Your Weekly Update for Monday, June 3, 2019
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Mike Elerath
National Social Security Advisor
Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
NMLS #107972
Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “While economic data points to continued strength, financial sentiment is weakening with the spread between the 10-year and the 3-month Treasury bill narrowing as fears of the impact of the trade war with China grow. Lower rates should, however, give a boost to the housing market, which has been on the upswing with both existing and new home sales picking up recently.”
The 30-year fixed-rate mortgage (FRM) averaged 3.99% with an average 0.5 point for the week ending May 30, 2019, down from last week when it averaged 4.06%. A year ago at this time, the 30-year FRM averaged 4.56%.
The 15-year FRM averaged 3.46% with an average 0.5 point, down from last week when it averaged 3.51%. A year ago at this time, the 15-year FRM averaged 4.06%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.60% 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 3.80%.
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 3% to 2,4815.04. The S&P500 ended down 2.62%% to 2,752.06, and the Nasdaq Composite finished down 2.41% to 7,453.23. The annual yield on the 30-year Treasury fell 17 basis points to 2.58%. Markets were closed Monday in honor of Memorial Day.
During a shortened week, economic data consisted of a downwardly-revised but still-strong Q1 GDP report, continued low jobless claims, and mixed consumer confidence. Housing data was again mixed to a bit weaker.
Equity markets around the world lost significant ground on the week, as existing (China) and new (Mexico) trade issues drove sentiment in developed nations, while emerging markets gained ground. Bonds again rallied with U.S. treasury rates falling to their lowest levels in several years. Commodities also were hit, due to a recent sharp decline in crude oil prices, which offset higher prices for grains.
Economic Notes
(0) The 2nd estimate for Q1 U.S. GDP was revised down by a tenth of a percent from the initial estimate to 3.1%; however, this was better than the 3.0% reading expected by consensus. Details about revisions are usually far less interesting than the headline release, although they’re more accurate. In this case, personal consumption was revised up a bit by a tenth of a percent to 1.3%, while net exports and business spending/intellectual property were reduced, as was residential investment. Core PCE inflation was also taken down nearly a tenth further, while remaining at a 1.6% year-over-year rate on a rounded basis.
Estimates for Q2 GDP continue to look tempered compared to Q1, ranging from 1.0% to 1.5%, based on a variety of estimates from various Fed banks and various economic research departments.
(0) Personal income for April rose by 0.5%, beating expectations by two-tenths of a percent; personal spending rose 0.3%, a tenth higher than forecast. Each is up 4% on a year-over-year basis, which has interpreted as quite strong. The personal savings rate inched 0.1% higher to 6.2% for the month. PCE inflation rose 0.3% on a headline basis and 0.2% on a rounded core measure, each generally in line with expectations. Year-over-year, PCE inflation for the April period was up 1.5% on a headline basis and 1.6% for core—each of which decently below the Fed target, and the reason for recent discussions by the FOMC about inflation trends and possible adjustments to their methods for targeting this metric (i.e. keeping the gas pedal depressed for a longer period of time).
(0) The advance goods trade balance report showed a tick higher in the deficit of -$0.2 bil. to -$72.1 bil., but not quite as wide as the expected -$72.7 bil. level. Goods trade activity declined on both sides, with imports falling a bit less than exports across all primary segments of capital and consumer goods, as well as autos.
(-) The FHFA house price index rose 0.1% for March, which was about half of the gain expected. Just over half of the studied regions saw home price gains in the month, led by the upper Midwest and Middle Atlantic states, while the Great Lakes region and New England lost nearly a percent for the month. The year-over-year rate continued to decline, although remaining robust on an inflation-adjusted basis, at 5.0%. Over that time, the strongest gains were 10% increases in Idaho, Nevada, and Utah; while Maryland, Delaware and Louisiana barely changed in price over the past 12 months.
(-) Similarly, the March S&P/Case-Shiller housing index also gained 0.1%, but fell far below the 0.5% expected. Three-quarters of cities in the index saw gains, led by Boston, San Diego and San Francisco, which gained up to a percent. The year-over-year increase for this measure, focused on the 20 largest urban areas, declined to an even more significant degree, to 2.7% year-over-year, which is closer to historical averages on a real after-inflation basis.
Both indexes have experienced continued deceleration over the past year, which has some economists concerned, being that housing is an important driver of economic activity on the margin. On the positive side, the recent decline in long-term treasury rates, and accompanying mortgage financing rates down again toward 4.0%, could act as a positive catalyst.
(-) Pending home sales for April fell by -1.5%, which disappointed relative to the expected increase of 0.5%. Regionally, pending sales in the Midwest rose by over a percent, while the South declined by -2.5%. Despite the perhaps less meaningful year-over-year measure for this particular metric, it improved by almost a half-percent to -3.1%. Per the usual relationship, this monthly result bodes poorly for existing home sales results in upcoming months.
