Your Weekly Update for Monday, March 4, 2019
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Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates remained mostly unchanged this week, while mortgage applications rose 5.3% from the previous week. The general decline in rates we have seen recently, combined with rebounding pending home sales, hint at a strong spring homebuying season.”
The 30-year fixed-rate mortgage (FRM) averaged 4.35% with an average 0.5 point for the week ending February 28, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.43%.
The 15-year FRM this week averaged 3.77% with an average 0.5 point, down from last week when it averaged 3.78%. A year ago at this time, the 15-year FRM averaged 3.90%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.84% with an average 0.3 point, unchanged from last week. A year ago at this time, the 5-year ARM averaged 3.62%.
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.
Last week was mixed. The Down Jones Industrial Average ended down 0.02% to 26026.32. The S&P500 ended up 0.4% to 2803.69, and the Nasdaq Composite finished up 0.9% to 7595.35. The yield on the 30-year Treasury was up 10 basis points to 3.12%.
Economic data for the week consisted of prior quarter GDP growth coming in late but a bit better than expected, mixed results for housing and consumer sentiment, while ISM manufacturing and jobless claims were weaker.
U.S. equity markets gained slightly, as did those in foreign developed markets, while emerging markets declined. Bonds lost some ground as interest rates increased. Commodities fell, led by declines in multiple segments, including the price of crude oil by several percent.
(+) After a delay of almost a month (due to the government shutdown, which paused a good amount of economic data collection), and around the usual time of the second estimate, the advance (first) estimate of fourth quarter 2018 U.S. GDP was released. For the quarter, real growth came in at an annualized 2.6%, which represented a deceleration from Q3’s pace of 3.4%, but surpassed expectations calling for a more tempered 2.2%. For the full year of 2018, real growth came in at 2.9%, which exceeded 2017’s 2.2% growth rate.
The quarterly change was largely due to gains in personal consumption, business investment, inventories and exports; at the same time, residential fixed investment and state/local government spending were detractors. Although below the 3.5% rate expected, personal consumption rose at a 2.8% clip, led by gains in autos and financial services. Core PCE for the quarter was reported at an annualized rate of 1.7%, which was near consensus. Housing declined, but only by about half of the rate expected, at -4%.
As the Federal government shutdown began right before Christmas, it wasn’t a substantial part of the Q4 report, but is expected to reduce GDP growth for Q1 by up to 0.25-0.50% as a result of the related bottlenecks to suppliers, contractors, travel, etc. However, as with prior shutdowns, there could well be a rebound in Q2 as conditions revert to normal. Q1 has also suffered from some difficulty in measurement and adjustment for residual seasonality effects, which have led to lower growth readings for recent Q1’s.
Despite a starting estimate in early January of just over 2.0% for Q1, the NY Fed ‘Nowcast’ has fallen to about 0.9% for Q1, while the normally more optimistic GDPNow from the Atlanta Fed is estimating 0.3%. The ‘Blue Chip’ survey consensus shows that most economists are looking at just under 2.0% for the current quarter, noted by the Atlanta Fed, so it seems optimism persists for now on the private sector side.
(-/0) The ISM manufacturing index for February fell by -2.4 points to 54.2, reaching a 2-year low, and lagged expectations for a slightly better result of 55.8. Under the hood, new orders, production, supplier deliveries and employment all declined to varying degrees, but each remained in expansionary territory; inventories, on the other hand, gained just under a point. Despite the lackluster trend, growth remains positive, which is the key factor in determining economic slowing. In fact, nearly 90% of industries reported growth in the month, which was up from about 60% doing so in December.
(-) Due to the data delay from the shutdown, the personal income reports for January were released along with those for December. Personal income in December rose a sharp 1.0%, beating expectations of a half-percent gain, while income for January fell by -0.1%, disappointing relative to expectations calling for a gain of 0.3%. Personal spending for December fell by -0.5%, which was a few tenths weaker than expected. The raised the personal savings rate by 1.5% to 7.6%. PCE price inflation rose just under 0.1% on a headline basis for December, while the core measure rose 0.2%. Year-over-year, headline gained 1.8% and core 1.9% on a year-over-year basis, just below the Fed target.
(+) Pending home sales rose 4.7% in January, which beat expectations calling for a less dramatic 1.0% gain—this measure tends to correlate to future month existing home sales. Regionally, all four areas gained, led by a rebound in the South of 9%, while the West rose by less than a half-percent. The year-over-year change, however, remained a negative -2.3%.
(-/0) Housing starts for December (delayed by the shutdown) fell by -11.2% to a seasonally-adjusted annualized average of 1.078 mil. units, compared to a minor expected decline to 1.255 mil. units; this was in addition to a downward revision for November. The smaller and usually volatile multi-family category (typically representing about a third of the overall total) experienced a drop of -20%, while single-family starts fell by -7%. Regionally, starts in the Northeast were little changed, while all other segments experienced declines, particularly in the West, down over -26%. Building permits rose by 0.3%, though, compared to an expected decline of -2.6%. Multi-family permits rose by 5%, while those for single-family fell by -2%. The Western region saw a 17% gain in permits, while the Midwest experienced nearly an equivalent drop—other regions ended up with minor declines.
