Your Weekly Update for Monday, May 20, 2019
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Sam Khater, Freddie Mac’s chief economist, says, “Modestly weaker consumer spending and manufacturing data, along with continued jitters around trade policy, caused interest rates to decline throughout the yield curve. While signals from the financial markets are flashing caution signs, the real economy remains on solid ground with steady job growth and five-decade low unemployment rates, which will drive up home sales this summer.”
The 30-year fixed-rate mortgage (FRM) averaged 4.07% with an average 0.5 point for the week ending May 16, 2019, down from last week when it averaged 4.10%. A year ago at this time, the 30-year FRM averaged 4.61%.
The 15-year FRM this week averaged 3.53% with an average 0.4 point, down from last week when it averaged 3.57%. A year ago at this time, the 15-year FRM averaged 4.08%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.66% with an average 0.4 point, up from last week when it averaged 3.63%. A year ago at this time, the 5-year ARM averaged 3.82%.
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 0.69% to 25,222.51. The S&P500 ended down 0.76% to 2,859.53, and the Nasdaq Composite finished down 1.27% to 7,816.29. The annual yield on the 30-year Treasury fell 5 basis points to 2.82%.
Economic data for the week included weakness in retail sales and industrial production, while several regional manufacturing surveys, jobless claims, consumer sentiment, and housing stats came in stronger than expected.
Equity markets in the U.S. and in emerging markets ended the week with declines, while developed foreign regions gained slightly on net. On the other hand, bonds and real estate fared decently as interest rates declined. Commodities gained, despite the stronger dollar, due to agriculture and energy affected by sector-specific factors, such as weather and geopolitics.
(-) Retail sales for April came in surprisingly weaker than expected, declining -0.2% from the prior month, versus consensus forecasts for a 0.2% increase. Removing the more volatile components of autos, gasoline and building materials took the core measure to flat on the month, which was below the 0.3% increase expected. Key components for the month included a -1% drop in auto sales, which offset the 2% rise in gas station receipts (which is typically coupled with gasoline price increases, of which there is little control over from a spending standpoint). Otherwise, sales of electronics/appliances, health/personal care, clothing/accessories, and non-store/internet sales all declined to a certain degree for the month.
(-) Industrial production fell by -0.5% in April, versus expectations of an unchanged reading. Manufacturing production was in keeping with broader results, down a half-percent, led by a -2% drop in business equipment. Utilities production fell by over -3% as well. Capacity utilization came in at 77.9% for April, down -0.6% from the prior month, and below the 78.7% forecast.
(+) The May edition of the New York Empire State manufacturing index rose 7.7 points to 17.8, beating expectations for a lesser gain to 8.0. Under the hood, new orders and shipments increased by several points, as did expected business conditions over the next six months by nearly 20 points, while employment fell by -7 points—all remained solidly in positive territory.
(+) Similarly, the Philadelphia Fed manufacturing index rose by 8.1 points in May to 16.6, beating forecasts calling for 9.0. Shipments and employment both saw gains during the month, while new orders fell by nearly -5 points—however, all remained in expansion. Business activity expectations for the coming six months also ticked up slightly. This report, along with the data from the New York region, was a welcome surprise in a trend that had pointed to weakened manufacturing results as of late.
(+) The NAHB homebuilder index rose 3 points in May to 66, beating forecasts calling for 64. The best reading was current sales, on par with the overall index, while prospective buyer traffic and future sales rose to a lesser degree. Regionally, the Northeast rose by a strong 10 points, while the Midwest lagged with an unchanged result. This overall number points to stronger building in months ahead, which could correlate to future housing starts.
(+) Housing starts for April rose by 5.7% to a seasonally-adjusted average annualized level of 1.235 mil. units, a bit above the 1.209 mil. expected, including a revision higher for March. Single-family starts rose by 6%, which was similar to multi-family, up just under 5%. Regionally, the Northeast and Midwest rose by over 80% and 40%, respectively, while starts in the South and West each fell by just over -5%. Building permits rose 0.6%, beating forecasts calling for a nominal 0.1% increase. Multi-family permits rose in the West and Midwest in the lower single-digits, while the Northeast lagged with a decline of -4%.
(0) Import prices rose 0.2% in April, falling short of the 0.7% increase expected. Removing petroleum from the equation (which rose 6%), however, brought prices down -0.6% for the month on a core level, led by weaker prices for autos, as well as capital goods, where prices were down by nearly a half-percent. These declines were offset by food prices, which rose 3%, along with a slight increase for industrial goods.
