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CUNA On Fed Decision: Margin Compression To Continue To Mid-2014

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MADISON, Wis. (10/31/13)--Yesterday's decision by Federal Reserve policymakers to stay the course on its $85 billion-a-month asset buying (quantitative easing) program and keep the target funds rate at 0% to 0.25% will continue to compress credit unions' margins, at least through mid-2014, according to a Credit Union National Association economist.
 
"The decision by the Federal Reserve to maintain the status quo with respect to monetary policy will keep credit union asset yields and funding costs reaching new record lows," said CUNA Senior Economist Steve Rick.
 
"Preliminary call report data from the National Credit Union Administration indicates that yield-on-asset ratios fell seven basis points in the third quarter, to 3.27%.  This is down from the 5.9% reported in 2007, right before the onset of the great recession," he said.
 
"Credit union cost-of-funds ratios also fell seven basis points in the third quarter to reach a record low of 0.52%," Rick said. "This is down from the 2.8% reported in 2007. Credit union net interest margins therefore remained at 2.75% in the third quarter--the lowest in credit union history and down significantly from 3.10% six years ago.
 
"The tight margin environment is forcing credit unions to lower operating expense-to-average-asset ratios. So far this year, operating expense ratios are running at 3.14%, down from 3.38% six years ago," Rick added.
 
Rick recognized that market expectations are for the Federal Reserve to begin tapering of its quantitative easing in the first half of 2014.  "The tapering and faster economic growth will push up the 10-year treasury interest rate to over 3.25% in 2014," he said. "This will raise mortgage interest rates and slow the decline in credit union asset yields.  We should therefore see a slowdown in credit union margin compression by mid-year 2014."
 
Rick made the comments after the Fed's monetary policymaking group, the Federal Open Market Committee, voted 9-1 to stay the course on its bond buying and target rate policy. The FOMC met Tuesday and Wednesday, with results that were expected.
 
The committee noted that "economic activity has continued to expand at a moderate pace." It cited "some further improvement" in labor market conditions but noted "the unemployment rate remains elevated." Its statement recognized that "household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months."

It also noted that "fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the committee's longer-run objective, but longer-term inflation expectations have remained stable."
 
The FOMC said it "expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate" of fostering maximum employment and price stability.

It "sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall" and "recognizes that inflation persistently below its 2% objective could pose risks to economic performance," but the committee said it "anticipates that inflation will move back toward its objective over the medium term."

Keeping in mind the "extent of federal fiscal retrenchment over the past year," the FOMC noted it "sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

Voting for the FOMC monetary policy action were: Federal Reserve Chairman Ben S. Bernanke, Vice chairman William C. Dudley, James Bullard, Charles L. Evans, Jerome H. Powell, Eric S. Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen, the nominee to succeed Bernanke at the end of his term in January.

Esther L. George, who voted against the action, was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

See related News Now story, NEW: Fed Policymakers Maintain QE3 Pace, by using the link.

The full FOMC statement can also be accessed through its link.

Refinancing Driving October Mortgage Market Activity

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WASHINGTON (10/31/13)--Mortgage applications increased by 6.4% on a seasonally adjusted basis for the week ending Oct. 25, according to data released by the Mortgage Bankers Association.

The group's Market Composite Index, which gauges mortgage application volume, showed that refinancing accounted for the lion's share of the activity, with the MBA Refinance Index up 9% from the previous week.

The Purchase Index was up just 2%, last week, with potential first-time home buyers continuing to be skeptical or priced out of home ownership entirely. While homeowners making their debut normally make up about half of all residential housing purchases, existing-home sales in September showed that first-time home buyers only made up about 28% of such purchases last month, with young adults facing an employers' labor market, and high levels of student debt (Moody's Economy.com Oct. 30) .

Meanwhile, refinancing as a share of total mortgage market application activity, increased to 67%--the highest it has been since June, as interest rates decline. MBA data show that 30-year fixed-mortgage rates, 30-year jumbo mortgage rates, and five-year adjustable rate mortgages have mostly declined between Sept. 6 and last week.

The MBA Market Composite Index accounts for 75% of U.S. retail residential mortgage applications, and has been conducted weekly since 1990.

New Hires At the Lowest In Six Months

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ROSELAND, N.J. (10/31/13)--The first October jobs numbers, released yesterday, indicate that the dysfunction in Washington has had a significant short-term effect on the labor market.

Employers added 130,000 workers this month, according to the New Jersey-based ADP Research Institute. But the figure is at a half-year minimum--lower than economists thought it would be, with analysts saying that the shutdown slowed job growth in October by almost 25%.

A median forecast of 39 economists polled by Bloomberg predicted that there would be an additional 150,000 jobs this month (Bloomberg.com, Oct 30). Moody's said that the shutdown slowed private sector job growth in October by about 30,000 (Moody's Economy.com, Oct. 30).

Moody's did note that job growth is expected to be higher in November, with federal employees receiving back pay and the holiday shopping season starting. Federal Reserve officials, who met Tuesday and Wednesday, also extended stimulus programs in light of the congressional gridlock. (See related News Now story, CUNA On Fed Decision: Margin Compression To Continue To Mid-2014, in today's issue.)
 
Of the additional 130,000 jobs, service industries accounted for 107,000; trade, transportation and utilities represented 40,000; manufacturers, builders and other goods-producing industries made up 24,000; and business and professional services jobs added another 20,000 to payrolls.

Moody's pointed out that service job gains were down by 23,000 in October and that business and professional services employment--a sector that includes government contractors--was repeatedly adding more than 40,000 jobs per month earlier in the year.

Among other sectors that saw employment shrink, the financial sector--banks, insurance companies, real estate and leasing--shed 5,000 jobs this month, the largest drop since February 2011.