Your Weekly Update for Monday, May 6, 2019
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Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Slightly weaker inflation and labor economic data caused mortgage rates to dip this week. Moving into summer, we expect rates to be about a quarter to half a%age point lower than where they were last year, which is good news for the housing market. These lower rates combined with solid economic growth, low inflation and rebounding consumer confidence should provide a solid foundation for home sales to continue to improve over the next couple of months.”
The 30-year fixed-rate mortgage (FRM) averaged 4.14% with an average 0.5 point for the week ending May 2, 2019, down from last week when it averaged 4.20%. A year ago at this time, the 30-year FRM averaged 4.55%.
The 15-year FRM this week averaged 3.60% with an average 0.4 point, down from last week when it averaged 3.64%. A year ago at this time, the 15-year FRM averaged 4.03%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.68% with an average 0.4 point, down from last week when it averaged 3.77%. A year ago at this time, the 5-year ARM averaged 3.69%.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
Summary
Markets were mixed last week. The Dow Jones Industrial Average fell 0.14% to 26,504.95. The S&P500 ended up 0.19% to 2,945.58, and the Nasdaq Composite finished up 0.22% to 8,164.00. The annual yield on the 30-year Treasury was unchanged at 2.93%.
Economic data for the week was characterized by a Federal Reserve meeting where policy was left unchanged. Positive data included a very strong employment situation report, and gains in consumer confidence, while the ISM services index tempered, but remained expansionary. On the negative side, the ISM manufacturing index and regional manufacturing data came in below expectations.
U.S. and foreign equity markets both gained slightly on the week, despite mixed growth and policy news. Bonds were flat to slightly negative, as interest rates ticked just a bit higher. Commodities lost ground, led by lower prices for crude oil due to concerns over a near-term supply glut.
Economic Notes
(0) The FOMC meeting, as mentioned mid-week, offered little in terms of changed narrative, with a continued description of strong labor markets and solid economic growth, while spending had weakened somewhat. Inflation has also been a challenge, as core rates have fallen below the 2% target. While the formal statement initially taken as a bit dovish, the Fed Chair Powell press conference afterward created a bit more market volatility—with policy tone seeming to tilt a bit less dovish than initially expected—with the economy described as ‘solid’ and recent falling inflation as being due to ‘transitory’ factors, all of which implied no easing of policy would be needed at this time. Opinions by some that the next move by the Fed would be a cut in rates certainly now seem less likely than hoped, especially when Powell refused to specifically address any questions about scenarios when the Fed would cut.
In news released following the formal statement, the Fed announced that the IOER (interest on excess reserves—paid to member banks on reserve balances larger than the Fed’s required amount) would be lowered by -0.05% to 2.35%. Some took this move as a precursor to a later rate cut, but in actuality, it represents more of a technical adjustment to allow for smoother monetary policy transmission and better control cash balances within the system. Compared to prior eras when banks were not paid any interest on this excess, the IOER can incent or discourage certain bank behavior (such as lending funds out or keeping them in the Fed system). In this arena, just a few basis points may not seem like much, but it adds up on very large balances.
(-) The ISM manufacturing index for April fell by -2.5 points to 52.8, which underwhelmed compared to the 55.0 reading expected, and representing the weakest level since the fall of 2016. In the depths of the report, new orders, production and employment all experienced declines to a larger degree than the headline index, as did net export orders, which contracted. On the other hand, supplier deliveries and inventories rose slightly, as did order backlogs. While not a great report, it was released too late to be considered by the FOMC in their economic growth analysis anyway, but does remain in expansionary territory. The ISM has fallen to the neutral range a few times over the past several years temporarily, due to a variety of events, such as fluctuations in oil prices, so upcoming months will shed more light on any trends.
(-) The ISM non-manufacturing index fell by -0.6 points in April to a level of 55.5, below the rise to 57.0 expected. Data within the release was mixed, as employment, new orders, and prices paid fell by at least a point, while business activity and new export orders rose by several points. While a small disappointment, a level in the mid-50’s continues to imply solid growth, and stronger than that of the much smaller manufacturing sector currently.
(-) Construction spending fell -0.9% in March, which disappointed compared to expectations calling for no change; additionally, growth from the prior two months was downwardly revised by a decent amount. While private non-residential and public residential construction spending inched up a bit, private residential and public non-residential each fell by over a percent each.
