Your Weekly Update for Monday, April 22, 2019
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Sam Khater, Freddie Mac’s chief economist, says, “After dropping dramatically in late March, mortgage rates have modestly increased since then. While this week marks the third consecutive week of rises, purchase activity reached a nine-year high – indicative of a strong spring homebuying season.”
The 30-year fixed-rate mortgage (FRM) averaged 4.17% with an average 0.5 point for the week ending April 18, 2019, up from last week when it averaged 4.12%. A year ago at this time, the 30-year FRM averaged 4.47%.
The 15-year FRM this week averaged 3.62% with an average 0.5 point, up from last week when it averaged 3.60%. A year ago at this time, the 15-year FRM averaged 3.94%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.78% with an average 0.3 point, down from last week when it averaged 3.80%. A year ago at this time, the 5-year ARM averaged 3.67%.
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.
Markets were mixed last week. The Dow Jones Industrial Average ended up 0.56% to 29,559.54. The S&P500 ended down 0.08% to 2,905.03, and the Nasdaq Composite finished up 0.17% to 7,998.06. The annual yield on the 30-year Treasury fell 1 basis point to 2.96%.
Economic data for the week included stronger-than-expected retail sales, jobless claims and a tighter trade deficit, several regional manufacturing indexes showed mixed results, while housing starts again struggled.
In a shortened week, U.S. equity markets were mixed, while foreign stocks gained slightly. Bonds were generally flat with little change in underlying interest rates. Commodities fell slightly, with a minimal rise in crude oil offset by declines in other sectors.
(+) Retail sales for March rose by 1.6%, surpassing expectations calling for 1.0%. Removing the most volatile components, the core/control sales number was trimmed to 1.0%, but still beat expectations of just under a half-percent increase. Gas station and auto sales each gained 3% for the month, explaining the strength in the headline figure. In the core number, the areas of clothing, furniture, non-store/retail and restaurants also showed broader gains, which enhanced the positivity of the report. Tax refunds appear to be down from a year ago, likely related to tax reform changes, which could end up as a net drag on retail sales overall.
(+) The April New York Fed Empire State manufacturing survey rose by 6.4 points to 10.1, beating expectations for a smaller gain to 8.0. New orders expanded by the greatest degree, followed by a minor bump higher for shipments, while employment and prices paid both fell. While current conditions look solid on net, expected business conditions six months out also fell sharply, by -17 points, but remained a positive 12.4.
(-) The Philadelphia Fed manufacturing index fell by -5.2 points in April to 8.5, below the 11.0 level expected. Despite the headline, several underlying components increased, including new orders, employment, and prices paid—further into expansionary territory. Shipments and inventories, however, declined but remained in expansion, as did expectations for business activity six months out.
(-) Industrial production for March fell by -0.1%, in contrast to an expected gain of 0.2%. The manufacturing production component was unchanged for the month, with gains in business equipment offset by auto production falling by -3%, while the mining segment (including energy extraction) fell by nearly a percent, representing the most substantial drop in over a year for that segment. Capacity utilization came in at 78.8%, below expectations of 79.2%. While still running at a high level for the cycle, it’s down a bit from the near-80% readings reached a few times during the post-recession recovery.
(+) The trade deficit for February fell to -$49.4 bil., tighter than the expected level of -$53.4 bil. This was the net result of a 1% rise in exports, led by the non-petroleum category, such as capital goods and autos, as petroleum and agriculture exports fell by a few percent. This more than offset the gain of 0.2% in imports.
(-) Housing starts for March fell by -0.3% to a seasonally-adjusted 1.139 mil., which disappointed compared to an expected monthly gain of 5.4%. Revisions for several prior months were neutral on net. Single-family starts fell by -0.4% to reach their lowest level since the fall of 2016, while the multi-family segment was little changed. Regionally, while starts in the West rose by over 30%, those in the Midwest fell by -18% (which could have been weather-related), followed by mid-single digit declines for the South and Northeast. Building permits also fell, by -1.7% on the month to an annualized 1.269 mil., versus an expected gain of 0.7%. Multi-family permits fell by -3%, while single-family fell just over a percent. Similarly, permits in the West rose by 10%, while those elsewhere lost ground. Overall, the year-over-year decline in overall starts continues, with the rate reaching -14%, although some of the blame has been put on shortages for land and labor, as well as higher materials prices, offsetting the positive element of falling financing rates.
(+) The NAHB homebuilder index for April ticked up to 63, meeting expectations and reaching its highest result since last fall. Current sales and prospective buyer traffic both gained by at least a point, while future sales fell by a point. Regionally, the Midwest came in with the strongest gain, followed by positive results in the Northeast and West, while the South declined by a few points. Seasonally, we are entering prime construction activity season, which may boost industry sentiment, although we’ve had several false starts for a hoped-for housing bounceback in this cycle.
