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Your Weekly Update for Monday, December 10, 2018
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 at https://beaconrrwa.com and 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].
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Have a great week!
Mike Elerath, NSSA
Bill Roller, CFA, CFP®
NMLS #107972
Mortgage Rates
On Thursday, December 6, 2018 Sam Khater, Freddie Mac’s chief economist, said,“Mortgage rates declined this week amid a steep sell-off in U.S. stocks. This week’s rate reaction to the volatile stock market is a welcome relief to prospective homebuyers who have recently experienced rising rates and rising home prices.”
The 30-year fixed-rate mortgage (FRM) averaged 4.75% with an average 0.5 point this week, down from last week’s 4.81. A year ago, it averaged 3.94%.
The 15-year FRM this week averaged 4.21% with an average 0.4 point, down from 4.25%. A year ago, the 15-year FRM averaged 3.36%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.07% with an average 0.3 point, down from last week’s 4.12. A year ago the 5-year ARM averaged 3.36%.
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.
Summary
Economic data for the week was highlighted by stronger results for ISM reports in manufacturing and services, while factory orders and employment numbers for November came in showing slower growth than expected.
Global equity markets slumped, with foreign faring a bit better than U.S. with help from a weaker dollar. Government bonds performed well, being the recipient of investor flows. Commodities rebounded as well, as crude oil prices rebounded higher.
Economic Notes
(+) The manufacturing ISM index for November rose 1.6 points from the prior month to 59.3, beating expectations calling for 57.5. New orders rose sharply, by almost 5 points during the month, while increases were also seen in employment, production and inventory levels. However, supplier deliveries fell back a bit as did prices paid, along with the severe drop in petroleum costs in recent weeks, even though the metric continues to show a rise in prices. This index continues to mark strong manufacturing activity despite some concerns over the impact of tariffs, which has been steadily mentioned for several months now. By contrast, U.S. manufacturing numbers continue to be world-leading, with PMI figures in Europe and U.K. coming in at barely-expansionary low-50’s readings.
(+) The November non-manufacturing ISM index, which measures services, rose 0.4 to 60.7, which beat expectations calling for a minor decline to 59.0. Overall business activity and new orders both rose to the low-to-mid 60’s level, the employment and supplier deliveries segments declined slightly, and the export orders component declined a bit further (in line with some tariff concerns noted by those responding to the survey). Prices paid rose a few points to the low 60’s. This metric continues to show healthy growth.
(-/0) Factory orders for October fell -2.1% on the month, just below the -2.0% decline forecasted, in addition to downgrades for the prior month. Core capital goods orders and shipments were revised lower for the prior month, as well.
(-) Construction spending fell -0.1% in October, in contrast to forecasts calling for an increase of 0.4%; in addition, levels for August and September were both revised down by over a percent each. In the most recent month, private construction on both the residential and non-residential side experienced a decline, while pubic construction gained a bit in both areas.
(-) The trade balance for October increased its deficit by -$0.9 bil. to -$55.5 bil., which was a bit wider than the -$55.0 bil. level expected. The differential was led by higher imports for goods, while exports for goods declined by roughly the same amount. It appears there could be some activity pulled forward due to expected tariffs, but not to an overly significant degree.
(-) The November ADP Employment Report came in showing an increase of 179k jobs, which underwhelmed compared to the 195k expected. Under the hood, services jobs rose by 163k, led by gains in the professional/business and education/health segments. Goods-producing jobs increased by 16k, led by construction at 11k. Weather may have paid a role in the lower results.
(0) The preliminary Univ. of Michigan consumer sentiment index for December came in unchanged at 97.5, beating expectations calling for a reading of 97.0. Assessments of current economic conditions rose by almost 3 points, while future expectations declined by -2. Inflation expectations for the coming year ticked down a tenth to 2.7%, while those for the coming 5-10 years fell by -0.2% to 2.4%.
(0/+) Initial jobless claims for the Dec. 1 ending week fell by -4k to 231k, above the consensus 225k level. Continuing claims for the Nov. 24 week fell dramatically, by -74k, to 1.631 mil., below the 1.690 mil. expected. While the changes were largely focused in the largest states, alluding to few anomalies, it’s possible that seasonal adjustments may have played a role in the more extreme numbers in recent weeks—in keeping with typical patterns around the holidays. The insured unemployment rate fell to a low point of 1.1%, which continues to point to strong labor conditions, although conditions could be showing signs of potentially having reached their peak.
