Your Weekly Update for Tuesday, May 28, 2019
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Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates fell for the fourth consecutive week and continued the medium-term trend of lower rates since late 2018. The drop in mortgage rates is causing purchase demand to rise and the mix of demand is skewing to the higher end as more affluent consumers are typically more responsive to declines in rates.”
The 30-year fixed-rate mortgage (FRM) averaged 4.06 percent with an average 0.5 point for the week ending May 23, 2019, down from last week when it averaged 4.07 percent. A year ago at this time, the 30-year FRM averaged 4.66 percent.
The 15-year FRM this week averaged 3.51 percent with an average 0.4 point, down from last week when it averaged 3.53 percent. A year ago at this time, the 15-year FRM averaged 4.15 percent.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.68 percent with an average 0.4 point, up from last week when it averaged 3.66 percent. A year ago at this time, the 5-year ARM averaged 3.87 percent.
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 continued down last week. The Dow Jones Industrial Average fell 0.69% to 25,585.96. The S&P500 ended down 1.17% to 2,826.06, and the Nasdaq Composite finished down 2.29% to 7,637.01. The annual yield on the 30-year Treasury fell 5 basis points to 2.75%. Markets were closed Monday in honor of Memorial Day.
Economic data for the week included slightly disappointing housing sales, and weaker durable goods orders, but jobless claims that remained status quo at a strong cyclical level.
Equity markets globally generally lost ground as trade tensions between the U.S. and China intensified. Bonds, as expected, fared well as investors fled from risk—pushing down interest rates. Commodities were mixed, with weather affects pushing commodity prices higher, while higher inventories and slowdown concerns damped sentiment for crude oil.
Economic Notes
(0/-) Durable goods orders for April fell by -2.1%, just beyond the -2.0% drop expected. The headline figure was driven by an unsurprising -18% decline in aircraft/parts, the most volatile piece of the report (this month based on order adjustments from the troubled Boeing 737 Max). The more stable core durable goods orders component fell -0.9%; this was weaker than the consensus forecast of -0.3%, in addition to a revision downward for March. Core capital goods shipments were unchanged, bucking expectations for a tenth of a percent decline, while the prior month data was revised downward a bit here as well. A drop in primary metals and communications were offset by machinery and fabricated metals, which could be a positive. Overall, the report was mixed, which has led to a few downward revisions for Q2 GDP, which is already coming in at a very tempered estimated rate of 1.0-1.5%, which reflects a flattening of growth when looked at over the full year.
(-) Existing home sales for April fell -0.4% to a seasonally-adjusted annualized rate of 5.19 million units, which disappointed relative to an expected increase of 2.7%. Any positivity for the month was driven by condos/co-ops, which rose 6%, while sales for the far larger single-family home group fell by -1%. Regionally, sales in the West rose by 2%, while those in the Northeast fell by -5% to lag by the greatest degree. Existing home sales are down over -4% from levels last April, while the median existing home sales price is up nearly 4% from that time at $267,300.
(-) New home sales for April fell by -6.9% to a seasonally-adjusted annualized level of 673k units, below the forecasted level of 675k, although revisions for prior months were slightly positive. Regionally, sales lost ground in almost every area, led by the South and West, while the Northeast experienced a minor increase for the month. On the bright side, sales are up 7% from a year ago. From an inventory perspective, months’ supply of new homes ticked up by 0.3 to 5.9 months, while the median sales price came in at $342,200, up nearly 9% from April 2018.
These represented another mixed set of reports for the early stages of the spring housing season, in keeping with the last several years, where hopes for a pickup in home sales continues. Low inventories are certainly one problem, as is affordability, although masked by measures such as ‘days on the market,’ which are two days below last year at this time at 24 days. Tempered interest rates, nearly a percent lower than levels of last fall, may continue to help.
(0) Initial jobless claims for the May 18 ending week fell by -1k to 211k, under the 215k level expected. Continuing claims for the May 11 week, on the other hand, rose 12k to 1.676 mil, which came in above the 1.666 mil. forecast. No anomalies were reported by the DOL, with claims levels remaining at very strong levels.
(0) The April/May FOMC meeting minutes offered little surprise, with a continued focus on patience. Per descriptions already noted in the formal statement at the time, growth was considered solid, but spending by households and businesses has tempered. A key item of discussion appeared to be the level of inflation, with several committee members viewing the under-2% level as ‘transitory,’ while others expressed more concern over the longer-term lower inflation trend. Also discussed were the ramifications of changing (shortening) the average maturity of the Fed’s balance sheet of treasuries.