(+/0) The Conference Board’s Index of Leading Economic Indicators increased by 0.2% for April, continuing a string of similar recent results over the last several months. Contributors to the result were the majority of indicators, including stock prices, financial conditions and consumer sentiment, while manufacturing was a bit of a detractor. The coincident indicator rose by 0.1%, while the lagging economic indicator declined by -0.1% to break a string of recent increases. The leading indicator’s pace over the last six months was an annualized 1.3%, lower than the 4.3% rate of the prior six months, in keeping with the other two indicators which have also decelerated.
Interestingly, the Conference Board noted that, according to their calculations, July would represent the threshold for bringing the current economic expansion into its 11th year—which is already the longest in U.S. history. This paints a very similar picture to the results of the last few months—continued economic growth, albeit at a slower pace than that of a year ago.
Source: The Conference Board. Shaded areas represent recessions as determined by the NBER Business Cycle Dating Committee.
(+) The preliminary Univ. of Michigan consumer sentiment index for May showed an increase of 5.2 points to 102.4, surpassing the 97.2 level expected. Assessments of current economic conditions ticked up by 0.1 of a point, while expectations for the future represented most of the change, up 8.6 points over last month. Inflation expectations for the coming year rose 0.3% to 2.8%, as did the 5-10 year inflation estimates to 2.6%—each of which could have been related to higher gasoline prices as of late, as well as potential concerns over the impact of tariffs.
(+) Initial jobless claims for the May 11 ending week fell to 212k, which was below the 220k level expected. Continuing claims for the May 4 week also declined, by -18k, to 1.660 mil., which was below the 1.673 mil. expected by consensus. No anomalies were reported, other than a reversal of higher claims for New York in prior weeks. Overall, despite the normal week-to-week back-and-forth in the data, claims levels remain extremely low and indicative of a strong labor market environment.
Question of the Week: It appears the other shoe has dropped. What is the expected impact of the newly U.S.-imposed tariffs on Chinese imports?
It may not be as dramatic as laid out in several worst-case scenarios, but intensification of tensions doesn’t appear to be a positive. (On a historical basis generally, restricting trade typically doesn’t enhance prospects for either side, long-term.) While the U.S. feels that taking a stand against trade infractions (mostly on the intellectual property side) by remaining steadfast in its demands is critical, the Chinese are attempting to save face, with economic stability, internal control, and underlying social harmony remaining key objectives. According to comments from a variety of experts involved with similar trade negotiations, critical sticking points have been the reluctance of the Chinese to formally codify laws against the stealing of technology and other inappropriate intellectual property transfers, in addition to the inability to agree on details of verification the U.S. is demanding. It seems, according to some, the hard line appears partially based on the reputation of the Chinese to delay or avoid previously agreed-to commitments.
The Chinese are also sensitive to a trade deal appearing ‘imbalanced,’ considering a history of perceived overreach by foreign powers over their economy in the past—notably by the British in the 19th century. Sensitivity to these perceptions internally and externally may be just as important to the outcome of the negotiations as the economic component (as it might be to the U.S. administration in light of the 2020 elections). This is especially true with the 70th anniversary of the Chinese People’s Republic coming up, as avoiding an economic downturn at that time would be preferred. The U.S. position has been also supported by protectionist rhetoric from both sides of the aisle, and segments of the American public, where China has been cast as a villain in the narrative of technological change and jobs moving overseas—although it’s been debated by economists whether we have suffered as much from job losses in certain industries than we’ve benefitted from widespread cheaper imports.
Thus far, this second tranche of tariffs affects $200 bil. in Chinese exports to the U.S., while China has threatened to slap up to 25% tariffs on $60 bil. of U.S. exports to China. A third and final tranche of ‘all remaining’ Chinese imports, totaling up to $300 bil. is being reviewed with ‘paperwork being drawn up,’ but wouldn’t take effect until early July at the earliest, which is just after the upcoming U.S.-China meeting in Japan to be held in late June. Naturally, it appears the timing was designed to serve as an incentive for some type of deal to be inked by then. What is also interesting is while a formal ‘trade agreement’ would require Congressional approval (such as NAFTA’s replacement), the imposition (and any subsequent removal) of tariffs separately is a power housed in the executive branch, which puts additional pressure on upcoming meetings.
If the full brunt of tariffs were imposed on Chinese imports (meaning that third tranche of $300 bil.), estimates indicate a reduction of up to about a half-percent from U.S. GDP growth, which is a significant percentage of the total from recent quarters—mostly due to the reduction in broader global growth than a result of imports/exports directly. It appears the impact on Chinese growth could be even more severe, which could push the Chinese government into enacting additional stimulus domestically, such as fiscal accommodation as well as currency devaluation to make exports more attractively priced. They have been hesitant to go overboard with this, due to already-high levels of debt and desire to unwind excess credit from the financial system.
