Your Weekly Update for Monday, March 11, 2019
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Sam Khater, Freddie Mac’s chief economist, says, “While mortgage rates very modestly rose to 4.41% this week, they remain below year-ago levels for the fourth week in a row. In late 2018, mortgage rates rose over a full percentage point from the prior year, which was one of the main reasons that weakness in home sales continued into early 2019. However, the impact of recent lower rates and a strong labor market has led to a rise in purchase mortgage demand as we start the spring homebuying season.”
The 30-year fixed-rate mortgage (FRM) averaged 4.41% with an average 0.5 point for the week ending March 7, 2019, up from last week when it averaged 4.35%. A year ago at this time, the 30-year FRM averaged 4.46%.
The 15-year FRM this week averaged 3.83% with an average 0.4 point, up from last week when it averaged 3.77%. A year ago at this time, the 15-year FRM averaged 3.94%.
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 3.84%. A year ago at this time, the 5-year ARM averaged 3.63%.
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 a down week. The Down Jones Industrial Average ended down 2.2% to 25450.29. The S&P500 ended down 2.2% to 2743.07, and the Nasdaq Composite finished off 2.5% to 7408.14. The yield on the 30-year Treasury was unchanged at 3.12%.
Economic data for the week, with a delayed schedule still affected by the government shutdown, showed positive results for ISM non-manufacturing/services and housing, coupled with a lackluster February employment report, which looked to have strongly negative winter weather effects.
Equity markets declined by several percent globally, due to concerns over world growth, with a stronger U.S. dollar punishing local returns a bit more for foreign stock markets. In fixed income, safe haven U.S. government bonds gained ground, while high yield struggled. Commodities were little changed, in keeping with a rare calm week for crude oil prices.
(+) The ISM non-manufacturing index for February rose by 3 points to 59.7, beating expectations of a more tempered level of 57.4. Business activity and new orders were both up significantly, each reaching new highs for this cycle. Supplier deliveries gained to a lesser degree, while the employment measure declined a bit. However, all areas remained solidly in expansionary territory, noted by the near-60 headline figure. Anecdotally, continued concerns over tariff policy between the U.S. and China were noted, although the impact is less direct on the services side than is the ISM manufacturing gauge.
(-) Construction spending for December fell by -0.6%, bucking expectations for a 0.1% gain. Residential construction on both the private, and even more so, public, sides declined by several percent. However, non-residential construction gained a bit on the private side.
(+) New home sales for December (coming in over a month past the expected rollout date) rose by 3.7% to a seasonally-adjusted annualized rate of 621k units, relative to an expected decline to the 600k-unit level. However, at late as the data is now, revisions for November were negative by nearly -60k. Most regions gained, led by the South and Northeast, while the Midwest saw falling sales for the month. Inventories have now reached another cycle high, with sales activity running at a bit over half that of previous cycles, so certainly a dampened rate.
(+) Housing starts for January rose 18.6% to a seasonally-adjusted annualized rate of 1.230 mil., which surpassed the over-10% gain to 1.195 mil. expected; however, December data was revised downward a bit. Single-family was responsible for a bulk of the gain, rising by 25%, while the less significant multi-family component rose just over 2%. Regionally, the Northeast saw an increase approaching 60%, followed by West at just under 30% and South at 14%, while those in the Midwest fell by -6%. Building permits rose 1.4% on the month, which also outperformed an expected decline of -2.9%. In this series, multi-family rose by 7%, while single-family fell by -2%. Regionally, the Midwest increased by 33% and Northeast by 26%, while the West and South each declined. These were all likely weather-related, as is typical for the winter months.
(-/0) The ADP private sector employment report showed a gain of 183k jobs for February, which fell just under the 190k expected. However, the January number was revised up by nearly 90k to 300k in total. Services sector jobs rose by 139k, with professional/business and education/health, as usual, accounting for the leadership, with the former by 49k and latter by 37k. Goods-producing jobs rose by 44k, with construction outpacing manufacturing. Overall, this points to continued strong job growth with little break in trend.
