Weekly Update 11/19/2018

Beacon Rock Wealth Advisors is an investment management and financial planning firm in Camas, Washington.  Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. We are always available to answer your finance questions. Give us a call at (800) 56207096 or send us an email at [email protected].  Have a great week and a Happy Thanksgiving.
Mike Elerath, NSSA
Bill Roller, CFA, CFP®

Mortgage Rates
Mortgage rates were steady last Thursday 11/15/2018.  Freddie Mac reported the 30-Year Fixed Rate Mortgage was unchanged at 4.94%, while the 15-Year Fixed rose only 3 basis points to 4.36%.

Summary
Economic data for the week was highlighted by higher retail sales, driven by energy prices, mixed regional manufacturing results, tempered inflation and jobless claims that rose slightly.
Equity markets in the U.S. and developed Europe declined last week, while emerging markets fared positively, as sentiment improved.  Flows away from risk and falling interest rates benefitted fixed income.  Commodities were mixed but were generally led lower by a continued decline in crude oil prices but a sharp spike higher in natural gas.

Economic Notes
(0) Retail sales in October rose by +0.8%, which beat expectations calling for growth of +0.5% on the month.  The headline growth number was led by stronger sales at gas stations (which gained +4% based on higher prices) and autos, where sales were up a percent.  However, removing the more volatile components from the equation, the core/control retail sales number came in at +0.3%, which trailed expectations by a tenth of a percent.  This was in addition to downward revisions for several prior months as well as lower sales in certain segments (like restaurants) that could have been related to hurricane activity in certain parts of the country.  Retail sales conditions overall have been considered good, but not outstanding, while some of the benefits of core consumer goods are being reaped by foreign firms.
(+) The New York Fed Empire state manufacturing survey for November rose +2.2 points to +23.3, beating expectations calling for an even +20.0.  While shipments and employment rose, as did prices paid, the more significant new orders segment fell by a few percent.  Sentiment for business conditions in the coming six-month period also rose to an even higher level.  Overall, the data continues to suggest manufacturing activity running at a high level in this region.
(-) By contrast, the Philadelphia Fed manufacturing survey for November fell by -9.3 points to +12.9, versus an expected +20.0 reading.  Declines were seen in all key segments, including new orders, shipments and employment, while prices paid rose slightly.  In this case, business sentiment for the coming six months fell by nearly seven points.  Despite the declines, however, all key areas remained solidly expansionary, as evidenced by the positive readings.
(0) Industrial production for October rose +0.1%, which underperformed relative to the expected +0.2% increase.  The manufacturing component rose at a faster +0.3% rate due to gains in the capex equipment group, demonstrating that this segment has indeed picked up.  Utilities production declined by a half-percent, which appeared likely due to hurricane effects.  Capacity utilization came in at 78.4%, a tenth below last month but surpassing estimates of 78.2%.
(0) The consumer price index for October rose by a rounded +0.3% on a headline level and +0.2% for core, which was generally as expected.  Energy prices rising by over +2% was a main reason for the gain in the headline number, while prices for used cars, electricity and shelter also rose.  Home furnishings saw a bump, perhaps due to pre-tariff adjustments.  On a year-over-year basis, headline and core CPI have increased by +2.5% and +2.2%, respectively, which are a touch stronger than the Fed’s target.
(0) Import prices rose +0.5% in October, which beat expectations calling for a +0.1% gain; growth in the September price figure was revised down significantly.  The headline result for the most recent month was driven by a +3% increase in petroleum and +2% in foods/feeds/beverages; removing those key components, prices only ticked up by +0.2%.
(-) Initial jobless claims for the Nov. 10 ending week rose by +2k to 216k, which surpassed the 213k expected.  Continuing claims for the Nov. 3 week rose by +46k to 1.676 mil., which surpassed the 1.625 mil. claims expected.  No anomalies appeared nationally, and overall levels remained low compared to history.
(0) The Federal Reserve’s Senior Loan Officer Opinion Survey for the third quarter offered mixed results.  For commercial/industrial loans, demand was down and lending standards and terms eased a bit in response.  Real estate loans also ended up with weaker demand, on both the commercial and residential level, with loan standards ending the quarter little changed.  On the residential side, this has gone along with a general tempering in housing data over the past few months—with higher interest rates appearing to play a significant role in affordability (which wasn’t high to begin with).  Demand appeared more stable for auto loans and credit card, and lending standards changed little.  The anecdotal questions surrounded the current and future shape of the yield curve, with bankers responding that the recent flattening had not played a role in decision-making, but further progression and/or an outright inversion of the yield curve at some point would result in a tightening of standards coupled with concerns about lending profits.
Market Notes

