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313,000 new jobs added in February – Wage growth moderates – The Department of Labor Statistics reported that U.S employers added 313,000 new jobs in February.  It was the economy’s largest monthly gain in jobs since July 2016. This crushed analysts expectations of 203,000 new jobs. The unemployment rate remained unchanged at 4.1% for the fifth straight month. Wage growth moderated and rose by just 2.6% from last February. Wages, which have been pretty stagnant for several years, rose by an unexpected 2.9% year over year in January.  Experts have been puzzled as to why wages are not growing at a faster pace. Higher wage growth would be expected in an economy that has reached what is considered full employment. January’s 2.9% led investors to believe that wages were finally on the rise at more healthy levels, which The Fed targets at around 3%. Rising wages gives people more money to spend which leads to more inflation.  Higher inflation drives interest rates up. Inflation has also been below The Fed’s target rate. After the January wage growth of 2.9% was announced interest rates rose, as investors felt inflation was about to pick up to more normal levels. Wages were the most anticipated part of the jobs report this month, as investors wanted to see if January’s wage growth was an outlier, or the start of a trend. Today‘s report suggests that January’s 2.9% may have just been an outlier, not a trend.  Everybody will now have to wait until March’s jobs numbers which will be released the first Friday of April to see if wages are finally rising at more normal levels.
Stock markets end week up 3.5% – Stocks rose this week making up the losses suffered last week after President Trump announced that he was going to place tariffs on steel and aluminum imports to help American metal manufacturers. Thursday President Trump excluded Canada and Mexico from steel and aluminum tariffs. This was a deviation from last week’s pledge of tariffs on all steel and metal  imports. With almost all companies reported, 75% of companies reported that their fourth quarter profits beat expectations.  313,000 new non-farm jobs were added to the economy in February. That exceed expectations by over 100,000! Wage gains which scared the markets in January moderated in  February reducing the risk of inflation.  The Dow Jones Industrial Average closed the week at 25,335.74, up from last week’s close of 24,538.06.  It is up 2.5% year to date. The S&P 500 closed the week at 2,786.57, up from 2,692.25 last week.  It’s up 4.2% year to date. The NASDAQ closed at 7,569.81, up from 7,257.87 last week. It is up 9.5% year to date.

Treasury Bond Yields
 –  The 10 year treasury bond closed the week yielding 2.90%, up slightly from 2.86% last week. The 30-year treasury bond yield ended the week at 3.16%, up slightly from 3.14% last week. We watch bond rates because mortgage rates follow bond rates.Mortgage Rates slightly higher this week – The March 8, 2018 Freddie Mac Primary Mortgage Survey reported that the 30 year fixed mortgage rate average was 4.46%, up slightly from last week’s 4.43%. The 15 year fixed was 3.94%, up  from 3.90% last week. The 5-year ARM was 3.63%, down from 3.62% last week.

Economic update for the month of February 2018

313,000 new jobs added in February – Wage growth moderates – The Department of Labor Statistics reported that U.S employers added 313,000 new jobs in February.  It was the economy’s largest monthly gain in jobs since July 2016. This crushed analysts expectations of 203,000 new jobs. The unemployment rate remained unchanged at 4.1% for the fifth straight month. Wage growth moderated and rose by just 2.6% from last February. Wages, which have been pretty stagnant for several years, rose by an unexpected 2.9% year over year in January.  Experts have been puzzled as to why wages are not growing at a faster pace. Higher wage growth would be expected in an economy that has reached what is considered full employment. January’s 2.9% led investors to believe that wages were finally on the rise at more healthy levels, which The Fed targets at around 3%. Rising wages gives people more money to spend which leads to more inflation.  Higher inflation drives interest rates up. Inflation has also been below The Fed’s target rate. After the January wage growth of 2.9% was announced interest rates rose, as investors felt inflation was about to pick up to more normal levels. Wages were the most anticipated part of the jobs report this month, as investors wanted to see if January’s wage growth was an outlier, or the start of a trend. Today‘s report suggests that January’s 2.9% may have just been an outlier, not a trend.  Everybody will now have to wait until March’s jobs numbers which will be released the first Friday of April to see if wages are finally rising at more normal levels.

Stock markets drop sharply in February – Stocks sold off in February as investors reacted to fears of higher inflation, which led to higher interest rates. The January jobs report showed that average hourly wages had grown by 2.9% year over year. Wages had been stagnant at about 2.5% for several years. Higher wages led to higher inflation which drives up interest rates. Higher interest rates drive up borrowing costs which cuts into corporate profits.  Jerome Powell, the new Federal Reserve Chairman, testified that the economy was so strong that there is no reason for rates to be at historic low levels, in his first address to congress. He said that he would act more quickly in raising interest rates than his predecessor, because low interest rates are no longer needed to stimulate the economy. This also made investors fear that higher borrowing costs would cut into profits. President Trump stated that he would place tariffs on steel and aluminum
imports to help U.S. metal manufacturers. This caused investors to fear higher material costs to manufacturers of cars, trucks, cans, and just about every product, as metal is used on just about everything. They also feared possible retaliation of tariffs on our exports by other countries. This also shocked the market,   The Dow Jones Industrial Average closed on February 28, 2018 at 25,029.20, down over 1,000 points from its January 31, 2018 close of 26,076.89. The S&P 500 closed on February 28, 2018 at 2,713.83, down from 2,822.23 on January 31.  The NASDAQ closed on February 28 at 7,273.01, down from 7.402.28 on January 31.

