Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates fell to the lowest level in nine months, and in response, mortgage applications jumped more than 20 percent. Lower mortgage rates combined with continued income growth and lower energy prices are all positive indicators for consumers that should lead to a firming of home sales.”
The 30-year fixed-rate mortgage (FRM) averaged 4.45 percent with an average 0.5 point for the week ending January 10, 2019, down from last week when it averaged 4.51 percent. A year ago at this time, the 30-year FRM averaged 3.99 percent.
The 15-year FRM this week averaged 3.89 percent with an average 0.4 point, down from last week when it averaged 3.99 percent. A year ago at this time, the 15-year FRM averaged 3.44 percent.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.83 percent with an average 0.3 point, down from last week when it averaged 3.98 percent. A year ago at this time, the 5-year ARM averaged 3.46 percent.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.
Summary
Markets were up last week. The Dow Jones Industrial Average rose 2.4% to 23,995.95, the S&P500 was up 2.5% to 2596.26, and the Nasdaq Composite rose 3.5% to 6971.48. The annual yield on the 30-Year Treasury rose 6.3 basis points to 3.04%
Economic data for the week was lighter than usual, due to the Federal government shutdown, but was highlighted by a tempered but still-strong ISM services report, pullback in consumer inflation, decent labor data and release of the minutes from the last Fed meeting.
Global equity markets recovered by several percent, in a continued effort to shake off the bear market of last quarter. Bonds were mixed, with interest rates inching higher. Commodities gained ground, again led by a recovery in crude oil pricing.
Economic Notes
(-) The ISM non-manufacturing index for December fell -3.1 points to 57.6, which remained a strong and expansionary result, but solidly underwhelmed relative to expectations of 58.5. The underlying composition showed that business activity and employment declined, although each remained in the high-50’s, as did supplier deliveries to a greater degree, while new orders rose several points to over 60. Despite a few anecdotal comments about tariff worries, and the accompanying pareback in sentiment, this index continues to register strong activity.
(0) The December consumer price index report showed a rare decline of -0.1% on a headline level, but a 0.2% increase for core, when removing the impact of food and energy prices. Both figures were generally expected by consensus. Falling energy prices were the primary culprit on the headline side, showing a drop of -3.5%, while food prices rose nearly a half-percent to partially offset that result. In the core measure, owners’ equivalent rent and standard rent each rose by 0.2%, considered a bit softer pace, while medical services remained robust at a rise of 0.4%. Other areas of note were lodging, which rose by several percent, and recreation. For the full year of 2019, headline CPI gained 2.0%, while core increased by 2.2% (the different was naturally due to the volatility and ultimate drag caused by crude oil prices). This continued an interesting trend of very moderate inflation readings—inflation has remarkably come in right around 2% for the last three calendar years, after running for four straight years well under that level. In fact, the only ‘extreme’ calendar year inflation reading over the last 20 years was 4.1%, registered in 2007, with only a small handful of years over 3%.
(0/-) The government JOLTS job openings report showed a decline of -243k jobs for November to 6.888 mil., after revisions, versus an expected level of 7.050 mil. This was the lowest level since June. The sector results were split, as manufacturing job openings were unchanged, while food/lodging slowed from a more frantic pace in recent quarters. The job openings rate fell by a tenth of a percent to 4.4%, hires fell -0.2% to 3.8%, while quits were flat at 2.3%. Despite the weaker single month, overall results remain strong from a longer-term historical standpoint—they may be finally just be beginning to pull back from peak levels.
(+) Initial jobless claims for the Jan. 5 ending week fell by -17k to 216k, below the 226k level expected. Continuing claims for the Sep. 15 week also fell, by -27k from an upwardly revised number the previous week, to 1.722 mil., which was below the expected 1.740 mil. Claims were most changed in the largest states, as is typical, with no anomalies reported by the DOL. Obviously, levels continue to remain low, indicative of a strong jobs market and increased mobility and ability of workers to change jobs.
(0) The FOMC minutes from the December meeting were consistent with public messaging, mentioning steady economic growth, but with sentiment a more tempered than it had been compared to prior meetings—it appeared there were some raised concerns about an increase in downside risks (made much more obvious by the sharp drawdown in financial markets). Mostly, this conversation appeared to be concentrated in the apparent disconnect between continued good economic data but acknowledgement of tighter financial conditions, stemming from strongly negative financial market sentiment, which has traditionally tended to be a forward-looking indicator and possible catalyst for a self-fulfilling prophecy, if it were to translate to weaker consumer and business confidence and spending. This even more increased focus on data-dependency has seemed to lower the probabilities of rate hike movements in 2019, from initial estimates of one per quarter, to perhaps only one or two at this point.