(+) The Conference Board’s consumer confidence index for May rose 4.9 points to 134.1, beating expectations of 130.0. Perceptions of current conditions gained 6 points, which just slightly outperformed readings for future expectations. The labor differential that measures the availability of employment also rose by several points to a high point in this economic cycle. The result was somewhat surprising due to negative headlines regarding U.S.-China trade negotiations in mid-May, the negativity around which would normally pull down sentiment.
(-) The final Univ. of Michigan sentiment report for May showed a decline of -2.4 points to 100.0, which fell below the 101.5 expected. Assessments of present conditions and future expectations each declined to a similar degree, and coincided with negative trade headlines and a challenging period for stocks and risk assets. Inflation expectations for the coming year ticked up a tenth to 2.9%, while those for the coming 5-10 years were unchanged at 2.6%—each of which are near cyclical highs.
(0) Initial jobless claims for the May 25 ending week ticked up 3k to 215k, to just a bit above the 214k expected. Continuing claims for the May 18 week fell by a more dramatic -26k to 1.657 mil., below the 1.662 mil. expected. No unusual events or other anomalies were reported for the week, and levels remain very healthy.
Market Notes
| Period ending 5/31/2019 | 1 Week (%) | YTD (%) |
| DJIA | -2.93 | 7.54 |
| S&P 500 | -2.58 | 10.74 |
| Russell 2000 | -3.18 | 9.26 |
| MSCI-EAFE | -1.87 | 7.64 |
| MSCI-EM | 1.15 | 3.34 |
| BBgBarc U.S. Aggregate | 0.92 | 4.80 |
| 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 |
| 5/24/2019 | 2.35 | 2.16 | 2.12 | 2.32 | 2.75 |
| 5/31/2019 | 2.35 | 1.95 | 1.93 | 2.14 | 2.58 |
U.S. stocks suffered through another difficult week, due to ongoing rhetoric from the stalled trade negotiations with China, coupled with the surprise announcement of potential tariffs on Mexican imports. Every sector ended up with losses, led by energy and consumer staples, while materials, interestingly, held up best with only a -2% decline.
China announced that it was ‘considering’ an export restriction of rare earth metals to the U.S., in another escalation of the ongoing trade war. While a lower likelihood than other trade tools, due to effects on its own supply chains and labor, this has occurred before, in a behind-the-scenes Chinese trade spat with Japan in 2010. China produces roughly 70% of the world’s rare earths, used extensively in computer and mobile phone hardware, due to their unique properties and specialized uses in certain components, such as screens and batteries.
Some relief was felt later in the week, when Fed Vice Chair Clarida hinted that a more ‘accommodative’ policy could be in order if downside risks intensified. A variety of market strategists and economists have also shifted forecasts further into the ‘easing’ camp, due to the possibility of a trade deal taking far longer than expected (even moving into next year).
This points to a very real conundrum of the current U.S.-China trade negotiations: while the tariffs and uncertainty of short- and long-term policy bring a large degree of open-ended outcomes, including possible inflation and lack of business investment, a sustained economic downturn or recession could be politically problematic. In fact, as much as a strong economy has served as a tailwind for incumbent Presidents in re-election bids, a weakening economy has quickly derailed such hopes, and favors challengers—as much as any other factor in elections of recent decades. This small amount of positive sentiment was reversed again Friday as the President announced tariffs in stages to be levied against Mexico, in increments of 5% per month to a maximum of 25% until the ‘illegal immigration problem is remedied.’ This has ramifications on the political negotiations behind the likelihood of passage of the USMCA (NAFTA’s replacement), although the trade situation as obviously become very fluid and difficult to predict in recent weeks. Mexico, along with Canada, is the U.S.’ largest trade partner, with $350 bil. in imports last year, a quarter of which are autos and auto-related parts.
Foreign stocks in Europe and the U.K. fared similarly to the U.S., while emerging markets fared far better, earning positive returns for the week. Investors absorbed EU parliament election results, which included a slip in the power for the more conventional pro-EU centrist coalition parties, while populist fringe parties on both the right and left gained significant ground. Emerging market gains, oddly bucking the trend of negative global growth sentiment, were led by gains in Brazil, the Far East (including China), as well as Turkey. The latter was due to improved relations with the U.S., including the release of a held U.S. scientist as a sign of goodwill.
U.S. bonds continued their strong run as equities struggled. Treasury interest rates fell to their lowest levels in two years, with the 10-year reaching near 2.1%. The inversion watch continues, with the 10y-3m spread inverted, while the 10y-2y remains positively sloped. During the week, treasuries outperformed credit, with high yield bonds performing especially poorly, along with equities. With the dollar up slightly, foreign developed market bonds fared positively, albeit to a lesser degree than in the U.S., as did emerging markets to a limited degree.
Commodities generally lost ground, with gains of nearly 5% in agricultural contracts corn and soybeans being more than offset by sharp declines in energy. While the price of natural gas also fell by -5%, the price of crude oil declined by nearly -9% in the week to $53.50/barrel—vying for the lowest level this year. Crude is now again in bear market territory, having fallen -20% since highs of $66 in April, due to the double-whammy of fears of a global slowdown affecting demand and supply levels remaining solid due to U.S. production.
Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.
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.