This week’s U.S. data showed improving housing market conditions, strong labor demand but a weak leading economic index. News from China and Europe figures in our U.S. analysis as global central bank easing continues.
Today, the People’s Bank of China cut its benchmark lending rate by a quarter point, cut its deposit rate by a quarter of a point and reduced its reserve-requirement ratio for Chinese banks. These easing moves are designed to encourage bank lending in an effort to support economic growth. A strong Chinese economy is an essential support to many other Asian and Pacific economies.
Yesterday, Mario Draghi, President of the European Central Bank, signaled that the ECB would likely extend its asset purchase program at its December meeting. The euro fell immediately against the dollar.
The recent announcements by the PBOC and the ECB figure in our expectation of Federal Reserve Policy. Easing monetary policy outside the U.S. is an increasing deterrent against the Fed’s often stated intention of raising the Fed funds rate this year. We now believe that fed funds lift-off this year is a low probability event. U.S. stock markets opened with gains today, supported by the PBOC announcement and better-than-expected third quarter earnings.
Residential construction activity increased in September as total housing starts gained 6.5 percent. Residential construction permits eased in September, dropping 5.0 percent to a 1,103,000 unit rate. We expect to see gradual improvement in the rate of construction into next year, supported by increasing new home sales and strong demand for new multifamily units. Solid job growth, improving consumer confidence and still-low home mortgage rates are all tailwinds for the housing market. Likewise, we expect construction employment to continue to grow, contributing to tightening labor market conditions in most major metropolitan areas.
The National Association of Homebuilders’ builder confidence index gained three points in October, to hit 64. According to the NAHB, the October increase represents a return to the builder confidence level of late 2005.
Existing home sales for September increased by 4.7 percent, to a 5.55 million unit rate. The months’ supply of existing homes dropped from 5.1 in August to 4.8 in September, the tightest supply since last March. The median sales price of an existing home was up 6.1 percent in September over the previous year, according to the National Association of Realtors.
According to the Mortgage Bankers Association, the rate on a 30-year fixed rate mortgage fell to 3.95 percent as of October 16th, which will support home buying at the start of the fourth quarter.
Initial claims ticked up slightly, by 3,000, for the week ending October 17, to hit 259,000. These are numbers comparable to the mid-1970s.
The Conference Board’s Leading Economic Index for September declined by 0.2 percent, its first decline since last February. Notably, the Coincident Index and the Lagging Index were both positive for the month. The biggest negative component was stock prices, dragged down by the sell-off in China. Two negative components, average weekly manufacturing hours and the ISM new orders index, are illustrative of the increasing headwinds for U.S. manufacturers.
We believe there is essentially zero chance of the Federal Reserve increasing the fed funds rate at the upcoming FOMC meeting over October 27 and 28, and a low probability for a December increase as well.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-23-2015.