Your Weekly Update for Monday, June 17, 2019
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Mike Elerath
National Social Security Advisor
Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
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Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates were mostly unchanged from last week due to easing of trade tensions with Mexico which helped stabilize markets. These historically low rates should provide continued opportunities for current homeowners to refinance their mortgages – which combined with new homebuyer activity – will help sustain the momentum in the housing market in 2019.”
The 30-year fixed-rate mortgage (FRM) averaged 3.82% with an average 0.6 point for the week ending June 13, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.62%.
The 15-year FRM averaged 3.26% with an average 0.5 point, down from last week when it averaged 3.28%. A year ago at this time, the 15-year FRM averaged 4.07%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.51% with an average 0.4 point, down from last week when it averaged 3.52%. A year ago at this time, the 5-year ARM averaged 3.83%.
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 flattish last week. The Dow Jones Industrial Average rose 0.41% to 26089.61. The S&P500 ended up 0.47% to 2,886.93, and the Nasdaq Composite finished up 0.70% to 7,796.66. The annual yield on the 30-year Treasury rose 2.1 basis points to 2.59%.
Economic data for the week included generally as-expected reports for retail sales, producer prices and consumer prices, retail sales and industrial production came in higher than expected, while consumer sentiment and labor figures disappointed a bit.
Global equity markets were relatively flat on net for the week, with U.S. stocks ending slightly in the positive, and foreign slightly in the negative. Bonds experienced similar results, with the yield curve little changed, upon few changes in investor risk preferences. Commodity markets were characterized by lower prices for crude oil offset by sharp price gains in the grains complex.
Economic Notes
(+) The May advance retail sales report came about as expected, with growth of 0.5% both on a headline level and core/control measure, after removing the impact of the more volatile components. This is in addition to positive revisions to prior-month data. Under the hood, auto sales, gasoline, non-store/online retail and electronics/appliances fared especially strongly for the month, which could act as an upward boost to Q2 reported GDP.
(0) The Producer Price Index for May rose by 0.1% on a headline level and 0.2% on a core basis, removing food and energy prices—each about as expected. Energy prices rising nearly 2% were offset by a minor decline in food, while the unique trade services component fell a few tenths due to retail margins contracting. This was offset a bit by higher medical care services pricing. All-in-all, this was a relatively tempered report, but a touch stronger than consumer inflation, with year-over-year headline and core PPI rising 1.8% and 2.3%, respectively.
(0) The Consumer Price Index for May rose by 0.1% on both a headline and core basis, largely in line with expectations. While food prices rose 0.3%, energy prices declined by -0.6% to more than offset the difference. On the core side, medical services prices gained a half-percent, shelter/rents slowed a bit to a quarter-percent increase for the month, while medical care commodities and used autos declined in May. Year-over-year, headline and core CPI decelerated to 1.8% and 2.0% respectively, just a bit under the Fed’s target.
(+) Industrial production for May rose by 0.4%, surpassing expectations of a 0.2% gain, in addition to a slight upward revision for the prior month. The manufacturing production component rose by 0.2%, matching the gain for business equipment. However, the sharper gain for the total figure was driven higher by utilities production, which rose over 2%. Capacity utilization rose by 0.2% to 78.1%, exceeding forecasts calling for 78%.
(+) Import prices for May fell by -0.3%, which was further than the -0.2% expected—on both a headline level and when removing petroleum from the equation. Prices for industrial supplies and food on the business side each fell by nearly -1%, while consumer prices were close to flat, although auto prices declined slightly.
(0/-) The preliminary Univ. of Michigan consumer sentiment index for June fell by -2.1 points to 97.9, just under the 98.0 level expected. While assessments for current conditions rose by 2.5 points, expectations for the future fell by nearly -5 points, explaining much of the differential. Inflation expectations for the coming year fell by -0.3% to 2.6%, as did those for the coming 5-10 years by -0.4% to 2.2%, which was interestingly an all-time low for that series. While declines in gasoline prices tend to have near-term inflation sentiment implications, perhaps perceptions of slower economic growth may have played a role as well.
(-) The government JOLTs job openings report for April showed a drop of -25k openings to 7.449 mil., which came in below the consensus forecast of 7.496 mil. openings. The job openings and quits rates were unchanged at 4.7% and 2.3%, respectively. The hiring rate rose a tenth of a percent to 3.9%, as did the layoff rate to 1.2%. These numbers reflect labor market strength, which was in some doubt after the prior Friday’s weaker employment situation report.
