Your Weekly Update for Monday, January 21, 2019
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 us 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, CFPÂŽ
NMLS #107972
Mortgage Rates
Sam Khater, Freddie Macâs chief economist, says, âWeaker manufacturing data and a more dovish tone from the Federal Reserve left mortgage rates unchanged relative to last week. However, interest rate-sensitive sectors of the economy â such as consumer mortgage demand and homebuilder construction sentiment are on the mend, which indicates that lower interest rates are beginning to have a positive impact on some segments of the economy.â
The 30-year fixed-rate mortgage (FRM) averaged 4.45% with an average 0.4 point for the week ending January 17, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.04%.
The 15-year FRM this week averaged 3.88% with an average 0.4 point, down from last week when it averaged 3.89%. A year ago at this time, the 15-year FRM averaged 3.49%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.87% with an average 0.3 point, up from last week when it averaged 3.83%. A year ago at this time, the 5-year ARM averaged 3.46%.
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 finished up 3.0% to 24,706.35, the S&P500 ended up 2.9% to 2670.71, and the Nasdaq Composite was up 2.7% to 7157.23. The 30-year treasury gained 6 basis points to an annual yield of 3.1%.
Although limited to some extent due to the Federal government shutdown, economic data for the week included a slight decline in producer prices, weaker consumer sentiment, mixed regional manufacturing results, but strong industrial production and jobless claims.
U.S. equity markets continued their recovery upward upon stronger sentiment, with foreign stocks in developed and emerging markets just behind. Bonds ended the week with negative returns, as interest rates again ticked higher. Commodities gained on the back of crude oil, which regained ground by several% on the week.
Economic Notes
Due to the ongoing government shutdown, the closely-watched metrics of retail sales and housing starts for the prior month were unavailable.
(0) The Producer Price Index for December declined -0.2%, which was a tenth beyond the drop expected by consensus estimate. Excluding food and energy, the core PPI measure fell by only -0.1%, counter to the gain of 0.2% expected. A fall of -5% in energy prices accounted for much of the one month differential, although food prices rising by 3% offset a bit of that impact. Core intermediate producer prices fell by a more extreme -0.7%, although petroleum also appeared to play a large role. For 2018 as a whole, final demand PPI increased by 2.8%, which surpassed the gain of 2.3% in 2017, reflecting the pickup in some components of inflation.
(-) The New York Fed Empire manufacturing survey fell by -7.6 points for January, to a level of 3.9, which disappointed compared to an expected 10.0 reading. Under the hood, shipments, new orders and employment all showed declines, as did prices paid and index of 6-months-future business conditions. Although the final result remains in the growth column, a deceleration of that growth is clearly demonstrated.
(+) To the contrary, the Philly Fed manufacturing index for January rose by 7.9 points to a level of 17.0, beating expectations calling for 9.5. While the sub-indexes of shipments and employment both fell, as did prices paid, new orders were up sharply. Business expectations for the coming six months were also up by just over a point to an even more expansionary level. Interestingly, this index was far more robust across the board than was the New York regional measure.
(+/0) Industrial production for December increased by 0.3%, beating forecasts calling for 0.2%. The manufacturing component of this rose just over a%, sharply beating expectations for little change, led by gains in the business equipment category. Utilities production, however, declined by -6%. Capacity utilization came in at 78.7% for December, which was two-tenths of a% higher than expected.
(+) The January NAHB homebuilder index rose by 2 points to 58, versus expectations for no change. The improvement was widespread with current sales, prospective buyer traffic and future sales all gainingâthe latter ending with the largest increase. Regionally, the Northeast and West rose while the Midwest fell by a few points. Due to the surprise decline over the prior month, this was no doubt a welcome surprise to the lackluster housing sector, even if not a critical report.
(0) Import prices fell -1.0% in December, to a slightly lesser degree than the expected -1.3%. However, energy played a key role here, too, with prices down -12%, resulting in the ex-petroleum index rising by 0.3%, compared to a flat result expected. Industrial supplies and capital goods prices fell, while consumer goods outside of autos as well as food/beverages each rose by a tenth of a%.
(-) The Univ. of Michigan index of consumer sentiment declined by -7.6 points to 90.7 in the preliminary January report, to a 2-year low, which disappointed relative to an expected minor decline to 96.8. Respondentsâ assessment of current conditions fell by -6 points, while expectations for the future declined by nearly -9 points. Inflation expectations for the coming year were unchanged at 2.7%, while those for the upcoming 5-10 years rose a tenth of a% to 2.6%.