(0) Personal income for March rose by 0.1%, which was far surpassed by personal spending of 0.9% for the month (on top of the 0.1% spending gain for February, which was included in the report due to the prior government shutdown, which delayed a variety of results). This lowered the personal savings rate by nearly a percent to 6.5% for the month. The PCE inflation gauge rose by 0.2% on a headline level in March, while core PCE increased by a less than a tenth of a percent. This took the year-over-year PCE change to 1.5% for headline and 1.6% for core, which are each far below the Fed’s targets (especially being that the PCE inflation index is their preferred measure over CPI, due to its composition). While the PCE and CPI differ in their composition, which explains their divergent results at times, lower prices in transportation, apparel and health care have lowered core PCE by about -0.2% in recent months.
(-) The Chicago PMI fell by -6.1 points to 52.6, in contrast to an expected increase to 59.1. While order backlogs increased, the other key indicators, including new orders, production and employment, all declined. The anecdotal question of the month addressed expected hiring levels over the next several months, with just over half of firms planning on adding workers, but more of the temporary than permanent variety. In keeping with other manufacturing data recently, it will remain to be seen whether this is the beginning of a downward trend, or another mid-cycle slowdown, of which we’ve seen many over the past decade.
(0) The S&P/Case-Shiller home price index for February rose 0.2%, which matched expectations. Gains continued to be widespread among the 20 constituent cities, led by increases of nearly a percent in Tampa, and Denver just behind that. Year-over-year, the index continued to decelerate, as it has steadily over the past year, to 3.0%. While low inventories have kept housing prices buoyant, especially in hot markets, lower interest rates have also improved financing conditions. However, the extreme home price recovery post-recession appears to show signs of flattening, although seasonal adjustments have played a role, which increases the room for error of these indexes.
(+) Pending home sales rose by 3.8% for the month of March, which surpassed the 1.5% increase expected. By region, sales in the West and South gained in the mid-single digits, while the Northeast was the only area to experience a decline, of nearly -2%. Year-over-year, the rate of change improved by a few percent, but remained negative at just over -3%. This monthly result bodes well for upcoming existing home sales releases.
(+) The Conference Board’s index of consumer confidence rose by 5 points in April to 129.2, surpassing the 126.8 level expected. Consumer assessments of current conditions and future expectations both rose by roughly the same amount, as did the labor differential, which measures the ease in finding employment—all pointing to a relatively balanced report.
(0) Initial jobless claims for the Apr. 27 ending week were flat at 230k, a bit above the expected 215k level. Continuing claims for the Apr. 20 week, on the other hand, rose by 17k to 1.671 mil., above the median forecast of 1.660 mil. No anomalies were reported, with the largest claim activity, in both directions, occurred in the largest states, although the timing of Easter weekend may have played a role.
(+) The ADP private payrolls report for April showed a gain of 275k jobs, which far surpassed the forecasted 180k expected. This was in addition to an upward revision for March, to 151k. Services jobs gained 223k, with strength in professional/business services and education/health, while goods-producing jobs also gained a solid 52k, predominately led by a recovery in construction, while manufacturing jobs were only up by 5k. Interestingly, ADP themselves mentioned that the strength of the report seemed to overstate the strength of the underlying economy, due to the fact that prior government payroll and claims data are included as inputs into the assumptions, which included a significant weather effect.
(+) The employment situation report for April came in stronger than expected, although the rebound will likely be dismissed to some degree due to the weather-related rebound effects. Nonfarm payrolls rose by 263k, which surpassed expectations calling for 190k or so—this was coupled with positive revisions on net for two prior months. Service jobs rose by 202k, with gains led by professional/business services at 76k, notably by administrative/support personnel and computer-based jobs, and education/health employment up 62k. Construction jobs rose by 33k, in keeping with weather improvements, while manufacturing jobs rose slightly, by 4k, but was offset by a decline in mining. On the negative side, retail and general merchandise jobs declined by around -10k each.
The unemployment rate fell by -0.2% to 3.6%, which is the lowest level since December 1969. The labor force participation rate similarly fell by two-tenths to 62.8%, in keeping with where it was a year ago. The U-6 underemployment rate, however, was unchanged at 7.3%, where it’s been for several straight months. Household survey employment, by contrast to nonfarm payrolls, showed a decline of -103k jobs, notably by weakness in the self-employment category.
