Last updated: October 3, 2012 7:21 pm

US data point to impetus in economy

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Stronger employment figures and a surge in applications to refinance mortgages were cautiously hailed Wednesday as a sign of momentum returning to the world’s largest economy.

Refinancing applications have soared as Americans rush to take advantage of record low rates triggered by the Federal Reserve’s programme of quantitative easing.

It will be several weeks before it becomes clear if the applications turn into actual refinancing deals, but the 20 per cent jump suggests that “QE3” could soon have a significant impact on household finances.

Consumer sentiment going into the November 6 election remains one of the critical factors in the race for the White House. While the mortgage figures and other economic data on Wednesday were seen as positive for President Barack Obama, he still has to face Friday’s monthly jobs numbers.

Economists are expecting a 115,000 increase in payrolls but also a rise in the overall unemployment rate to 8.2 per cent. Better than expected numbers could bolster Mr Obama in the wake of Wednesday’s presidential debate; likewise, a weak number would reinforce any momentum gained by his Republican challenger, Mitt Romney.

Private companies added 162,000 jobs in September, according to the payrolls processing company ADP, raising hopes for solid growth in the official numbers on Friday. However, the ADP figures are volatile, and often contradict the official numbers in the short term.

More encouraging was a solid rise in new orders in the service sector. The Institute for Supply Management’s service sector index rose to 55.1 from 53.7 last month – well ahead of expectations for a small decline.

The Fed promised in September to buy $40bn of mortgage-backed securities a month for as long as it took to bring down unemployment, and its intervention in the market has already pushed wholesale mortgage rates to below 2 per cent.

The Mortgage Bankers Association’s latest weekly survey showed applications jumped 20 per cent over the previous seven days to the highest level since April 2009.

Mike Fratantoni, MBA’s vice-president of research and economics, said the average interest rate on a 30-year fixed-rate mortgage fell to 3.53 per cent from 3.63 per cent last week, a new historic low.

“Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates,” he said.

The figures for mortgage applications could include multiple applications from some borrowers and are typically taking two to three months to process, said Richard Gilhooly, strategist at TD Securities.

Nevertheless, the jump in applications signals that consumers are betting on the same thing as the Fed: that banks will finally be forced to loosen lending standards.

“That has been the missing ingredient,” Mr Gilhooly said, “and the Fed has the wind at its back after 10 months of improving existing home sales and prices moving off the floor.”

The leap in mortgage applications comes on top of already strong refinancing activity. A survey from Lender Processing Services showed pre-payment rates – a key indicator of refinancings – hit their highest levels since 2005 in August. The figures surpassed the “mini refinance waves” of 2009 and 2010, when the Fed launched earlier bouts of quantitative easing.

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