December 4, 2009

Unexpected Rise

By Amanda Parsons - ALM Specialist

The pending home sales index rose 3.7% in October, beating expectations; it was widely expected this measure would fall by at least 1.0% last month due to the expected November 30 expiration of the first-time homebuyer tax credit. Mortgage rates are still falling, with the 30-year fixed rate averaging 4.79% as of the November 27 report, the lowest since mid-May.

In other good news, the manufacturing ISM index is still above the key 50.0 mark. Although it dipped
from 55.7 in October to 53.6 in November, anything above 50.0 signals economic expansion. Store
sales are up, and initial reports suggest Black Friday and Cyber Monday shopping has been robust.
Although these signals are positive overall, we are eager to see November’s unemployment number.
It’s expected to remain unchanged at 10.2%, a number we still can’t get used to. Many market watchers
think the equity markets are anticipating a reasonable recovery in 2010, but those projections are based
on assumptions that some think are overly positive. The market is susceptible to a crisis of confidence if
the actual numbers fail to live up to the forecasts. The shorter maturity investments remain very low, reflecting
the Federal Reserves actions aimed at encouraging consumers and businesses to borrow and invest in
expansion. All indicators of future interest rate changes show very little movement by the Fed in the near
term and a surprising amount of support for the longer-term investments. 10-year Treasury rates are below
3.40% even as many economists have voiced concern about inflation growing over the next few years.
Credit unions will need to balance the impulse to reach for yield with the potential interest rate risk if rates
begin to rise quickly.