(-) The November employment situation report came in a bit weaker than expected, but the consensus view is that it wasn’t enough to stop the Fed from raising rates again in a few weeks. However, the number of hikes in 2019 is again being debated, as it was last year at this same time concerning 2018 policy.
Nonfarm payrolls came in showing a gain of 155k, which disappointed relative an expected 198k gain; prior month gains were also revised downward a bit. In the services segment, job increases were strongest in professional services (+32k) and education health (+34k), although information employment fell by -8k. In goods, manufacturing rose by +27k, while mining/logging jobs fell. Construction jobs also gained at a far slower pace than the prior month. It appears, as with the ADP employment report, that poor winter weather may have cut jobs by as much as 20-30k. Regardless, the other premise is that job growth is beginning to slow, which is not uncommon at previous stages of high employment.
The unemployment rate was unchanged at 3.7%, which matched expectations, in addition to the household employment survey showing a gain of 233k, while the participation rate was flat. The U-6 underemployment rate, however, rose by two-tenths to 7.6%.
Average hourly earnings rose +0.2% for the month, which ended a tenth of a percent below expectations. The year-over-year rate of increase was little changed at 3.1%, which remains the high point for this cycle, despite anecdotal reports of pressures in some high-skill jobs where employers have experienced a difficulty in finding suitable workers. Average weekly hours slipped a tenth of an hour to 34.4. The final nonfarm productivity figure for the third quarter came in at 2.3%, which was near expectations. Unit labor costs rose at a 0.9% annualized rate, which was just below expected.
(0) The Fed Beige Book, which covered the November month, reported growth at a modest to moderate pace across most national regions—except for Fed districts Dallas and Philadelphia, which noted slower growth. Details were a bit more mixed, with a few issues of concern being noted, which, unsurprisingly, included higher interest rates, tariff/trade rhetoric and uncertainty as well as labor shortages in a few industries. Consumer spending appeared solid, with auto sales improving relative to other retail segments, bucking a recent slow patch and tourism offering mixed results. Home construction fell back a bit, which lagged commercial building slightly, which was flattish to slightly positive. Consumer lending was split, with a mix of growth and slowing based on region. Manufacturing rose at a moderate pace, although the impacts of and uncertainty surrounding tariffs weighed on forward-looking activity in that segment. Labor market growth started to slow, in no small part to difficulty in finding and keeping workers, which has ended up pushing wages up to a faster growth rate. However, overall inflation seemed to rise at only a ‘modest’ pace other than a few areas affected by tariffs.
Question of the Week
What has perpetuated this stretch of market weakness?
At the risk of being repetitive, many of the same issues as in the last installment, with resolution still hard to find.
- Tariffs/Trade. Despite the positive market reaction to a 90-day deferral by the U.S. in implementing a 25% tariff on a broader group of Chinese exports, this merely delays the issue, as opposed to solving it. This continues the angst investors are already experiencing about the uncertain outcome of this policy, although an extension is certainly preferred to an outright Jan. 1 implementation. Last week, a series of tweets from the President, one in which he referred to himself as a ‘Tariff Man’, seemed to sour sentiment.
- U.S./China escalation to ‘new cold war’? Frictions reached a head due to a side issue that markets reacted to on Thursday. This was the Dec. 1 arrest (in Canada) of the CFO of Huawei Technologies, the world’s largest wireless equipment supplier, and involved in cutting edge and security-sensitive mobile technologies such as 5G. It appears she was charged with fraud related to circumventing sanctions the U.S. has placed on Iran. It’s likely not the event so much as the poor timing and possible further deterioration of relations between the two nations—threatening a deal for the aforementioned trade issues.
- Slowing growth. While trade issues remain top of mind, a broader softening of global economic growth has risen higher in investor minds. While it’s a become widely-held view that exceptionally strong GDP (3%+) and earnings growth (25%+) levels from 2018 are likely unrepeatable peaks for this business cycle, due to the impact from tax cuts and a lower base, how quickly 2019 growth will temper remains in doubt. Signs of lower growth in Europe and Japan, as well as a challenging domestic market in housing and a few other segments are increasing fears of the ‘R’ word (recession) surfacing—even though many models continue to show this a few years off based on current economic growth levels.