(+) Initial jobless claims for the Mar. 2 ending week fell by -3k to 223k, just below expectations calling for 225k. Continuing claims for the Feb. 23 week fell by -50k to 1.755 mil., far below the 1.772. mil. level expected. Despite week-to-week volatility based on weather and other idiosyncratic events, claims levels continue to run at multi-decade lows.
(-) The February employment situation report came in far weaker than expectations, but seemed largely due to the impact of extreme weather during the month (such details are not always noted by media outlets when a disappointing number is released). Nonfarm payrolls came in at a meager 20k, compared to forecasts calling for 180k and a dramatic drop from the 300k-plus number in January. Based on the composition of the report, with construction jobs falling by over -30k, as well as softness in areas such as hospitality, leisure and retail, it appeared that weather and more significant snowfall around the country than normal played a prominent role in the result. Two of the brighter spots were professional/business services gaining 42k, along with healthcare adding 21k.
The unemployment rate, however, declined back down by -0.2% to 3.8%, matching a multi-decade low for the series. The household survey also showed a job gain of 255k, with about half of that figure likely being related to the government shutdown effects reversing. The number of job losers and those on temporary layoff declined significantly, which reflected a recovery from the prior month’s Federal government shutdown. The U-6 underemployment rate also declined, by a substantial -0.8% to 7.3%. Labor force participation remains at its highest levels in five years, reflecting the strength of underlying conditions and demand for labor at all levels.
Average hourly earnings, however, rose 0.4% in February to a pace of 3.4% on a trailing 12-month basis. The average workweek fell by -0.1 hour to 34.4.
Data released earlier in the week included nonfarm productivity rising by 1.9% in Q4, which beat expectations by about a half-percent, bringing the year-over-year increase to 1.8%. Unit labor costs rose 2.0% for the same quarter, which was three-tenths of a percent better than expected. The year-over-year increase in that series amounted to 1.0%, which was a tenth slower than the pace of the prior quarter.
(0) The Fed Beige Book, covering regional economic conditions across the country, again reported growth at a slight to moderate pace around most regions of the twelve; overall, this was a bit weaker than the prior report. It seemed the Philadelphia and St. Louis areas were the outliers showing little change for the period, while at least half of the districts were negatively affected by the government shutdown or severe winter weather. Otherwise, it seemed that continued concerns over U.S.-China trade policy/tariffs and a global tempering of growth appeared to weigh on sentiment. Consumer spending appeared especially affected by winter conditions, to no surprise, with a lack of tourism and weaker construction activity, although manufacturing was also affected to a degree. Employment continued to growth at a pace described at modest/moderate, with labor markets remaining tight with instances of labor shortages and signs of wage growth. Inflation also remained modest/moderate, with higher input prices and mixed ability to pass such increases on to consumers, which would serve to tighten margins.
Question of the Week-What’s changed since the market trough a decade ago?
Market watchers and strategists are big on anniversaries, so have been acknowledging that 10 years ago, March 9, 2009, marked the end of the Great Recession bear market and beginning of the bull market run of the past decade. It wasn’t an obvious turn, as sentiment at that time remained quite poor (according to the AAII survey, 70% of investors that prior week were bearish, over two times the long-term average—near where it lies today). This has often been the case after a period of extreme losses and economic calamity, but conditions weren’t deteriorating any further. Often, since markets are forward-looking, that subtle shift is all that’s needed. From that point, over the next ten years, the market has gained an average annualized 17%—far above the 10% long-term historical average.
There hasn’t been a recession since, but that’s largely due to the deep hole the global economy fell into and the slow grind back to some semblance of normal. Frequently, as we’ve discussed previously, recessions are caused by excesses and the climb back was so extreme, no room for excess existed. We’ve seen a few areas become frothy since, but overall, absent a few hiccups such as the U.S. debt downgrade, ‘taper tantrum’ and a few others, it’s been a relatively smooth ride. We probably should not get used to it—bouncebacks from bad times are often the best times to invest, precisely when sentiment is at its worst. Interestingly though, sentiment has never become especially buoyant in this cycle, due to memories of that recession remaining fresh, political conflict, greater economic inequality measures, and perhaps other reasons. This is despite labor markets reaching multi-decade strength and inflation remaining very contained.
