Personal Finance Blog By MoneyRates
June 13, 2013
As rates on savings accounts threaten to disappear into nothing, the latest jobs report did nothing to provide a boost.
The report on May job growth from the Bureau of Labor Statistics (BLS) was pretty much right down the middle -- not disappointing, but not a pleasant surprise either. That kind of mediocre showing is not likely to move interest rates higher, especially when it comes to rates on savings accounts and other deposits.
Mediocre employment growth
The BLS reported last week that a net total of 175,000 new jobs were created in May. That almost exactly matches the average of 172,000 new jobs that have been created monthly over the past year. In other words, May's job growth was about average by recent standards, though a little below average if you subtract the 12,000 jobs represented by downward revisions of previous months' employment estimates.
Between tepid job growth and growth in the labor force, the unemployment rate was virtually unchanged in the latest report, at 7.6 percent.
What does this job market information say about the economy? It places the economy in the same holding pattern it's been in for about four years now: growing, but not gaining any momentum. The soft job market is both a symptom and a cause of this problem. Employers lack the confidence in the economy to start hiring in big numbers. In turn, with people only slowly able to return to work, just a trickle of new wages are being introduced into the economy.
The other element that has influenced interest rates is the Federal Reserve's monetary stimulus. The Fed has stated that it will continue measures to keep interest rates down until unemployment falls to 6.5 percent. With unemployment treading water at 7.6 percent, the Fed looks as though it will keep downward pressure on rates for the next several months.
A double standard for interest rates
Along with mixed news on the economy, there has also been something of a double standard on how banks are setting their interest rates.
Mortgage rates were on the rise throughout May, suggesting that lenders saw enough improvement in the economy to expect higher interest rates in the future. At the same time though, CD, savings and money market rates remained unchanged.
The explanation is that while banks and other mortgage lenders are anticipating an eventual upturn in economic activity, they don't necessarily see it happening right away. So, when it comes to making 15- and 30-year loans, they are eager to protect themselves by raising rates. However, when it comes to offering higher rates on short-term deposits, banks simply don't see the need to do so just yet.
It will take more than a mediocre jobs report to push those deposit rates higher. In order for that to happen, monthly job growth will probably have to get to the 200,000 level -- and prove it can stay there.
June 6, 2013
Earlier this week, a report on U.S. manufacturing activity in May from the Institute of Supply Management (ISM) put a damper on what has lately seemed to be an increasingly upbeat economy. This setback also cast doubt on when -- or whether -- savings accounts would benefit from the recent rise in bond market interest rates.
According to the ISM, overall manufacturing activity in the United States contracted during the month of May, marking the first time that has happened since November 2012.
The ISM report had three troubling aspects. First, the reference to November 2012 is ominous, since that was the middle of a quarter in which real GDP growth slumped to a barely moving 0.4 percent. Second, the Manufacturing Index reading of 49.0 for May was the lowest since June 2009, when the economy was still struggling to emerge from the Great Recession. Third, this does not appear to be a case in which an isolated signal gives a false reading. May marked the third consecutive month in which the Manufacturing Index has declined from a year-over-year perspective.
Contraction in the Manufacturing Index does not necessarily mean contraction for the economy as a whole. According to the ISM, a Manufacturing Index level of 49.0 is consistent with real GDP growth of 2.1 percent. That would not represent a return to recession, but it would represent more of the sluggish, almost sleep-walking mode the economy has been stuck in for most of the last four years.
Interest rate reaction
Throughout virtually all of May, bond yields rose in reaction to growing optimism about the economy. In part, interest rates reflect how the price of capital is affected by the strength of the economy, with greater demand leading to higher interest rates. This tends to manifest itself first in the bond market, and later in more artificially set rates, such as those for mortgages and savings accounts.
During May, yields on 10-year Treasury bonds rose by nearly half a percentage point. Mortgage rates began to rise too, though average rates on savings accounts did not. The question is, if the rise in rates was based on economic optimism, what was the reaction to the disappointing manufacturing report?
The answer is that so far, that reaction has been fairly mild. Ten-year Treasury yields dropped by just 3 basis points the day the report came out, and stabilized the next day.
For the time being then, think of the rally for interest rates as being on hold. The rise in bond yields may pause, and the eventual response of savings accounts may be delayed, until clear evidence comes along to contradict the apparent slump in manufacturing. That may happen as soon as this Friday, with the May report on employment growth. However, if that report disappoints, expect bond yields to suffer a tumble -- and take with them the hope that savings account yields will rise in the near future.
May 30, 2013
National housing prices just posted their best year-over-year performance since 2006. Does that mean the housing market has fully recovered? If so, could it mean that today's low mortgage rates may soon be a thing of the past?
According to the Standard and Poors/Case-Shiller Home Price Indices, national home prices rose by 10.2 percent over the 12 months that ended with the first quarter of 2013. That's their best performance since the housing boom. Furthermore, it continues a string of positive performances for housing, and comes amid a run of generally favorable economic news.
Despite all those good signs, it may be too soon to declare the housing market fully recovered. Home prices may have to fight against a couple of headwinds in the months ahead.
Will mortgage rates rise?
Housing prices are not the only thing that has been headed higher lately. Mortgage rates have also been on the rise.
At 3.81 percent, according to today's Freddie Mac mortgage survey, current mortgage rates are nearly half of a percentage point above their low point for 2013. If the economy and the housing market continue to improve, mortgage rates may climb even further.
Here are three reasons why mortgage rates may follow housing prices upward:
- Stronger housing and economic growth may bring greater loan demand.
- The Federal Reserve may ease its low-interest-rate policies in response to a strengthening economy.
