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Fed opens meeting on rates as US consumer confidence steady and new home sales at 8-1/2 year peak

Economic data should encourage Fed to raise US interest rates this year

PUBLISHED : Wednesday, 27 July, 2016, 1:55am
UPDATED : Wednesday, 27 July, 2016, 1:55am

US consumer confidence held steady in July and new single-family home sales hit their highest level in nearly 8-1/2 years in June, suggesting sustained momentum in the economy that could allow the Federal Reserve to raise interest rates this year.

Other data on Tuesday showed moderate gains in house prices in May, which should support consumer spending and keep home purchasing affordable, especially for first-time buyers who have started venturing into the housing market.

The reports joined a slew of data, ranging from retail sales to manufacturing and services sector surveys, in painting a bright picture of the economy, and came as the Fed started a two-day policy meeting. The US central bank is not expected to increase rates on Wednesday.

“The upbeat tone of these reports will offer further encouragement to the Fed,” said Millan Mulraine, deputy chief economist at TD Securities in New York. “And while we do not expect any change from the Fed’s current wait-and-see mode, the resiliency in household sentiment will underpin their confidence in eventually putting rate hikes back on the table.”

The Conference Board said its consumer index was 97.3 this month after a reading of 97.4 in June. Economists had expected the index to drop to 95.9 in July.

The largely unchanged reading followed Britain’s stunning vote last month to leave the European Union, which rattled global financial markets and led to a dip in other consumer sentiment measures.

The survey’s so-called labour market differential, which closely correlates to the jobless rate in the employment report, improved this month after slipping in June.

“This report should be viewed as a lens through which to see the labour market and, along with the July readings on initial jobless claims, it continues to signal solid improvement in the employment situation,” said John Ryding, chief economist at RDQ Economics in New York.

A recent rally on Wall Street, the strengthening US labour market and lower gasoline prices are supporting consumer confidence, helping to underpin economic activity.

According to a Reuters survey of economists, the government is expected to report on Friday that the economy grew at a 2.6 per cent annual rate in the second quarter, accelerating from the 1.1 per cent pace logged in the January-March period.

US financial markets were little moved by Tuesday’s data, with stocks on Wall Street falling as weak earnings reports from several companies, including McDonald’s, hurt investor sentiment. Prices for US Treasuries dipped and the dollar was slightly weaker against a basket of currencies.

In a separate report the Commerce Department said new home sales increased 3.5 per cent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008. Economists had forecast new home sales, which account for about 9.6 per cent of the housing market, rising to a rate of 560,000 units last month.

Sales were up 25.4 per cent from a year ago. Last month’s increase left new home sales in the second quarter well above their average for the first three months of the year.

The housing market is gaining speed with a report last week showing home resales vaulted to near a 9-1/2-year high in June. At the same time, single-family housing starts increased solidly in June. New home sales are likely benefiting from a persistent shortage of previously owned houses available for sale.

New single-family homes sales jumped 10.4 per cent in the Midwest and soared 10.9 per cent in the West, which has seen a sharp increase in home prices amid tight inventories. But sales fell 5.6 per cent in the Northeast and slipped 0.3 per cent in the populous South.

A third report on Tuesday showed the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5.2 per cent in May on a year-over-year basis. Prices rose 5.4 per cent in April.

“With the fundamentals remaining supportive, we anticipate moderate price appreciation to increase homeowner equity and encourage inventory expansion, contributing to continued balanced improvement in the housing market,” said Kristin Reynolds a US economist at IHS Global Insight in Lexington, Massachusetts.

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