U.S. stocks experienced a negative week, as negative sentiment toward former market darlings in technology and related groups continued, including concerns over forward-looking prospects for Apple and Amazon.  However, markets were teased in both directions, on the negative side with threats of further auto tariffs, while later in the week hopes for a deal with China improved again for the time being.  From a sector standpoint, materials recovered to become the sole sector (along with real estate) to earn positive returns for the week.  Leading negative results were consumer discretionary and technology.

Foreign stocks were down in developed markets, but rebounded strongly in emerging as China, Brazil and India all ended the week with gains as investors appeared to rediscover bargains in the EM region.  Japanese markets lost ground in keeping with the group, as third quarter GDP came in a bit worse than expectations at a negative -1.2%—negatively affected by weather, lower exports and poor consumption.  The U.K. experienced among the worst losses, in keeping with a weaker pound, as the release of the highly anticipated Brexit Withdrawal Agreement came with political turmoil, with cabinet members continuing to resign amidst the disagreement with underlying terms.  Notably, this surrounded the amount of European control over terms and details surrounding the Northern Ireland trade region, which is the only geographic land border between the U.K. and EU.  (It’s important to note that cabinet resignations and similar displays of dissidence are quite common abroad, so don’t tend to raise the type of alarm we would likely see in the U.S. following a similar round of rash resignations.)  Parliament has yet to approve the agreement, which could likely be described as a ‘soft Brexit’ scenario, as opposed to the other options of no agreement (or ‘hard Brexit’) or even referring the matter to a second referendum—neither of which look to be ideal.
To add a second negative for Europe on the week, Italy rejected demands from the EU to lower proposed deficit/debt levels.  If this remains unresolved, Italy could be the recipient of monetary penalties imposed by the European body.  The key continuing issue is based on a mismatch in the projections made by each party—Italy claims forward-looking growth over the next several years should be sufficient to reduce worry about larger deficits, while the EU projects Italian GDP growth to be only around +1% in coming years, which naturally pressures the ability to pay back debt created by these deficits, that have largely been created out of political promises for enhanced social program spending.

U.S. bonds gained due to flows back into fixed income, leading rates about 0.10% lower across the longer end of the yield curve.  Treasuries fared best, while spreads widened, which punished investment-grade corporates, and especially high yield and floating rate bank loans.  Foreign bonds gained in developed markets due to a weaker dollar, with an especially robust week in emerging market local debt, which rose nearly a percent.

Real estate gained slightly, with help from lower interest rates, while foreign REITs were generally flat, with the exception of the U.K., which fell in keeping with pound weakness.

Commodities were mixed as metals and agriculture gained slightly, while energy overall lost ground.  The price of oil continued to decline beyond correction territory, with both fears of slowing demand and higher supplies than expected online took their toll.  West Texas Intermediate Crude fell nearly -6% on the week to end at just under $57/barrel, although Saudi Arabia announced plans for a cut in exports to stem the decline.  The even more dramatic story was that of natural gas prices, which rose over +15% by the end of the week, to the highest levels in four years, with inventories remaining lower than expected following a low price environment last year, along with early winter weather in key regions of the U.S.

Sources:  Ryan M. Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, FRED Economic Research, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Residential and reverse mortgages are offered through Prestige Home Mortgage in Vancouver, WA.
Notes key:  (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.