(+) The Conference Board’s Index of Leading Economic Indicators for March showed an increase of 0.4%, surpassing flattish results of the two prior months. Based on the formula, labor markets, consumer sentiment and financial conditions offered the largest contributions, although it was acknowledged that strong and weak elements in the index have become more balanced as of late. On a six-month trailing basis, the LEI has gained at an annualized 0.7% rate, far lower than the annualized 5.6% rate for the prior six-month period. The coincident and lagging indicators each rose 0.1% for the month, also showing signs of deceleration. While growth remains positive, the pace has obviously slowed.
(+) Initial jobless claims for the Apr. 13 ending week fell by -5k to 192k, beating expectations calling for 205k and reaching another multi-decade record dating from the late 1960s. Continuing claims for the Apr. 6 week also fell, by a strong -63k, to 1.653 mil., below the 1.722 mil. forecast. No anomalies were reported, with such peak conditions obviously hard to improve upon (although new records continue to be set).
(0) The Fed’s Beige Book of regional economic activity over the past month or so described growth as ‘slight to moderate,’ although there appeared to be some growth improvement over earlier in the year. On the positive side, manufacturing conditions have improved a bit to ‘modest to moderate,’ with tariff concerns remaining to perhaps a lesser degree. Employment conditions were also noted as ‘modest to moderate,’ with tight labor markets persisting, particularly for higher-skilled jobs. Consumer spending was mixed, with weakness in auto sales noted, while tourism and housing looked a bit better. Inflation was described as modest overall, with some higher input costs from wages and materials, but tempered elsewhere. All-in-all, the book was somewhat better than expected.
|Period ending 4/18/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.06||2.58|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
In a low-volume week shortened by the Good Friday holiday, U.S. stocks were mixed, with mega-caps gaining, while small caps lost a bit of ground. In fact, the VIX volatility measure reached an eight-month low during the week, with little headline news to move the needle in either direction as of late. Equity sentiment may have also been negatively impacted by continued Presidential criticism of the Fed, despite its more recent dovish stance, based on broader growth concerns.
By sector, industrials and information technology led with gains over a percent for the week, with the former being led by strong earnings results of several higher-profile components. However, healthcare lost over -4% to lead the pack significantly.
The weakness in healthcare as of late has been tied to intensifying pre-2020 election political rhetoric along the lines of enhanced Medicare (including a version covering everyone), or even moves toward a single-payer system. This has been spurred by grass-roots dissatisfaction with high prescription drug costs and lack of pricing transparency in other aspects of medical care, which, if reform were to be implemented, raises a cloud of uncertainty over future business conditions for insurers, benefit managers and even drug and device makers.
Earnings results for Q1 have been slowly rolling in. Per FactSet, with only 15% of S&P firms reporting, the earnings growth rate is a negative -4%. While early, if this pace keeps up, it will be the first year-over-year decline in earnings in about three years, although revenue is expected to grow at a similar 5% rate to recent quarters. Ironically, healthcare is expected to be one of the few growing sectors for the periods. For the entirely of 2019, earnings growth is expected to revert back to the mid-3% range, with revenue in the upper-4% area. Interestingly, while obviously early, estimates for 2020 earnings growth are currently in the 11-12% range, far from the recessionary number some are expecting.
Foreign stocks fared better in local terms, with similar results for developed and emerging markets, but a stronger U.S. dollar pared these back to far smaller gains. The extension for Brexit has provided a bit of a near-term respite for uncertainty, while earnings growth so far has come in a bit better than the far lowered expectations in Europe, perpetuated by manufacturing numbers in Germany and France that continue showing contraction. A recent shift in the U.S. administration’s tariff focus from China to Europe hasn’t helped matters from a sentiment perspective. However, based on the opinions of some strategists, the negativity could be excessive, based on the outperformance of the services segment of the economy relative to manufacturing.
U.S. bonds experienced minimal, but positive change across the board, in governments, investment-grade corporates and high yield—as the yield curve moved only by a few basis points in a handful of maturities. Foreign developed market bonds lost a small amount of ground in local terms, which translated into losses of up to a half-percent due to strength in the dollar. Emerging market bonds were similarly mixed, with USD-denominated faring better than local.
Real estate assets declined several percent on the week in the U.S., while foreign REITs in Asia and Europe suffered fewer losses, despite the negative dollar influence.
Commodities lost a bit of ground over the week, in keeping with a stronger dollar. Although energy was surprisingly flat, declines in agriculture, precious metals and industrial metals helped bring down most indexes. The price of crude oil was minimally changed, ending at a bit over $64/barrel, while natural gas fell by -6%, due to high levels of output and warming spring temperatures.
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.