According to this morning’s report on GDP, economic growth was virtually non-existent in the 1st quarter of 2014. While the market was anticipating a growth rate of 1.1% for the first three months of this year, actual growth was reported to be .1%. This leaves many scratching their heads, as it seems to contradict other indicators that point to much more economic activity. For instance, Chicago PMI for April was also released this morning. Rather than a disappointingly low figure, it was reported at 63.0 while the market was expecting 56.9. It was a dramatic improvement over last month’s 55.9, so it appears likely that 2nd quarter GDP will be much higher than the 1st.
The first of three employment reports of the week was released this morning. ADP reported job growth for the month of April to be 220,000. While the market was only expecting 210,000, this is the best ADP report since last November. Adding to the strength of this report were significant upward revisions to last month’s initial report of 191,000. There was an increase of an additional 18,000 new jobs for March, bringing the total for that month to 209,000. This report sets up for a strong Bureau of Labor Statistics (BLS) report which will be released this Friday. If that report is strong, that will likely be a market mover, driving interest rates higher.
There is serious weakness in purchase mortgage applications, as they were reported to be down another 4% last week, which was a drop of 3% from the week prior. This weakness cannot be blamed on weather, holidays, or any other event. It shows a clear trend in a continuing weakening housing market. This does not boast well for our economic recovery, and is likely entirely a reflection of the increase in mortgage rates we have felt this past year. Had rates remained at April 2013 levels, I believe our housing market would be flourishing. Our economy is not prepared for higher rates. Hopefully the Fed does not allow our market to push interest rates much higher.
The Fed completes their two day meeting this morning, with their official announcement set for 12:00 p.m. MST. We fully expect the Fed to continue with tapering QE3, with another $10 billion reduction announced today. This will bring the total reductions to $40 billion of the initial $85 billion per month purchase program. With far fewer mortgages being originated, the reductions have not had significant impact to mortgage rates. It will, however, be more of a headwind for interest rates as the Fed continues its path.
With bonds up so far this morning, there is no need to rush to lock. However, we suggest locking in today’s gains by this afternoon to avoid the likely volatility we will experience as the Mac Daddy employment report draws near.