Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington. Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check out our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to [email protected]. Have a great week!
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Bill Roller, CFA, CFP®
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Mortgage Rates
Freddie Mac reported that mortgage rates barely moved last week. The 30-year fixed-rate mortgage (FRM) averaged 4.81% with an average 0.5 point for the week ending November 29, 2018, unchanged from last week. A year ago, it averaged 3.90%.
The 15-year FRM this week averaged 4.25 % with an average 0.4 point, up from last week when it averaged 4.24%. A year ago at this time, the 15-year FRM averaged 3.30%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.12% with an average 0.3 point, up from last week when it averaged 4.09%. A year ago at this time, the 5-year ARM averaged 3.32%.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
The other mortgage news from last week is that Fannie Mae and Freddie Mac announced higher loan limits on conventional mortgages for 2019. Lenders are already applying those higher loan limits for purchase and refinance applications starting December 1, 2018.
A number of states, including Alaska and Hawaii do not have any increased loan amounts for their high-cost areas in 2019. Twenty states and DC have one or more counties with high costs limits. Click here to look up specific limits in your area. Near Seattle, Pierce, King, and Snohomish counties are high-cost areas.
Summary
Economic data for the week included an updated release of prior-quarter GDP that was unchanged, stronger housing prices but weaker housing sales metrics, slightly weaker consumer confidence and an increase in jobless claims.
U.S. equity markets rebounded sharply with decent economic numbers and less aggressive language toward interest rate tightening from the Federal Reserve. Foreign stocks followed suit, with emerging markets outpacing developed. Bonds gained ground as interest rates declined, in both U.S. and foreign markets. Commodities were mixed, while crude oil prices rebounded slightly.
Economic Notes
(0) The 2nd estimate of 3rd quarter GDP was unchanged at 3.5%, despite consensus expectations for a slight tick higher to 3.6%. Personal consumption was revised down by nearly a half-percent to 3.6%, a tenth beyond expectations, while business fixed investment activity was revised upward a bit, in both structures and equipment, as were inventories. On net, the changes were minimal, but moved in a slightly positive direction as weaker capex has been a steady concern by policymakers and economists in recent years. Inflation, as measured by the GDP deflator and PCE, were revised minimally, with year-over-year price growth remaining around an annualized rate of 1.5-2.0% during the period.
(-) The advance October trade balance showed a widening of the deficit by -$1.2 bil. to -$77.2 bil., which was wider than the -$77.0 bil. expected. Imports rose +0.4%, with large increases in consumer and ‘other’ goods, while imports for capital goods fell by nearly -5%. Exports declined -0.3%, with weakness in agriculture and autos.
(+) Personal income rose +0.5% in October, which surpassed forecasts by a tenth of a percent, interestingly, boosted by a subsidy paid to U.S. farmers in response to tariff pressures. Personal spending gained +0.6%, beating expectations by two-tenths; however, spending growth was revised down by several tenths for the previous month. The brought the personal savings rate down a tenth to 6.2% for the month. The PCE inflation metrics for the same month rose +0.2% and +0.1% on a headline and core basis, respectively. The year-over-year numbers increased at a decelerated +2.0% on the headline side and +1.8% for core—right about on target with the Fed’s mandate.
(+) The November Chicago PMI report rose +8.0 points to 66.4, an 11-month high. Business activity overall gained strongly, with all key sub-groups experiencing gains, including new orders, production, order backlogs, as well as employment. Inventories fell as there appeared to be some pre-emptive tariff activity in prior months. Prices paid moderated a bit for the month, but remained in a higher range as input costs have picked up. While sentiment remained high, some concern remained about the impact of trade policies with China.
(0/+) The S&P/Case Shiller home price index for September rose +0.3%, which was a tenth better than expected. Of the 20 included cities, all but two showed an increase, led by Las Vegas and Phoenix, which were up just under a percent for the month, while Seattle prices declined by a few tenths. Year-over-year, however, the pace of growth declined almost a half-percent to +5.1%. This is still robust, no doubt, but shows a deceleration from peak levels.
