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Bill Roller
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Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates fell for the third consecutive week, continuing the general downward trend that began late last year. Wages are growing on par with home prices for the first time in years, and with more inventory available, spring home sales should help the market begin to recover from the malaise of the last few months.”
The 30-year fixed-rate mortgage (FRM) averaged 4.35% with an average 0.5 point for the week ending February 21, 2019, down from last week when it averaged 4.37%. A year ago at this time, the 30-year FRM averaged 4.40%.
The 15-year FRM this week averaged 3.78% with an average 0.4 point, down from last week when it averaged 3.81%. A year ago at this time, the 15-year FRM averaged 3.85%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.84% with an average 0.3 point, down from last week when it averaged 3.88%. A year ago at this time, the 5-year ARM averaged 3.65%.
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
Last week was an up week. The Down Jones Industrial Average ended up 0.6% to 26031.81. The S&P500 ended up 0.65% to 2792.67, and the Nasdaq Composite finished up 0.7% to 7527.54. The yield on the 30-year Treasury was up 2 basis points to 3.02%.
Economic data for the week consisted of weaker results from durable goods orders and a key regional manufacturing index, as well as a lower existing home sales. An index of leading economic indicators was flattish, with incomplete data. However, jobless claims and homebuilder sentiment improved.
Global equity markets earned positive returns again, as sentiment stayed buoyant, and emerging markets leading the way. Bonds were flat, in keeping with minimal changes in interest rates. Commodities rose as the result of gains in industrial metals, natural gas and crude oil.
Economic Notes
(-) Durable goods orders for December (delayed due to the shutdown, so now largely stale data) rose by 1.2%, falling short of expectations of a 1.7% increase. The headline figure was driven by a 5% gain in aircraft and parts, which tends to be lumpy month-to-month. Removing transportation, goods orders rose by only a tenth of a percent, while the ‘core’ component declined by -0.7%, in contrast to a 0.2% gain expected. Core goods shipments, on the other hand, increased by a half-percent. November’s numbers were also revised down a bit, although that data is now even more stale than that of this report.
(-) The Philadelphia Fed manufacturing index fell by a substantial -21.1 points in February to a contractionary level of -4.1. This was in sharp contrast to the expected and continued-expansionary 14.0 level. New orders and shipments represented the bulk of the negativity, falling to their lowest levels in about three years, as did prices paid, while the employment metric improved by several points. Expectations for business activity in the next six months also increased slightly to an even more expansionary level of over 30. While this represents only a single month, this bears watching for any changes in trend going forward.
(-) Existing home sales for January fell by -1.2% to a seasonally-adjusted annualized rate of 4.94 mil. units, contrary to expectations for a 0.2% increase. By category, the larger single-family group fell by -2%, while condos/co-ops rose by nearly 4%. Regionally, sales fell by nearly -3% in the West and Midwest, while the Northeast saw gains of 3% for the month. The negative trend in housing news continues, although the story is incomplete with planned housing starts data delayed.
(+) The February NAHB homebuilder index, on the other hand, rose by 4 points to 62, beating expectations of a less substantial gain to 59. All three key segments—current sales, future sales expectations and prospective buyer traffic—experienced gains of similar magnitude. Regionally, the Midwest and South saw strong increases for the month, while the West and Northeast declined slightly. This measure of sentiment tends to be decently correlated to future month housing start activity, and could well have been spurred by the recent decline in mortgage rates as anchored to the 10-year treasury note.
(0) The Conference Board Index of Leading Economic Indicators for January fell by -0.1%, which followed an unchanged result for the prior month, and, really, very little change in the underlying index since last fall. This is also keeping in mind that several of the ten underlying data points have been held up due to the government shutdown earlier in the year. The January number was held back by higher jobless claims, negative consumer sentiment and lower manufacturing hours, which weren’t offset by positive contributions by financial conditions and ISM new orders. In looking at the last six months, the index rose by an annualized 1.6%, which was a substantial slowing from the 5.5% annualized pace of the prior six-month period. By contrast, the coincident economic index rose by 0.1% (and 2.3% over the last six months on an annualized basis) and lagging economic index gained 0.5%.
As seen in the graphic below, the growth trend of the past few years has been persistent, but has included a few soft patches along the way. Whether this is another of those mid-cycle slowdowns or represents more substantial end-of-cycle slowing remains to be determined in the months to come. More complete data post-shutdown would also help clarify the picture.
(+) Initial jobless claims for the Feb. 16 ending week fell by -23k to 216k, surpassing the expected lesser decline to 228k. Continuing claims for the Feb. 9 week fell by a much more substantial -55k to 1.725 mil., far below the 1.743 mil. level expected by consensus. It appeared that initial claims originated mostly from states in the upper Midwest and Northeast, implying weather-related effects. Otherwise, levels continue to run at extremely low levels, pointing to strong labor conditions with little layoff activity.
(0) The FOMC Minutes from the January meeting reflected the change in tone implied by the formal statement released after the meeting. The key change from December was the insertion of the word and theme of ‘patience’, when describing forward-looking monetary policy, as opposed to the apparent communication missteps of December (when terms such as ‘auto-pilot’ were misconstrued). Differences in tone from last year included an acknowledgement of more challenging economic growth conditions from abroad—especially in China and Europe—while U.S. growth remained ‘solid’ for now. This is in addition to tighter financial conditions, which can reflect higher treasury yields, risk asset (stock) prices, wider credit spreads and a strong currency. Inflation, though, continued to be seen as ‘muted’, with levels near or just below the 2% policy target.