In the long-term, though, the imposing of tariffs is a mixed bag. If this is a negotiation tactic, and a long-term trade deal eventually is worked out, previous estimates of moderate (but not robust) economic growth globally still apply. However, if the tariff battle continues or intensifies, it could lessen growth. Tariffs are essentially a tax, and higher taxes have the tendency to bog down commercial activity and raise prices. In more challenged areas, such as Europe and several emerging market nations (including the Far East, a region heavily affected by Chinese trade), fissures in economies could widen and create a need for continued and even enhanced accommodative policies. This could keep interest rates ‘lower for longer,’ due to both the need for stimulus and fears of a policy error by normalizing rates higher too early. Indirectly, it could also exacerbate political tensions in a variety of nations, notably in Europe, but also in emerging markets and the U.S., where populist policies in an apparent shift away from globalization continue to make headway. In fact, some pundits have called for ‘peak globalization’ already having happened, although it’s difficult to measure such dramatic proclamations except in hindsight.
From a market perspective, it’s all about future growth prospects. An extended period of slower global growth would negatively affect earnings, which justifies lower valuations—explaining recent stock market volatility. However, it could affect other risk assets as well, such as certain commodities (like cyclically-sensitive industrial metals or oil to some degree), as well as corporate credit, where tighter spreads later in the economic cycle would be more sensitive to weaker fundamentals.
There are also other sensitivities here, and optics involving the 2020 U.S. election. It’s important for the administration to see this deal as ‘strong,’ not only to appeal to the voting base, but to also pre-empt pushback from Congressional Democrats. At the same time, the rise of China towards superpower status has raised concerns about an overdependence on their involvement in the supply chain for U.S. goods for national security reasons, which can be at odds with economic/cost efficiencies. Due to non-economic nature of these issues, the outcome is much more dependent on the harder-to-predict political winds.
What else could go wrong? A lengthy delay or lack of a trade deal could fuel growing frustration from the farming segment in the Midwest and South, due to China’s pushback on importing U.S. soybean and grain exports during the critical spring planting window. The Chinese, on the other hand, could chip at the U.S. in other ways, such as restricting operating activity of U.S. companies within its borders, which affects technology firms in particular. A well-quoted fear is that the Chinese could choose to unload more U.S. Treasury bond assets, although there is some doubt about how realistic this is, being that Treasuries remain the world’s primary ‘safe haven’ asset—with few competitors. Naturally, an enhancement of resentment and/or nationalistic sentiment would result in more of an adversarial and cooperative relationship going forward.
|Period ending 5/17/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.33||3.57|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks began the week with an ugly Monday, in a continuation of last week—due to continued aftereffects of the U.S.-Chinese trade situation seemingly breaking down. However, conditions quickly improved a bit during the week, as earlier rumors (and later confirmation) of a postponement of a decision for up to six months about implementing widespread auto tariffs, which somewhat lowers the chances of their implementation. This affects the EU and Japan, more than other regions. By the end of the week, the White House removed steel import tariffs on Canada and Mexico, seen as a positive, but imposed a ban on trade with Chinese telecom firm Huawei, which could disrupt supply chains for technology manufacturers.
Traditionally defensive utilities and consumer staples ended the week as the only sectors earning positive returns, helped by a strong earnings results from Walmart, while financials and industrial suffered the most severe damage—each down around -2% for the week.
Foreign stocks in developed markets fared better than U.S. equities, gaining a percent in local terms, despite a stronger U.S. dollar pulling these lower. Emerging markets fared worse, with continuations of trade concerns due to the ramped up U.S.-China rhetoric. While Brazil fared worst, down about -5%, the Far East group was similarly punished due to embedded trade linkages with China.
U.S. bonds fared well during the week, as interest rates declined by several basis points across the treasury yield curve, which remained partially in inversion for the near-term maturities. This is in spite of rumors claiming the Chinese sold a multi-year high number of Treasuries. Governments outperformed investment-grade corporates slightly, as spreads widened. More severely, this affected high yield bonds, which lost ground during the week. A stronger dollar offset flight-to-quality impacts in developed market government bonds, which ended flat, while emerging market debt ended in the negative—affected by widening risk spreads.
Real estate, in contrast to broader equities, gained ground during the week, proving their value as a portfolio diversifier yet again. Foreign REITs, however, lost ground a bit, albeit to a lesser degree than broader foreign equities.
Commodities generally gained on the week, despite the typical headwind of a stronger U.S. dollar, with gains of nearly 5% in the agricultural space (led by strength in both wheat and corn, led by threats of crop disease and concerns over storms and delayed wet planting conditions), followed by a general rise in energy. The price of crude oil ticked up by nearly 2% to just under $63/barrel, a tempered pace despite enhanced confrontational rhetoric with Iran.
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.