- Spending growth may bring a little inflation.
It's important to remember that current mortgage rates are unusually low, brought about by extraordinary circumstances. It would be unrealistic to expect those rates to continue under more normal conditions.
Additional headwinds for housing prices
If mortgage rates rise even further, it will make it more challenging for housing prices to continue their current momentum. The real estate market may continue to strengthen, but perhaps at a more measured pace. After all, rising mortgage rates may not be the only headwind that housing prices will face.
A report released jointly by the U.S. Treasury and Department of Housing and Urban Development shows that while the inventory of houses available for sale appears to be declining, the number of houses being held off the market is unusually high. These are properties that are vacant, but that the owner has chosen not to put up for sale at this time.
Often, this is the result of an investment decision to hold back the property until the housing market is a little stronger. Ultimately though, these properties being held off the market represent an unsold inventory of housing that will have to work its way through the system. When this excess supply is finally introduced into the market, it will put downward pressure on housing prices.
Rising mortgage rates and the unwinding of this pent-up supply of housing may well slow the pace of home prices, but that's not a bad thing. The healthiest thing for the market might be a return to a saner pace, rather than going from boom to bust and back to boom again.
May 23, 2013
The biggest economic news of the past week was the release of the inflation number for April. The sight of easing consumer prices in the midst of what seems to be a general strengthening of the economy brought to mind an expression that was often used to describe the economy of the late 1990s: the "Goldilocks" economy.
The Goldilocks economy was not too hot or not too cold, but just right. What that really meant was that the U.S. was able to have steady growth without inflation ever getting overheated. Could the current economy be starting to settle into this type of ideal scenario?
On May 16, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) declined by 0.4 percent in April. While easing inflation is good, normally such a significant drop in prices would bring concerns of deflation as a sign of economic weakness. However, coming amidst generally positive signs of economic growth, this inflation relief is seen simply as removing a potential problem from the economic equation -- at least for the time being.
The challenge for the Federal Reserve has been to apply aggressive economic stimulus without sparking inflation. Recent indications are that this may finally be working, though there should be one caution about inflation. As is often the case, the key to April's CPI number was the energy sector, which saw generally declining prices in April. So far though, oil prices have risen in May. It remains to be seen to what extent that will carry over to inflation as a whole.
The balancing act
Balancing between growth and inflation is the central challenge the Federal Reserve faces, but it's not the only balancing act the Fed needs to pull off.
Whether or not inflation starts to perk up, the Fed must find away to unwind its monetary easing programs without choking off economic growth. This also means having interest rates rise gradually enough that they don't spook the stock market or real estate, both have which have risen largely on the strength of artificially low interest rates. The key to the balancing act will be to have confidence in the economy grow quickly enough to replace the stimulus of low rates.
A Goldilocks scenario for savings accounts
Having economic growth accelerate while inflation remains moderate would be a Goldilocks scenario for many aspects of the economy, including savings accounts. Such an environment would allow the interest rates on savings accounts to rise without inflation negating the value of those higher rates.
The next couple weeks will bring two more key indicators of how well this is playing out. Next week the Bureau of Economic Analysis will release its second estimate of first-quarter Gross Domestic Product, and the following week the BLS will release its employment report for March. Those growth indicators should provide strong clues on whether the Goldilocks scenario is becoming a reality -- or just another fairy tale.
May 16, 2013
The stock market rallied to new highs in mid-May, as investors continued to ride the momentum from a surprisingly good jobs report that came out at the beginning of the month.
Investor sentiment has a great deal to do with how news is interpreted, and even reported. Not only have stock market bulls made the most of that recent jobs report, but they are now seizing on anything that can be interpreted as good news as another excuse to push stock prices higher. Unfortunately for more conservative investors in savings accounts and other deposits, banks will not be so quick to embrace this optimism by raising rates.
A widely reported indicator of stock market valuation reached a 58-year high recently. This indicator is the ratio of the earnings yield on stocks to the yield on Treasury bonds, and it is a good proxy for a of couple fundamentals that go into stock valuation, namely:
- Prices relative to underlying earnings. Stock prices have gone up by a tremendous amount over the past several decades, but that doesn't mean that stocks keep getting more and more expensive. What matters from a fundamental investing standpoint is how much prices go up relative to the underlying earnings. So, everything else being equal, a stock selling at $20 a share with $2 a share in earnings should look the same to an investor as a stock selling at $40 a share with $4 a share in earnings. Both stocks would have a price-to-earnings (P/E) ratio of 10, and the earnings yield is simply the inverse of that P/E ratio.
- The discounting value of interest rates. By comparing the earnings yield on stocks to bond yields, investors are acknowledging that interest rates discount the value of future earnings. The higher interest rates are, the less valuable future earnings appear. However, with interest rates as low as they are now, future earnings are not discounted by much, which makes stocks appear more valuable.
Because fundamental stock valuation is a function of prices, earnings and interest rates, stocks can be hitting new highs and still appear like a good value, as long as earnings have grown and/or interest rates are low.
The sobering facts
While the stock market is quick to celebrate any sign of good news these days, there are some more sobering facts about the current economy -- chiefly the fact that unemployment remains stubbornly high.
On the global front, it was recently announced that the European Union has entered its sixth quarter of recession -- with France now one of the countries in the union that is officially in recession.
The economy's lingering problems are the reason why depositors will have to wait a while longer for higher rates on savings accounts. The banking environment is closely linked to the grassroots of the American economy, and until economic improvement becomes more widespread reality than isolated stories, expect banks to keep rates on savings accounts and other deposits as low as possible.