Your Weekly Update for Monday, May 13, 2019
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Sam Khater, Freddie Mac’s chief economist, says, “Investors wary of the current economic situation due to ongoing trade disputes resorted to the bond market, causing the 10-year treasury yield to decrease. A combination of low mortgage rates, a strong job market and modest wage growth should spur homebuyer interest and also serve as an incentive for homeowners looking to refinance this spring.”
The 30-year fixed-rate mortgage (FRM) averaged 4.10% with an average 0.5 point for the week ending May 9, 2019, down from last week when it averaged 4.14%. A year ago at this time, the 30-year FRM averaged 4.55%.
The 15-year FRM this week averaged 3.57% with an average 0.4 point, down from last week when it averaged 3.60%. A year ago at this time, the 15-year FRM averaged 4.01%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.63% with an average 0.4 point, down from last week when it averaged 3.68%. A year ago at this time, the 5-year ARM averaged 3.77%.
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.
Markets were down last week. The Dow Jones Industrial Average fell 2.12% to 25,942.37. The S&P500 ended down 2.18%9% to 2,881.40, and the Nasdaq Composite finished down 3.03% to 7,916.94. The annual yield on the 30-year Treasury fell 5 basis points to 2.87%.
Economic data for the week included ongoing mixed to lower reports for producer and consumer inflation, little changed conditions but lower demand for bank loans, and continued positive jobs markets and claims data.
Equities fell across the globe last week, due to threats and eventual implementation of U.S.-China tariffs. Government bonds fared well as flows moved away from risk, while credit lagged a bit. Commodities were mixed to lower, with little change in either the dollar or crude oil prices.
(0) The producer price index rose 0.2% in April, which was a tenth of a percent below expectations. While energy prices rose 2%, a slight drop in food prices brought the Core PPI down to a gain of only 0.1%, while removing trade services as well pushed the monthly gain back up to 0.4%. Medical care prices represented a sizable input, rising 0.3% for the month.
(0) The consumer price index for April rose by 0.3% on the headline side, and just over 0.1% for core, not including food and energy—each was about a tenth of a percent below forecast. Energy prices rose 3% for the month (gasoline by nearly 6%), which offset a small decline in food prices. On the core side, rental inflation continued to move upward at a multi-decade high pace, as did medical care commodities, which offset price weakness in used car prices and apparel. On a year-over-year basis, headline and core CPI rose 2.0% and 2.1%, respectively. In keeping with other measures, and adjusting for composition of CPI relative to the Fed’s other preferred measures, inflation is continuing to run a bit below target, which continues to be a head-scratcher for some economists.
(0) The March trade balance ticked a bit further into deficit, at -$50.0 bil., a notch tighter than the expected -$50.1 bil. Both sides were relatively balanced, as both imports and exports were about 1% higher than the prior month. Imports included a 4% gain in petroleum and 8% gain in agricultural products, while exports were led by a 7% increase in agriculture and 4% in industrial supplies.
(+) The government JOLTS job openings report for March showed as a strong recovery from February, rising 346k to 7.488 mil., surpassing the 7.350 mil. expected. The hiring and quits rate remained unchanged at 3.8% and 2.3%, respectively, while the layoff rate fell a tenth to 1.1% and the job openings rate rose 0.2% to 4.7%. Good news across the board.
(-) Initial jobless claims for the May 4 ending week fell to 228k, but not quite to the 220k level expected. Continuing claims for the Apr. 27 week rose by 13k to 1.684 mil., a bit above the 1.670 mil. forecast. The key initial claims anomaly reported was the large increase of 11k in New York for that week, while those in neighboring New Jersey fell by -8k. Other than those unexplained reports, overall claims continue to run at very low levels.
