Consumer Confidence, which measures how optimistic or pessimistic consumers are with respect to the economy in the near future, hit a five-year high in May, coming in at 76.2. The Consumer Sentiment Index, a similar measure, also came in above expectations for May.
There was also good news on the housing front, as the Case Shiller 20-city Home Price Index rose 10.9 percent year-over-year. This was above expectations and the best annual gain in seven years. In addition, the second estimate for first quarter Gross Domestic Product (GDP) rose by 2.4 percent. By comparison, the final reading of GDP for the fourth quarter of 2012 was 0.4 percent. GDP is an important measure of productivity growth and a key indicator of economic strength.
In inflation news, the Personal Consumption Expenditures (PCE), the Fed’s favorite measure of inflation, shows that inflation remains tame. In fact, the year-over-year core PCE (which excludes volatile food and energy measurements) is running at 1.1 percent, well below the Fed’s upper end target of 2 percent and just above the all-time low.
What does all of this mean for home loan rates? Remember: Weak economic news normally causes money to flow out of stocks and into bonds, helping bonds and home loan rates (which are tied to mortgage bonds) improve. Strong economic news often has the opposite result. With several strong economic reports released last week, bonds and home loan rates felt the impact.
However, helping bonds and home loan rates is the fact that inflation remains non-existent, as inflation reduces the value of fixed investments like bonds. An important question moving forward is: Will the Fed continue its bond purchase program known as Quantitative Easing? While low inflation gives the Fed reasons to do so, there are growing opinions that the program should come to an end.
30 year rates still around 4% is VERY low cost of money.
Chris Ryder