(-) The September FHFA home price measure rose by +0.2%, which disappointed compared to the +0.4% expected. Regionally, all but two areas gained, led by the Mountain states which gained a percent, while the Pacific states fell by just over a percent. Year-over-year gains here were also slower than previous trends, but still robust, at +6.0%.
(-) New home sales fell -8.9% for October, to a seasonally-adjusted annualized rate of 544k, below the expected 575k, to their lowest levels in over two years. However, upward revisions added over +50k to results for the immediate prior months. Regionally, all areas lost ground during the month, with the South bearing the largest brunt, down -26k, likely due to Hurricane Activity. The supply of unsold new homes has risen to 7.4 months worth, which is quite high compared to 4-5 months seen in a ‘normal’ environment.
(-) Pending home sales for October fell by -2.6%, again disappointing relative to expectations for a slight gain of +0.5%. Regionally, the Northeast segment saw a gain of just under a percent, while all others were down, led by the West, down -9%. While the wildfires in California might be the first thing to come to mind, the timing was generally in November, so likely unrelated to the pending data.
Housing activity continues to struggle, due to a likely combination of higher interest rates, tight inventories and some demographic influences. While the poor metrics here may have some concerned about a relationship with higher recession probabilities in the next year or two, housing has never truly gotten off the ground from the recession a decade ago to reach more long-term normal levels, let alone the status of ‘overbuilt’—a more common condition that has often accompanied past recessions.
(0/+) The Conference Board’s consumer confidence index for November fell -2.2 points to 135.7, which matched consensus expectations. Consumer assessments of present conditions rose slightly, very close to cycle highs reached during the summer, while expectations for the future fell by four points. The labor metric that measures the ease in finding jobs rose by several points as well, reaching the highest level in almost 18 years.
(-) Initial jobless claims for the Nov. 24 ending week rose by +10k to 234k, exceeding expectations of 220k and the highest level in six months. Continuing claims for the Nov. 17 week also rose sharply, by +50k, to 1.710 mil., exceeding the forecasted 1.663 mil. While falling oil prices were expected to produce layoffs, this did not appear to be the catalyst in this case. The holiday weeks can produce some seasonal adjustment challenges, due to a ramp up in certain segments (like retail) but wind-downs in others. The uninsured employment rate remains quite low, unchanged by the higher claims, but levels will have to be watched to see if a trend is beginning toward claims bottoming and starting to reverse.
(0) The minutes for the early November FOMC meeting were fairly non-eventful, and perhaps less reacted to than normal, with most attention being focused on Chair Powell’s speech about monetary policy (noted below). The language was standard for the most part, although there was an acknowledgement of volatility in U.S. equity markets in the formal report, which was attributed to global trade and growth uncertainty. However, broader economic conditions, generally remain accommodative, per their notation, which is typically based on interest rate levels and spreads, but can contain a component of equity sentiment and U.S. dollar levels. A few members expressed concerns over timing of rate increases, which alludes to data dependency next year (as usual), as well as increasing levels of corporate leverage. The chances of a quarter-percent hike in December remain the base case for most, with updated economic and inflation expectations to come out at that meeting, in keeping with their quarterly format.
(+) Fed Chair Powell’s speech mid-week to the New York Economic Club wouldn’t normally warrant mention, but it happened to be closely-watched and reacted to in light of questions over how far the Fed will go in terms of tightening. The tone was taken by ‘dovish’ by some, and ‘neutral’ or par for the course, by others, with no change in Fed policy or their gradual approach. The tone taken appeared to be the key difference, with the dovish element being an acknowledgement of possible economic pitfalls, such as trade tensions, growing debt levels and geopolitics. Perhaps even more importantly, and in contrast to prior comments that the FOMC may choose to ‘overshoot’ a bit by taking the fed funds rate target to above its ‘neutral’ or ideal rate if necessary, his comments this time described the current policy rate as being ‘just below the broad range’ of neutral rate estimates (2.5% being the lowest currently, although the median is still at 3.0%). Some took this (as did markets) as the Fed is close to being finished, which is perhaps premature, but it does cast more uncertainty on the number of Fed policy actions in 2019. In the base case, the economy continues to grow at an above-trend pace, as is employment, although inflation is relative tame. Therefore, no obvious conclusions yet.