Back to the question of what’s changed? It depends on one’s perspective. In terms of economic and financial market repair, quite a lot. Based on a starting point of near-collapse, banks are now better capitalized and regulations have perhaps made it more difficult for a 2008 to occur again. Along those same lines, mortgage lending standards that delved into the level of fraudulent territory in some cases has been tightened up. Then again, it is rare for back-to-back financial crises to originate from the same source. Credit is a tool nearly as old as money itself, so excess could rear its head again from a different catalyst, whether it be corporate debt, government debt or another area yet to be identified. Investors can hope that lessons of the past can be remembered to prevent future crises, which could be decades, but they’re often only remembered so long.
|Period ending 3/8/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.68||1.49|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks fell back by several percent, as worries were again focused on perceived weakening in the global economy, particularly through policy actions in Europe and China to stimulate growth. Small caps fared worse, down over -4%.
From a sector standpoint, the only positive sector for the week was utilities, with a small gain, while energy and health care experienced the sharpest losses, at nearly -4%, due to a leveling in oil prices for the former and individual company results in the latter.
Foreign stocks were down in similar terms, as slightly stronger local currency results were dampened by the U.S. dollar, which gained about a percent on the week. Last week’s ECB meeting ended in a lowered estimate for European economic growth to just above 1% for the year, as well as the decision to further enhanced eurozone banking system liquidity, in efforts to stimulate economic activity broadly through greater lending. This was in addition to comments stating that rates would be kept unchanged through at least the end of the year—a somewhat unusual (and long) pledge, but another example of the tool of ‘forward guidance’, which has become more popular among the world’s central banks.
Emerging markets were led by strength in China, where the annual NPC government meeting resulted in several policy measures intended to stimulate growth during a stretch of recent slowing, including infrastructure spending and lower taxes in certain segments. Other regions came in a weaker by several percent, including South Korea, which tends to be affected by changes in North Korean rhetoric, and Mexico, which was downgraded slightly by S&P, as were several key companies in the country, due to perceived substantial open-ended payments likely needed in coming years to support state-owned energy firm Pemex, which is heavily indebted.
With the deadline of March 29 looming for U.K. policymakers to finalize some type of orderly ‘Brexit’ plan, it appears a few older plans may dusted off and revisited. The coming week will feature several potential votes on the issue, the first being on Mar. 12, with possible subsequent votes dependent on the outcome of the first. It appears that either PM May’s plan will be put through, with special care taken to address the Ireland/Northern Ireland issue, or an extension could be requested that would give Parliament more time for other options. While an exit without a deal (‘Hard Brexit’) is possible at month’s end, it doesn’t seem as likely at this time, and a new referendum seems even more remote. Obviously, this uncertainty has served to depress the value of the U.K. pound, as well as U.K. equities broadly.
U.S. bonds fared well last week, gaining upwards of a percent, in keeping with flows away from equities and other risk assets. Treasuries fared a bit better than credit, due to wider spreads, while high yield bonds and bank loans ended up losing ground. Similarly strong results for foreign developed market debt were largely reversed to flat by a strong dollar.
Interestingly, the yield curve flatness has again become even more pronounced with rates from the 3-month T-bill, all the way out to 5 years, are within a few basis points of each other, and in fact, are slightly inverted. The 10-year treasury, though remains positively sloped by a mere 15 basis points over the T-bill, while the 30-year treasury remains even more positively sloped (and even offers a 1% real yield, if basing things off of the Fed’s target inflation level). In historical terms, this is considered very flat.
Real estate gained slightly on the week, led by gains in residential, substantially outperforming the broader equity market, which lost ground. Foreign REITs performed similarly flattish, despite the headwind of the stronger dollar.
Commodities experienced a flattish week, with larger losses in agriculture and industrial metals offset by smaller gains in energy. The price of crude oil inched up by about a half-percent to just over $56/barrel.
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.