There are often questions from the economic community about this, whenever the Fed inserts commentary about or implies foreign financial conditions are affecting domestic policy. The modern reality is, in a world of globalized business activity and intertwined financial markets, no country is an island, implying that global conditions can and will trickle down to conditions in individual nations. For instance, some data recently showed that a one percent decline in global growth could affect U.S. growth by as much as a half-percent, despite our greater self-sufficiency and lesser reliance on trade than in many countries. Debate also continues about the possibility of slowing down the pace of unwinding the Fed’s balance sheet of treasury bonds and agency mortgage-backed securities. It’s now assumed the current pace will be scaled back somewhat in order to remove a possible excessive tightening effect, especially on the important long-term part of the yield curve, due to this area being where commercial and residential lending rates are based, but this remains to be seen in future meetings. Considering all that, consensus estimates now seem to call for about one rate hike this year, at most.
Market Notes
| Period ending 2/22/2019 | 1 Week (%) | YTD (%) |
| DJIA | 0.59 | 12.02 |
| S&P 500 | 0.65 | 11.74 |
| Russell 2000 | 1.34 | 18.08 |
| MSCI-EAFE | 1.65 | 8.94 |
| MSCI-EM | 2.72 | 9.62 |
| BBgBarc U.S. Aggregate | 0.11 | 1.21 |
| 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 |
| 2/15/2019 | 2.43 | 2.52 | 2.49 | 2.66 | 3.00 |
| 2/22/2019 | 2.46 | 2.48 | 2.47 | 2.65 | 3.02 |
U.S. stocks gained a bit in a holiday-shortened week. The positive earnings report from Wal-Mart, often taken as a proxy for the strength of the U.S. consumer, boosted early sentiment, while later-week news was again focused on U.S.-China trade and a possible closer resolution as various bullet points of contention were being more closely examined, signaling a deeper stage of negotiations, with envoy visits being extended. (Over the weekend, it was announced that the March 1 tariff imposition deadline date would be extended as talks continue.) The released FOMC minutes also seemed to help, as they solidified the ‘patient’ approach for upcoming meetings.
From a sector standpoint, utilities and materials led the way with gains of several percent, and the former helped by higher commodity prices, while energy and health care lagged. The latter has been a laggard this year, to some degree due to renewed bipartisan efforts to rein in drug prices and more recently by lower earnings projections.
Earnings results for nearly 90% of the S&P 500 have now been reported, with 70% reporting a positive earnings surprise, equating to a year-over-year earnings growth rate of just over 13%, per FactSet. However, profit margins appear to have peaked in the third quarter of last year and are now back on a trend downward, expected to be at just under 11% for Q1 of 2019. This is in line with expectations for an actual Q1 earnings decline on a year-over-year basis of about -3%, due to a tough comparison in Q1 of last year. This has brought the 12-month forward P/E on the index to 16.2, which is close to historical averages following the stretch of strong recovery performance early this year. All that considered, there remains room for positive earnings growth this coming year as a whole and beyond, just not to the same degree as 2018, where tax cuts provided an unexpected boost.
Foreign developed markets generally performed in line with U.S. equities, and similar returns between Europe, the U.K. and Japan, while emerging markets outperformed by gaining several percent. China and related nations in Asia, such as Taiwan and Korea, led the way as hopes for trade resolution again appeared promising.
Bond returns were flattish, as the yield curve was little changed, except for minor declines for long treasuries, where small basis point changes can leverage into more dramatic price impact. Higher-coupon segments such as high yield and bank loans outperformed treasuries slightly. Due to a slightly weaker dollar, foreign debt outperformed U.S., in developed and emerging regions.
Real estate earned gains in line with those of broader equities, led by the cyclically-sensitive lodging/resorts segment and foreign names, while domestic healthcare lagged. For the past quarter, REITs in the U.S. came in with among the best year-over-year revenue gains of any sector, despite their typical tempered results in line with other defensive segments. Despite being sometimes confused with the challenged residential homebuilding segment (which is actually in the consumer discretionary sector), REITs holdings of higher-quality office/industrial properties, data centers, storage and other properties have the historical reputation of performing decently during periods of slow, but steady economic growth when overall supply conditions are kept in check and remain free from overbuilding booms. Interest rates staying contained have also helped, although rate increases due to a strong economy have not tended to hurt medium-term returns for REITs, contrary to popular belief, unlike the negative impact of rising rates affecting home mortgage affordability.
Commodities gained overall, with positive returns in the segments of industrial metals and energy. In addition to sharply higher prices for natural gas, which appeared to be winter weather-related, the price of West Texas crude rose by a lesser amount for the week, by 2% to just over $57/barrel. The Baker Hughes rig count was down a bit from the prior week, but remains higher by almost 70 rigs over this time last year, pointing to higher U.S. production that has kept prices in relative check, although stronger sentiment about a U.S.-China trade resolution has continued to push prices a bit higher on a shorter-term basis.
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.