Market Notes
| Period ending 11/30/2018 | 1 Week (%) | YTD (%) |
| DJIA | 5.32 | 5.59 |
| S&P 500 | 4.91 | 5.11 |
| Russell 2000 | 3.04 | 0.98 |
| MSCI-EAFE | 0.97 | -9.39 |
| MSCI-EM | 2.64 | -14.13 |
| BlmbgBarcl U.S. Aggregate | 0.13 | -1.79 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2017 | 1.39 | 1.89 | 2.20 | 2.40 | 2.74 |
| 11/23/2018 | 2.41 | 2.81 | 2.88 | 3.05 | 3.31 |
| 11/30/2018 | 2.37 | 2.80 | 2.84 | 3.01 | 3.30 |
U.S. stocks recovered sharply during the final week of November, to erase some of the recent negativity. Mid-week, stocks shot upward following comments from Fed Chair Powell that acknowledged risks in the economy—stocks fared well due to the assumption that such fears may keep a lid on interest rate increases looking ahead. Additionally, positive sentiment surfaced from hopes of a U.S.-China trade agreement at the G20 meeting (which proved prescient, with the U.S. announcing a two-month postponement of trade escalation until March, and China agreeing to resume selected purchases of agricultural, industrial and energy products). Keys in an agreement remain the outstanding issues of cyber security and intellectual property. From a sector standpoint, all were in the positive, with leadership by healthcare, consumer discretionary and technology, while consumer staples and materials rose to the least degree. November ended with positive equity returns, perhaps surprisingly, while December has also tended to fare well historically (nearly 80% of Decembers over the past 40 years have been positive).
Eyes have also been focused on retail conditions—typically assessed by results for Black Friday and Cyber Monday—which look decent so far. Online sales were up over +26% over last year, per research from Adobe Systems; and while traffic in physical stores declined in the single-digits, it was better than expected. The positivity overall is not too surprising, considering fundamental macro strength, including a strong labor environment, which often correlates into levels of retail spending during the holidays.
Foreign stock returns were also positive, but less buoyant than those in the U.S. However, emerging markets outperformed Europe, U.K. and Japan. In the U.K., an upcoming vote on the Brexit deal is slated for Dec. 11, with odds of passage continuing to vacillate. Much of the positivity was centered on China, where sentiment appears to be seeing some bottoming and hopes rose again for a trade agreement at the upcoming weekend’s G20 meeting. In addition, the government has put through a variety of stimulus measures to help stem the recent slide in growth, as well as cushion the blow from any negative ramifications from U.S.-China trade impacts in coming quarters. The strong returns were spread among a variety of EM nations, including India, South Korea and Turkey, as lower U.S. interest rates and dovish Fedspeak may have played a role as well. Despite claims that emerging markets are less influenced by Fed policy, higher rates continue to act as a general headwind through a tightening of conditions and effects on bond issuance.
U.S. bonds rose slightly on the week, as bond yields continued to tick downward—partially due to renewed hopes that interest rates will not rise as fast as initially feared. Treasuries outperformed investment-grade corporates, while high yield eclipsed both, with help from strong returns in equities. The dollar gained minimally on the week, but foreign developed and emerging market debt all fared the strongest of all, as yields fell along with concerns over global growth prospects.
Commodities were mixed on the week, with agriculture experiencing the strongest gains, followed by energy, while safe haven precious metals fell back with positive sentiment toward risk assets. Crude oil experienced a quieter week than the prior few, rising back about a percent on the week to close just under $51/barrel. U.S. stockpiles continue to increase, based on data from the U.S. Energy Information Administration, while more recent focus turned to the weekend’s G20 meeting, and possible policy discussion between key oil nations, such as Russia and Saudi Arabia.
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.