Aside from the headline interest rate policy normally focused on, the committee also discussed the size of the Fed balance sheet and timeline/magnitude for ‘rolling off’ of owned government bond assets. Some economists have questioned the recent experiment of raising interest rates while also implementing ‘quantitative tightening’ (the opposite of the prior ‘quantitative easing’)—essentially implementing policy from two fronts. In theory, depending on size, this could raise the supply of bonds, and serve as a catalyst for higher rates at the long end of the yield curve. So the Fed could be thought of as taking a barbelled approach, so to speak. No changes were proposed at this meeting, and the Fed appears hesitant to pull back on plans to reduce its bloated balance sheet, but no doubt that could change if conditions warrant. Central bankers are generally hesitant to pursue policies that could result in higher rates in any form if economic weakness were to show itself.
Market Notes
| Period ending 1/11/2019 | 1 Week (%) | YTD (%) |
| DJIA | 2.42 | 2.93 |
| S&P 500 | 2.58 | 3.63 |
| Russell 2000 | 4.84 | 7.36 |
| MSCI-EAFE | 2.89 | 3.90 |
| MSCI-EM | 3.75 | 3.67 |
| BBgBarc U.S. Aggregate | -0.04 | 0.18 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2018 | 2.45 | 2.48 | 2.51 | 2.69 | 3.02 |
| 1/4/2019 | 2.42 | 2.50 | 2.49 | 2.67 | 2.98 |
| 1/11/2019 | 2.43 | 2.55 | 2.52 | 2.71 | 3.04 |
U.S. stocks continued their recovery last week, up several percent on hopes (again) that the U.S.-China trade dispute would be resolved through ongoing talks. It appears progress has been made in the areas of U.S. farm exports and better access to Chinese markets, while the key issue of Chinese technology pilfering remains unresolved. There also appears to be some recognition of value in equity markets, with P/E’s falling below long-term averages, after spending parts of the last year or two looking a bit ‘tired’, which is a euphemism for mildly expensive, even if not quite bubble-like. The now record-long government shutdown has not resulted in a major deterioration in market sentiment, although Fed chair Powell also acknowledged that a long-lasting episode could ultimately end up negatively influencing economic growth.
From a sector perspective, cyclicals outperformed, with industrials, consumer discretionary and technology leading, while defensive staples and utilities ended with minimal gains.
Foreign stocks rose along with U.S. equities, albeit to a lesser degree, with continued hope for U.S.-China trade resolution. This correlation with domestic stocks has been the tendency over the past several months, which has outweighed fundamental concerns over weakness in economic growth shown by slower industrial production numbers in Germany and France, in particular, and mixed results in Japan, which is hoping to generate some inflation to show that growth could be eventually improving. Overall, growth levels remain challenged in the foreign developed world, which has explained the weak results of regional stock markets. Emerging markets outperformed developed, with hope for trade resolution, which boosted China and Pacific region equities, in addition to stronger commodity results as of late, which has boosted prospects for materials exporters.
U.S. bonds were mixed in the week, with government indexes down as interest rates ticked back higher slightly, but credit outperformed with spreads contracting. Accordingly, high yield bonds experienced strongly positive results, followed by floating rate bank loans. Each of the latter two asset classes suffered during the fourth quarter as investor flows away from risk highlighted their somewhat higher equity correlations compared to other segments of fixed income. Foreign bonds gained slightly, with help from a weaker dollar.
U.S. treasury debt has long been thought of as the global ‘risk-free’ asset, where default is assumed to be unthinkable, and, therefore, is often the recipient of inflows when conditions turn sour in other asset classes. However, there are times when ‘risk-free’ isn’t a failsafe, either. As if the lesson wasn’t learned several years ago, the ongoing federal government shutdown has again caused bond rating agencies to discuss and/or even consider a de-rating for U.S. government debt. Even while Standard & Poor’s downgraded treasury debt a partial notch to AA+ during that 2011 summer debt ceiling debacle, Moody’s and Fitch held firm at AAA (albeit with their respective outlooks downgraded less severely to ‘negative’). However, Fitch has been providing warnings that stunts such as the government shutdown could again threaten that coveted AAA status, stating that such uncertainty was not consistent with behavior of nations deserving a top rating.
Real estate experienced very strong gains for the week, surpassing broader equity markets, with the exception of small cap. Cyclically-sensitive lodging and resorts outperformed, although all segments were sharply positive.
Commodities gained several percent, again driven by the volatile movements of crude oil, but also a weaker dollar and an increase in natural gas prices. Crude oil continued its roller-coaster ride, regaining ground to end the week 8% higher, at just under $52/barrel. While OPEC has reiterated its desire to raise prices to more budget-friendly levels in Middle Eastern and Eastern European producing nations, much of the recent volatility has been coupled with equity market gyrations and concerns over global growth—although demand is far more predictable than short-term supply. While forecasts are often not helpful in the commodity space, with no ‘fair value’ metrics based on actual cash flows, estimates for crude in the coming year appear to be in the mid- to higher-50s at this point.
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.