.1 percent in September. Declines in energy prices through September brought the energy sub-index of the CPI down by 0.7 percent for the month. Food prices were a counterbalance to falling energy prices in September. The food sub-index of the CPI was up by 0.3 percent for the month. Less food and energy, core-CPI was up by 0.1 percent in September, and was up 1.7 percent over the previous 12 months.
Even though inflation is a little weaker than expected due to lower energy prices, labor market metrics are tightening up. The U.S. unemployment rate is already below 6 percent, at 5.9 for September, and will fall further. Fifteen states are already at 5 percent unemployment or lower. Initial claims for unemployment insurance for the week ending October 18 increased by 17,000 to a still very low 283,000. Continuing claims for the week ending October 11 dropped by 38,000 to hit 2,351,000, the lowest since December 2000. Not only are companies hiring at a robust clip, they are generally not laying off.
Existing home sales for September increased by 2.4 percent to hit a 5.17 million unit annual rate, the best since September 2013. New home sales notched up by 0.2 percent, to hit a 467,000 unit annual rate in September, a post-recession high. The Federal Housing Finance Agency has announced plans that will allow Fannie Mae and Freddie Mac to relax underwriting standards, broadening the availability of mortgages. With job creation strong, consumer confidence rising and housing credit set to ease, conditions look positive for the housing sector at year end. Mortgage applications for refinance spiked in mid-October with the drop in interest rates. Purchase apps eased, but we expect them to improve as financial markets stabilize and economic metrics remain strong.
The Conference Board’s Leading Economic Index increased by a strong 0.8 percent in September. Both the Coincident Index and the Lagging Index also increased.
So heading into next week’s FOMC meeting central bankers have a lot to talk about. Falling energy prices complicate the Federal Reserve’s pivot away from extraordinary policy by keeping inflation lower than expected. However, economic conditions in the U.S. remain strong enough to justify the end of asset purchases. We believe that the Fed will announce, as planned, the end of QE at the upcoming October 28/29 FOMC meeting. We also continue to believe that interest rate lift-off will come around June of 2015.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-24-14.