(0) The Federal Reserve’s Senior Loan Officer Opinion survey for Q1 showed little change in a variety of metrics from the prior quarter. This is a unique survey in that there is very little quantifiable data, other than the percentage of banks seeing higher, neutral or lower outcomes in each area surveyed—compared to the prior quarter. (Interestingly, this was despite lower treasury interest rates and credit spreads over the period, so this could reflect reported economic slowing otherwise.) Commercial/industrial lending standards and terms appeared to ease slightly, while there was weaker demand for such loans in the period. Commercial real estate loans looked similar, with little change in lender standards, except for more speculative commercial/development borrowing, which tightened; but this was accompanied by a drop in demand, especially for construction loans in about a quarter of the banks surveyed. Residential real estate standards were also little changed, but demand here also slowed in both the conventional and home equity variety. In other areas, auto loan availability and demand were little changed, but credit card standards tightened in just under a quarter of banks, while demand on the consumer side also fell off somewhat.
|Period ending 5/10/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.31||3.22|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks experienced a negative week (which continues this morning), as hopes for a U.S.-China trade deal in the works for months deteriorated and, by Friday, implementation of additional tariffs following a pre-set deadline. Fears of China backing out of a deal continued to put pressure on equity markets, where the technicals were seen as a bit extended by some during recent weeks. It was apparent that almost all equity sentiment for the week was driven by the tariff issue, which resulted in the removal of the market’s premium of an assumed completed trade deal to some degree.
Specifically, the week had started poorly as tweets over the prior weekend from the President regarding frustration with progress in the U.S.-China trade negotiations pointed to tariff rate increases taking effect ‘shortly’ (which alluded to the previously-set deadline of May 10). This was in regard to the second $200 bil. tranche of goods being upped from 10% to 25% (the relatively minor first tranche at a tariff rate of 25% affecting $16 bil. of goods went into effect last summer).
Despite the negative headlines during the week, there appears to still be a window of time for a deal to be hashed out, alluded to by Treasury Secretary Mnuchin, stating that talks were continuing with progress being made. The disconnect between macro policy and micro logistics were perhaps best exemplified by analysts reviewing the approximate 2-3 week period of a cargo ship’s transit time from China to the U.S. for potential impacts, as tariffs would not technically apply to goods already en route. Assuming this second tranche remains in effect for now, this would leave the final tranche of $300 bil. in Chinese exports under threat, with an announcement that ‘paperwork is being drafted’ to begin the process of implementing tariffs here as well, but this could take time and leaves room for a deal in the meantime. While it’s certainly likely the tariff impositions are a negotiating tactic, it remains to be seen how much disruption and uncertainty will affect markets in the interim.
Every sector of the S&P ended in the negative, with traditionally defensive staples ending the week strongest, with minimal losses, along with energy; while technology, industrials and materials brought up the rear all losing near or more than -2.5%. The Russell 2000 small cap group actually tipped back into a -10% correction slightly, measured from last summer’s highs.
Foreign stocks in Europe and the U.K. fell in similar fashion to U.S. equities, while Japan fared a bit worse, due to tighter trade relations with China, and emerging markets declined by up to -5%, led by more severe declines in China and South Korea, which are naturally both heavily immersed in the zone of trade tensions. Other regions, such as Latin America, suffered losses on par with developed market equities.
U.S. bonds fared well, as expected, with flows moving away from risk assets, which pushed fixed income prices higher and yields lower. The yield curve is showing a pronounced inversion between the 3 month Treasury bill and 2-5 year note, before turning positive again going out toward 10 to 30 years. This is in keeping with continued higher market probabilities of a downturn in the next several years. For the week, Treasuries fared best, followed by investment-grade corporates up a few basis points, while floating rate and high yield lost up to a half-percent on the week. Foreign bonds performed similarly, with little change in the dollar to move the needle, as developed market treasuries gained ground, while emerging market local and USD-denominated bonds both declined on the week.
Real estate fared better than broader equity markets, declining only by about a percent. International fared better, actually experiencing a gain for the week as interest rates remained contained, and REITs being seen as a bit of a safe haven away trade-related concerns directly.
Commodities were mixed, with gains in precious metals due to movements away from risk in financial markets, while agriculture and industrial metals suffered due to the perceived demand implications of a longer-than-expected trade war. The price of crude oil bounced around in a trading range during the week, closing down a half-percent on net to just under $62/barrel. The Iranian output/waiver and intensification of tensions and offsetting impact of higher U.S. output has taken a backseat to global sentiment surrounding U.S.-China trade.
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.