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Economic Week in Review: Mystery over the Fed's next move

August 23, 2013

Conflicting monthly sales trends came from the housing market this week, while a gauge of future economic activity was upbeat. But, the development that likely drew investors' attention was the release of minutes from the latest meeting of the Federal Reserve's policymaking arm. Those minutes, however, left unanswered investors' main question: When will the Fed begin winding down its massive bond-buying program, a central feature of its unconventional economic stimulus program?

For the week ended August 23, 2013, the S&P 500 Index was up 0.5% to about 1,664 (for a year-to-date total return—including price change plus dividends—of about 18.3%). The yield on the 10-year U.S. Treasury note was down 2 basis points to 2.82% (for a year-to-date increase of 104 basis points).

The "tapering" is coming—but when?

Investors eagerly reviewed the minutes of the Federal Open Market Committee's July 30–31 meeting, as they sought clues about changes in the Fed's strategy to support the economic recovery. The minutes of the FOMC, which are released with a three-week lag, showed broad support for scaling back the Fed's purchases of Treasury bonds and mortgage-backed securities, a key element of its program. But details, such as timing and magnitude, were lacking. Some analysts believe that the "tapering"—as the pullback has become known—will begin as early as September; some suspect December. Earlier statements from Fed officials that suggested tapering might start this year had roiled the global financial markets. Interest rates (including mortgage rates) have been steadily rising since May when the Fed began signaling that it was preparing to wind down its stimulus. Central to the Fed's plan is the economic outlook: The stronger the economy appears to be, the greater the odds that the tapering will begin. Some concern was expressed at the meeting that the economic outlook has weakened a bit.

"Fed communications since May continue to address the possibility of a gradual winding down of its monthly purchases of $45 billion in Treasuries and $40 billion in mortgage-backed securities. No time frame has been mentioned, so any market reaction is rooted in speculation," said Andrew J. Patterson, Vanguard economist. "Moreover, the Fed continues to emphasize the importance that current economic conditions will have in shaping its policies. Once tapering begins, the course and timing of any tapering will be in no way predetermined. Also not predetermined will be policy changes, including an eventual increase in its target short-term interest rate, which remains some time off."

Sales of previously owned homes grow faster than expected

Strong broad-based demand pushed sales of previously owned homes up 6.5% in July, to an annual rate of 5.39 million units and well above expectations. The July result more than reversed June's dip in sales, putting purchases at their highest level in over three years. Median home prices jumped 13.7% from a year ago, because of fewer distressed sales and extremely tight inventories of available homes, which remain 5% below a year ago. Many of the contracts for existing-home sales had locked in mortgage rates from May and June. The average rate for a 30-year fixed mortgage stood at 3.35% as of May 2 and at 4.58% as of August 22, according to Fannie Mae.

Existing-home sales

New home sales surprisingly slump

Sales of new single-family homes fell by 13.4% in July from revised June levels. The July sales were at an annual rate of 394,000, well below expectations (490,000) and at their lowest level since last October. The largest decline was in the West, smallest in the Northeast. Compared with a year earlier, however, sales were about 7% higher. Median home prices rose by 8.3% from a year earlier.

Gauge of future economic activity gains ground

The Conference Board's index of leading indicators, a gauge of future economic activity, rose 0.6% in July after a flat June. Eight of the ten indicators that make up this composite index rose compared with only half the components a month earlier. "The pace of the [index's] growth over the past six months has nearly doubled, pointing to a gradually strengthening expansion through the end of the year," said Ataman Ozyildirim, an economist at The Conference Board.

The economic week ahead

The latest estimate on second-quarter gross domestic product will be released on Thursday. Other reports include durable goods orders (Monday), consumer confidence (Tuesday), and personal income and spending (Friday).

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
August 19       +4 bp –0.6%
August 20       –6 bp +0.4%
August 21 Existing-Home Sales (July, annualized)
Source: National Association of Realtors
5.39 million 5.16 million +5 bp –0.6%
  FOMC Minutes (July)
Source: Federal Reserve Board
   
August 22 Initial Jobless Claims (week ended August 17)
Source: Labor Department
336,000 330,000 +3 bp +0.9%
  Leading Economic Indicators (July)
Source: The Conference Board
+0.6% +0.5%    
August 23 New-Home Sales (July, annualized)
Source: Commerce Department
394,000 490,000 –8 bp +0.4%
      Weekly change –2 bp  +0.5%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
  • All investing is subject to risk, including possible loss of the money you invest.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax. We recommend that you consult a tax or financial advisor about your individual situation.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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