- Interest rates. As we’ve mentioned in the past, rates are a simple metric but drive pricing for a variety of assets—small changes can have wider implications. Concerns also flared from a minor/partial curve treasury yield curve inversion last week, when the 5-year note dipped below the neighboring 3-year and 7-year, while rates remained positively sloped at the longer end of the curve. To investors already somewhat on edge, this was the icing on the cake, although there’s the chance it may look benign in hindsight. In historical literature, a full inversion is a decent measure of forward-looking recession risk, but has occurred consistently across the full curve, being based on 3-month or 2-year yields rising above 10-year yields. Thus far, while the curve has certainly flattened, with the fed funds rate moving higher and long rates staying anchored, this type of full inversion has not occurred. While technicals continue to bear watching for signs of further curve flattening, it appears that inflation breakevens may have played a role, reflecting impacts from dramatic changes in oil prices, which affect CPI. It is important to note that true 10y-3m curve inversions, historically, have occurred well before a recession, and even before a peak in the equity market.
- Energy prices. The crude oil market shows
tendencies that are a bit of a double-edged sword.
- On one hand, equity markets often react negatively to lower oil prices due to the implied lower earnings from energy companies. Bond markets (especially high yield) react similarly, as weaker earnings and cash flows imply income statement pressure, and push down interest coverage ratios, which imply greater risk of bond downgrades and defaults. Additionally, a concern is that lower oil prices are the byproduct of lower oil demand, which would imply a deceleration in global growth.
- However, to no surprise, cheaper oil is good news for consumers and large parts of the economy as a whole. As most businesses and individuals are users rather than producers of oil, lower prices (for unleaded gasoline, specifically) have tended to spur more positive consumer sentiment, which can be a catalyst for increased spending generally. Furthermore, with several economic recessions in the past being sparked by oil price shocks, lower prices have tended to decrease recession probabilities, all else equal.
- Other items. These include Brexit and the Italian budget negotiations, as discussed in previous nots. Beyond the events themselves, which remain a concern due to the uncertainty of potential political outcomes (now that a European court has just ruled the U.K. decision to leave the EU could be reversed), sentiment surrounding sustainability of the EU as a cohesive political and economic union long-term continues to override all other considerations.
Market Notes
| Period ending 12/7/2018 | 1 Week (%) | YTD (%) |
| DJIA | -4.44 | 0.90 |
| S&P 500 | -4.55 | 0.32 |
| Russell 2000 | -5.53 | -4.60 |
| MSCI-EAFE | -2.26 | -11.44 |
| MSCI-EM | -1.34 | -15.29 |
| BlmbgBarcl U.S. Aggregate | 0.85 | -0.95 |
| 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 |
| 11/30/2018 | 2.37 | 2.80 | 2.84 | 3.01 | 3.30 |
| 12/7/2018 | 2.40 | 2.72 | 2.70 | 2.85 | 3.14 |
In a week shortened by a Wednesday closure in honor of former President Bush’s passing, U.S. stocks suffered significant losses last week, which neutralized the strength of the week prior. As noted above, several items came together to again focus the negativity on risk assets. Every sector except defensive utilities was down, led by weakness in financials and industrials—two areas that appear most affected by lower interest rates and curve flattening, and Chinese tariff uncertainty.
Trade worries carried globally (again), resulting in similarly poor performance in foreign stocks—with similar returns in Europe, U.K., Japan and emerging markets. Thursday’s decline of -3% in Europe and the U.K. represented the worst single day in two years. Brexit uncertainty continue to drive sentiment in the U.K.; Germany’s market reached bear market territory, as levels fell -20% from peaks earlier in the year—largely the result of that nation’s especially export-heavy economy (particularly in the automotive and auto supply sectors). Japanese stocks have an indirect relationship with Chinese trade, while negative growth hasn’t helped.
U.S. bonds were the beneficiary of investor flows away from risk assets last week, with treasuries benefitting, with lower long-term yields, while credit spreads widened, punishing corporate credit—notably high yield. Foreign bonds fared well in both developed and emerging markets, with lower rates globally, and weaker dollar.
Ironically, investors also became concerned about a technical inversion that occurred in part of the yield curve, where the 5-year yield dipped below the 3-year, but also the 7-year, so the total curve remained positively sloped. This can happen for a variety of reasons, but primarily due to technical demand in certain parts of the curve—in this case, demand for the 5-year note was high enough to drive yields down.
Commodities fared well last week, with help from a weaker dollar and bounceback in energy. Crude oil rose by 3%, to end the week at just under $53/barrel, to offset a drop in natural gas prices from the extreme gains over the prior few weeks. Precious metals also saw gains, unsurprisingly, as investors sought out safe havens and interest rates on treasuries fell. The crude oil market was led by speculation about OPEC, and peripheral non-OPEC members, working on production and inventory cuts to stem the recent glut that has kept pricing low. The seesaw battle for oil price normalcy continues.
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, Freddie Mac, 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.