Average weekly hours rose by 0.2% to $27.77, bringing the year-over-year change to 3.2%—running at a faster clip than broader inflation. The average workweek, on the other hand, fell by -0.1 hour to 34.4 hours.
Prior to the nonfarm payrolls, unit labor costs fell by -0.9% in the first quarter, which was a surprise compared to the 1.5% increase expected, and pulled the year-over-year rate down from 1.2% to 0.1%. There appeared to be a substantial impact from self-employed hours, while other data was less affected. Reports of Q1 nonfarm productivity showed a gain of 3.6%, which surpassed the forecast of 2.2%, and took the year-over-year rate to an 8-year high of 2.4%. Productivity is often one of the least-understood areas in economics, in terms of the forces driving it, especially in the short term, which has been acknowledged by Fed Chair Powell himself during post-meeting press conferences. However, it’s the second critical component to economic growth, coupled with labor force growth.
Market Notes
| Period ending 5/3/2019 | 1 Week (%) | YTD (%) |
| DJIA | -0.14 | 14.41 |
| S&P 500 | 0.22 | 18.26 |
| Russell 2000 | 1.42 | 20.19 |
| MSCI-EAFE | 0.29 | 13.00 |
| MSCI-EM | 0.44 | 12.11 |
| BBgBarc U.S. Aggregate | -0.06 | 2.90 |
| 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 |
| 4/26/2019 | 2.42 | 2.28 | 2.29 | 2.51 | 2.92 |
| 5/3/2019 | 2.43 | 2.33 | 2.33 | 2.54 | 2.93 |
U.S. stocks gained slightly on net, while small caps were up by well over a percent. By sector, financials, health care and industrials gained over a percent, while energy lagged the pack with a -3% decline, in keeping with weaker oil prices. It was one of the heaviest reporting weeks for Q1 earnings, with nearly 80% now having reported for the S&P, and the year-over-year decline now being trimmed to below -1%, mostly due to recent improvements in the health care sector. Corporate earnings, however, have become more bifurcated, with increased volatility for firms beating or missing their estimates resulting in wider price moves.
It was an interesting week from a sentiment standpoint for a variety of reasons. On a macro level, markets appeared a bit confused by the FOMC statement and subsequent Powell press conference. It appeared that a more dovish stance was hoped for—in keeping with a rising probability of a fed funds rate cut, as implied by futures markets—while Powell was more resolute in entrenching the ‘patient’ current policy, noting economic growth as solid, and dismissing currently low inflation as a temporary condition. The jobs report offered another mixed bag, with strong results naturally pointing to healthy labor markets and implying decent economic growth; while, at the same time, results that are ‘too good’ will put additional pressure back on possible continuation of Fed rate hikes. Time will tell, but this could be another sentiment inflection point.
Foreign stocks in both developed and emerging markets on net gained to a similar minor degree, in keeping with U.S. stocks. While there were some continued signs of continued tempering growth in Europe, notably in sentiment and industrial data, Q1 GDP came in 0.4% higher, which was stronger than the prior Q4 pace of 0.2%. The Bank of England held off on raising rates, due to ongoing uncertainty over Brexit, however, noted a continued need to pick up the pace due to embedded domestic inflation (partially as a result of a weaker British pound/stronger U.S. dollar). This makes England a bit of an outlier in the world in sticking with more hawkish sentiment. Japanese stock markets were closed for the week in acknowledgement of a new emperor being installed (ceremonial only). Emerging markets performed on par with developed, with continued hopes in China of a U.S. trade deal, although a few key components still appear to be in the process of negotiation.
U.S. bonds were down just a few basis points on the week, as interest rates ticked slightly higher on the Fed’s lack of ‘dovishness’ on top of Friday’s strong employment numbers. Treasuries and high yield were equally flat, while investment-grade corporates lagged and floating rate bank loans gained along with higher rate sentiment. Foreign bonds were helped by the weaker dollar, with slight gains in developed markets and larger gains in emerging markets.
Commodities were generally down on the week across the board, to varying degrees, despite a weaker dollar. Industrial metals were the worst-performing segment, followed by crude oil, which fell in price by -2% to just under $62/barrel. Fears of a supply crunch following the planned expiration of waivers of Iranian exports sanctions were offset by far-stronger than expected U.S. inventories.
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.