Levels of corporate debt—notably the non-financial sector variety—were also discussed by the FOMC, as a component of their mandate of financial stability. While others have shared this concern, due to the lateness of the cycle and gradually rising debt levels, other strategists have a more optimistic view, due to the stronger underlying company fundamentals relative to past cycles. While manufacturing and other growth measures had improved a bit during the year thus far, this meeting occurred prior to the most recent round of U.S.-China tariff escalations, so upcoming meetings will offer more color on how this affects their assessments and policy, although, this is likely to keep policy eased as opposed to tightened.
Market Notes
| Period ending 5/24/2019 | 1 Week (%) | YTD (%) |
| DJIA | -0.63 | 10.79 |
| S&P 500 | -1.14 | 13.67 |
| Russell 2000 | -1.39 | 12.85 |
| MSCI-EAFE | -0.51 | 9.69 |
| MSCI-EM | -0.98 | 2.16 |
| BBgBarc U.S. Aggregate | 0.27 | 3.84 |
| 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 |
| 5/17/2019 | 2.39 | 2.20 | 2.17 | 2.39 | 2.82 |
| 5/24/2019 | 2.35 | 2.16 | 2.12 | 2.32 | 2.75 |
U.S. stocks started another week in the red as Google, in keeping with announced U.S. restrictions on trade with Chinese telecom firm Huawei, limited the firm to the public version of its Android system. However, a 90-day reprieve granted by American officials resulted in improved hopes for resolution, apparently, once potential damage to tech firm revenues was re-considered. Additionally, a $16 billion White House aid package for farmers received mixed reviews, as it implied the possibility of tariffs being in place for a longer stretch than previously thought. While equity sentiment bounced around through the week, the net result was negative.
From a sector standpoint, defensive utilities and health care ended with the only positive returns for the week; energy and technology were the worst performers. The latter were hit by oddly falling oil prices, and concerns over supply chain impacts of the Huawei decision weighed on the broader technology sector—notably semiconductors, which are sensitive to not only this end-buyer specific issue, but also the winds of global demand sentiment. Fears of a ‘tech cold war’ have cast a bit of a cloud over the group, due to the intertwined fortunes of consumer product end users and supply chains involving both the U.S. and China.
Foreign stocks behaved similarly to U.S. equities, with Europe, the U.K. and emerging markets experiencing similar losses—all again hinged on sentiment surrounding U.S.-China trade and implications elsewhere. In the U.K. specifically, the resignation of British PM Theresa May effective in early June again heightened uncertainty over Brexit negotiations going forward, with groups wanting a ‘soft’ Brexit and no Brexit at all continuing to battle to an impasse, while the probability of a ‘no deal’ appears to have fallen as of late. However, this is obviously a very fluid environment, with several momentum shifts and false starts since the original referendum, so assigning odds at any given time is futile.
Elsewhere in Europe, manufacturing numbers continued to show contraction, which has continued to dampen sentiment as hopes for a near-term recovery without additional stimulus appear mixed. The outcome of the EU parliamentary elections was also a wild card—however, when the ballots were tallied, pro-EU parties generally appeared to retain a majority, although more extreme parties gained ground over the more centrist block. (Interestingly, the newly formed U.K. ‘Brexit’ party took a third of the British vote; the irony of their participation in the EU is fairly ironic.) Japan fared a bit better, with only minor losses on the week, with economic growth for Q1 coming in at a positive annualized rate of over 2%, bucking expectations for a slight decline. In emerging markets, the proposed tech restrictions punished Chinese stocks, while the predicted outcome of the Indian election that kept reform-minded PM Mode in office, boosted markets in that region substantially.
U.S. bonds fared decently due to a movement in investor flows away from risk last week. The bellwether 10-year treasury saw another decline in yield to just over 2.3%, which is a benefit to financing (notably corporate refinancings and home mortgages tied to this bogey), but the opposite direction of where many strategists and economists thought rates would be at this point in the cycle—more like above 3%. Governments outperformed investment-grade corporates, while high yield and floating rate bank loans lost ground. A weaker dollar boosted returns for foreign bonds, which also benefitted from the ‘risk-off’ trade in developed markets, although emerging market debt also fared well.
Real estate bucked the trend by rising slightly for the week, falling in the gap between weaker equity prices and falling interest rates, which benefitted rate-sensitive assets. A weaker dollar served to help international real estate somewhat, at least in Asia.
Commodities were mixed to negative on the week on net, with agricultural contracts gaining sharply (corn and wheat, more than soybeans, due to continued severe weather conditions in the Midwest), as did softs, which offset the sharp decline in the energy sector. The price of crude oil fell by a dramatic -7% on the week to just under $59/barrel. The drop in price has been somewhat surprising, in light of increased tensions with Iran in the Middle East. This normal catalyst for upward movements in prices was outweighed by higher U.S. inventories, coupled with fears of a widespread economic slowing resulting from a longer-than-expected tariff war and broader ramifications globally.
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.