(0) Initial jobless claims for the Jan. 12 ending week fell by -3k to 213k, which came in under the expected 220k. Continuing claims for the Jan. 5 week, on the other hand, rose by 18k to 1.737 mil., just above the 1.734 mil. level expected. The insured unemployment rate remained unchanged at 1.2%, with no anomalies reported and the largest claims activity taking place in the largest statesâper normal. Claims may no longer be at absolute trough levels, but remain extremely low and indicative of a strong labor market.
(0) The Federal Reserveâs Beige Book, which outlines regional economic conditions on an anecdotal narrative level, indicated that growth progressed at a modest to moderate level during the late December to early January reporting period. Standing out among a variety of districts were comments about volatility in financial markets, rising interest rates as well as ongoing trade/tariff policy uncertaintyâsimilar to recent reports seen elsewhere. It appeared financial market volatility has led to some pullbacks in sentiment in segments such as manufacturing and real estate activity. Employment conditions were also noted as tight, with modest/moderate growth, along with higher wage growth, albeit with employers encountering difficulty in finding skilled workers. Consumer spending rose modestly, with stronger tourism numbers, although auto sales and home construction were little changed in the period. From a broader inflation standpoint, prices rose at a similar modest/moderate pace in keeping with many other metrics.
Market Notes
| Period ending 1/18/2019 | 1 Week (%) | YTD (%) |
| DJIA | 3.01 | 6.02 |
| S&P 500 | 2.90 | 6.63 |
| Russell 2000 | 2.44 | 9.97 |
| MSCI-EAFE | 1.08 | 5.02 |
| MSCI-EM | 1.69 | 5.42 |
| BBgBarc U.S. Aggregate | -0.19 | -0.01 |
| 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 |
| 1/11/2019 | 2.43 | 2.55 | 2.52 | 2.71 | 3.04 |
| 1/18/2019 | 2.41 | 2.62 | 2.62 | 2.79 | 3.09 |
For the fourth straight week, U.S. stocks continued to recover as investors appeared to regain their calm, following probabilities of the Fed continuing their program of raising rates this year falling. Additionally, speculation over U.S.-China trade continued, with rumors of a possible U.S. rollback of tariffs to help calm markets and encourage better Chinese trade concessions. Sector returns were led by financials, which gained 6%, led by strong early Q4 earnings results, while utilities ended the week as the only sector with a loss. The latter was led by the announced bankruptcy of California-based Pacific Gas & Electric due to liabilities related to recent wildfires.
As earnings for Q4 2018 continue to roll in, results are no doubt expected to show growth at a slower pace than earlier in the year. Expected year-over-year growth is 10-11%, per FactSet, with revenue growth of around 6%. Other than sporadic cyclical growth in energy, the strongest numbers are slated to originate in industrials and communications services. In addition, expectations for upcoming quarters in 2019 have also declined substantially, along with slowing overall economic growth, waning positive bottom-line impact from tax cuts, as well as sharply lower oil prices from highs last year, which have continued the roller-coaster of earnings in the energy sector. At this point, calendar year 2019 is anticipated to experience earnings and revenue growth of 6-7% and 5-6%, respectivelyâalbeit this early in the period, such (or any forecasts) should be taken with a grain of salt.
Foreign stocks earned positive returns, albeit to a lesser degree than domestic stocks, due to the headwind of a strong dollar for the week. Sentiment in Europe and Japan again appeared to be driven by U.S.-China trade resolution optimism than by regional concerns, aside from core European GDP showing slower growth, notably in Germany. However, the British pound strengthened upon Prime Minister Mayâs Brexit plan being voted down by parliamentâwhich raised odds of a consensus plan with leaders of the other party, a possible delay in the implementation of Brexit itself as well as a final agreement with âsofterâ as opposed to âharderâ terms. Perhaps Brexit fatigue has set in, with most of the âworst case scenariosâ perhaps already having been priced in for some time. Emerging markets rose in sympathy with developed markets and improved sentiment, particularly in Asia, while Turkey rallied dramatically due to the central bankâs decision to leave interest rates unchanged due to signs of troublesome inflation perhaps slowing.
U.S. bonds fell back by a fraction of a%, as a partial inversion in the middle part of the curve (between the 2-year and 5-year) reverted to a flattening, while all bonds across the curve rose in yield. Corporates fared slightly better than governments, with a positive return, and a strong rally in high yield. However, a strong dollar turned a small nominal return for developed market bonds into a loss of nearly a%. USD-denominated emerging market bonds fared the best of all, with risk-taking again taking hold and shrinking spreads.
Commodities gained a few% overall, despite the headwind of a stronger dollar, as gains in energy and industrial metals outweighed a minor decline in risk-sensitive precious metals. Crude oil prices recovered by 4% to end the week at just over $54/barrel, upon assumptions of upcoming OPEC production cuts, per IAE reports.
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 & Poorâs, 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.