Treasury Bond Yields higher in February  
 –  The 10 year treasury bond closed on February 28, 2018 yielding  2.87%, up from 2.72% on January 31, 2018. The 30-year treasury bond yield was  3.13% on February 28, 2018, up from 2.95% on January 31, 2018. We watch bond rates because mortgage rates follow bond rates.
Mortgage rates higher in February – The March 1, 2018 Freddie Mac Primary Mortgage Survey reported that the 30 year fixed mortgage average rate was 4.43%, up from 4.22% on February 1, 2018 The 15 year fixed was 3.90%, up from 3.68% on February 1. 2018. The 5-year ARM was 3.62%, up from 3.53% last month.
Key index shows inflation picking up – The Labor Department reported that the Consumer Price Index rose 0.5% in January.  Economists had expected a 0.3% jump. Core CPI which strips out food and energy, as they tend to be more volatile, rose 0.3% in January. Although that was the largest month over month increase since last January, the year over year increase was just 1.8%. After 10 years of inflation below the target level, this report shows that fears of inflation normalizing may be sound. Low inflation has kept interest rates at historically low levels for a decade. Higher inflation would cause higher interest rates. Bonds and mortgage securities reacted negatively to the report and interest rates rose sharply after the release. The CPI has been so stable for so long, at such low inflation levels, that it’s something we have not been talking about. As inflationary pressure picks up it is an index we will be paying a lot of attention to.
Retail sales weak in January – The Commerce Department reported that retail sales unexpectedly decreased 0.3% in January. Economists had expected a 0.2% increase. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was reported to have increased at a 3.8 percent annualized rate in the fourth quarter. The economy grew at a 2.6 percent pace in the final three months of 2017, and holiday spending in 2017 was 4.9% higher than 2016.  After a strong holiday season, January’s retail sales figures marked the largest decline in retail sales in 11 months. That took experts by surprise.
California home affordability slightly higher in fourth quarter over third quarter of 2017 – The California Association of Realtors released their housing affordability survey for the fourth quarter of 2017. According to the report 29% of California homeowners could afford to purchase a $550,990 median priced detached home in the fourth quarter of 2017.  That was up up from 28% in 3rd quarter, but down from 31% in the fourth quarter of 2016. The minimum income required to qualify for a median priced home was $111,260. The payment was $2,780 a month with a 4.17% mortgage. 37% of California households could afford to purchase a condo, or townhouse.  It took a minimum income of $90,810 to qualify for a median price of $449,720, with a mortgage payment of $2,270. The Los Angeles region had a higher affordability rate than the state as a whole. 31% of Los Angeles households could afford to purchase a median priced detached home compared to 29% statewide. Interest rates are higher in the first quarter of 2018, so I’d expect affordability to be even lower now.
California existing home sales down in number of sales, but prices higher in January – The California Association of Realtors reported that existing home sales in California totaled 388,800 in January on a seasonally adjusted basis. This represented a drop of 7.6% from December’s pace, and a drop of 2.9% from the number of sales last January. We watch year over year numbers because January closings are often much lower than December. The statewide median price paid for a home in California was $527,800, up 7.3% from January 2017. The unsold inventory index rose to a 3.6 month supply from just a 2.5 month supply of activity listings in December. It was 3.7 months in January 2017.
Southern California median price increased 11.4% in January – CoreLogic/DataQuick announced that the median price paid for a home in the 6 county region increased 11.4% in January from one year ago. The median price was $507,000 in January. It was the highest year over year increase in the median price in 44 months.
Existing home sales nationwide decline 3.2% in January – The National Association of Realtors reported that total existing home sales dropped 3.2% in January from December’s home sales rate. The median price paid for a home in January was 5.8% higher than January 2017, the 71st straight month of year over year increases. The number of homes for sale represented a 3.4 month supply, down from 3.6 months last January. Existing home inventory in January was down 9.5% from January 2017.  Extremely tight inventory has caused prices to increase and has begun to cause fewer sales. 

U.S. Pending Home Sales Index drops 4.7% – The National Association of Realtor announced  that it’s pending home sale index, which is based on the number of contracts signed in January for existing home purchases, dropped 4.7% from December. It was the lowest number of pending sales since October 2014. Year over year existing home sales were 3.8% lower than last January. Extremely low housing inventory was blamed on the drop in sales. The number of active listings were down 9.5% in January from the number of listings in January 2017. The number of existing homes listed for sale in the U.S. was the lowest ever recorded in January.

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