(-) The S&P/Case-Shiller home price index ticked up by 0.2% in December, which trailed expectations by a tenth of a percent. Of the 20 cities, all but three gained, led by half-percent increases in New York and Atlanta, while San Francisco prices fell by nearly a percent. Year-over-year, the index continued to show a trend of deceleration by several tenths of a percent—this time to 4.2%.
(-) The FHFA house price index, which takes in a broader universe of homes outside of the largest U.S. cities, rose by a similar 0.3% in December, also a tenth of a percent below forecast. Regionally, house prices rose in all but two of the nine areas, with those in New England increasing by just under a percent for the month, while the upper Midwest/Great Lakes region and KY/TN/MS/AL segments declined by a few tenths each. Year-over-year, the rate of change slowed for this index as well, to 5.6%.
(-) The advance goods trade balance for December increased by -$9.0 bil. to -$79.5 bil., a record high level, beating forecasts calling for -$73.6 bil. Exports of goods fell by -$4 bil., mostly in the areas of industrial supplies/materials and capital goods other than autos. At the same time, imports rose by $5 bil., led by gains in both capital and consumer goods outside of autos, as well as food/beverage. No doubt, at that time and continuing, are fears over changes of trade policy with China and others, so activity has been perhaps pushed upward to circumvent the worst-case scenario of higher tariffs.
(-) The final Univ. of Michigan consumer sentiment index for February showed a decline of -1.7 points to 93.8, which disappointed relative to expectations calling for 95.9. Assessments of current conditions as well as expectations for the future both declined by roughly equivalent amounts. Inflation expectations for the coming 5-10 years were flat at 2.3%.
(+) The Conference Board of consumer confidence for February showed a sharp increase of 9.7 points to 131.4, surpassing the little changed result of 124.9 expected. Household perceptions of current conditions rose by a few points, but the change was largely driven by a double-digit increase in future expectations. Additionally, there was a small increase in the labor differential that resulted in the high for this cycle thus far. This appeared to be a bit of a bounceback related to lows in sentiment that accompanied the government shutdown early in the year.
(-) Initial jobless claims for the Feb. 23 ending week rose by 9k to 225k, which was a bit more than the expected level of 220k. Continuing claims for the Feb. 16 week rose by an even more substantial 79k to 1.805 mil., well above the 1.737 mil. expected. These continue to be influenced, it appears, by seasonal adjustment issues, that could self-correct over time, as well as extreme weather in certain parts of the country.
(0) The testimony of Fed Chair Powell before the Senate offered few deviations from other comments made in recent weeks, but again confirmed the Fed’s intent to take a ‘patient’ approach to monetary policy, given the mixed bag of economic positives and negatives as of late. These include muted inflation, near or even below the Fed’s target, as well as slower economic growth globally, trickling down to the U.S. While not making policy comments on U.S. trade or fiscal policy (which he admitted previously wouldn’t be appropriate), he did acknowledge that ‘uncertainty’ about such matters can have an adverse impact on business and consumer confidence, and hence, economic activity. Otherwise, he did not tip his hand in regard to future policy.
|Period ending 3/1/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.40||0.80|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks pushed higher for yet another week as optimism over a trade deal continued to boost sentiment, with noted progress on a variety of issues, as well as the prior announcement of an extension of the March 1 deadline. By sector, despite the drop in oil prices, energy led with a percent gain, followed by technology and financials, while materials fell by over a percent. Interestingly, the S&P index is now back to levels last seen in early October 2018, when the eventual bear market was just beginning—but not quite back to the highs of late September.
Foreign developed markets performed slightly more strongly than did U.S., while emerging market equities lost ground to serve as the outlier for the week. The dollar was mixed, as the yen weakened while the pound and euro strengthened; the latter appeared to be due to increasing sentiment towards some type of Brexit deal in coming months, with perhaps an extension of the late March deadline. There is even talk of a new referendum, which would throw another wrench into the works; however, that continues to be a lower probability event. Japanese GDP growth of 1.4% for Q4 was a bit better than expected, although future prospects remain mixed.
Chinese stocks rallied early in the week (over 5% on Monday alone) in response to the U.S. decision to delay the Mar. 1 trade tariff implementation. In addition, MSCI announced it would sharply increase weightings of Chinese equities in its benchmarks in 2019, in a reflection of the increasing proportional market cap of the nation’s equities in relation to the rest of the world. Brazil and Mexico, on the other hand, lost several percent. The latter was largely due to concerns over slower growth and increased needs for boosting financial support for the heavily-indebted state-owned energy firm.
U.S. bonds were largely negative, as interest rates ticked up across the bulk of the yield curve along with a stronger appetite for risk assets. The exception was high yield, which gained a half-percent, in keeping with a stronger correlation to equities. Foreign bonds similarly lost ground, in both developed and emerging markets.
Commodities suffered a down week, in keeping with most of its components—with declines in energy, agriculture and precious metals, while industrial metals gained slightly. A 4% increase in natural gas prices were not enough to offset the price of crude oil falling by -3% to $56/barrel. Crude tumbled in price sharply early in the week, in response to the President’s tweeting about displeasure with current prices (as ‘too high’), with a partial recovery achieved by Friday. The recovery appeared likely due to OPEC’s decision to cut production for the coming quarter in order to sustain prices, considering higher U.S production.
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.