(0) Initial jobless claims for the Jun. 8 ending week rose by 3k to 222k, above the 215k expected. Continuing claims for the Jun. 1 week also ticked higher, by 2k to 1.695 mil., which remained higher than the 1.660 mil. level expected by consensus. No anomalies were reported, and levels generally remained low, in keeping with long-term strong labor trends.
Question of the Week–How likely is the Fed to cut interest rates in the near term?
The rhetoric has certainly picked up, beginning with the Fed’s change in tone from last year’s rate hike in December—seen by many as a ‘mistake.’ This is in contrast to the Fed’s sharp about-face in early 2019, where rate hikes were effectively put on pause, and helped fuel the equity rally of the first quarter. Interest rate expectations are important to markets, where speculation about the Fed’s future moves has been in a first-place tie with global trade policy as the key market driver this year.
Policy communication, or formally, ‘forward guidance,’ is an increasingly important part of the modern central banker’s toolkit. Used by the FOMC and ECB especially, a single word (like ‘patience’ earlier this year) can spark market sentiment sharply in one direction or another, which is why every Fed speech and comment is parsed so diligently. This is in sharp contrast to years past where opaqueness was the norm, and Fed meeting outcomes had to be interpreted through changes in treasury bond trading after the fact.
In practicality, the Fed hasn’t said much that we don’t already know. In recent weeks, the fact that they stand ready to ‘support the economy’ was taken as the bar for a fed funds rate cut had been lowered; however, supporting the economy is something the Fed sees as a primary function continually. While some politicians prefer to see a Fed with the gas pedal always depressed—keeping rates low to keep economic expansions intact, which certainly helps broader sentiment—the role of central banks is to take an independent, detached view of economic cycles. The Fed’s key mandates from the beginning have been: (1) maximizing employment, (2) stabilizing prices (i.e. inflation), and (3) moderating long-term interest rates. Since interest rates are generally tied to inflation levels, the first two represent the oft-quoted ‘dual mandate.’ (General economic stability is an implied goal as well, but only as a means to accommodate the primary mandates.)
In reviewing the current status of these goals distinctly, employment is as strong as it’s been in several decades—by some measures, since the late 1960’s. Since changes in labor markets move relatively slowly in normal environments, data such as a steady deterioration in the unemployment rate or persistently rising jobless claims, would offer clues to worsening labor trends. Other than perpetually below-expected labor force participation due to a variety of perhaps societal and technological factors, and has kept a hidden amount of ‘slack’ persistent in labor markets, employment looks relatively strong by almost all counts. Lowering interest rates to stimulate ‘better’ employment at this level would seem a tough sell.
Inflation is also well-controlled. In fact, core inflation, which removes the dramatic price noise of energy and food, has been remarkably close to the target 2% level for years, although it’s dipped a bit below that recently. Central banks, and especially the Fed, are weary of chronic deflation taking hold, which can be a difficult paradigm to crawl out of; however, they’ve communicated that being a few tenths of a percent above or below that 2% level is well within their target range (implying it’s fruitless to fine-tune levels tighter than this). So, with inflation at target, no interest rate action could seem more appropriate than a movement up or down in rates based on that mandate.
There are other concerns, of course. The U.S.-China trade negotiations seem to be in a more precarious position than they were in prior months, and higher resulting tariffs for a longer period could likely slow global growth and pressure many central banks to ease. This raises the odds of a ‘preemptive strike’ rate cut, although this could also be more difficult to justify until the data actually turns negative, although this wouldn’t be the first time the Fed has implemented a rate change on that rationale.
Market Notes
| Period ending 6/14/2019 | 1 Week (%) | YTD (%) |
| DJIA | 0.46 | 13.18 |
| S&P 500 | 0.53 | 16.29 |
| Russell 2000 | 0.58 | 13.60 |
| MSCI-EAFE | -0.26 | 10.83 |
| MSCI-EM | 0.76 | 5.11 |
| BBgBarc U.S. Aggregate | 0.02 | 5.20 |
| 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 |
| 6/7/2019 | 2.28 | 1.85 | 1.85 | 2.09 | 2.57 |
| 6/14/2019 | 2.20 | 1.84 | 1.85 | 2.09 | 2.59 |
U.S. stocks ticked just a bit higher on the week, with less volatility than over recent weeks. Over the prior weekend, an agreement between the U.S. and Mexico regarding immigration policy resulted in a pullback on the previously-announced threat of tariffs, boosting market sentiment early in the week, with one of the potential trade hurdles removed. Several announced mergers, such as United Technology’s proposed acquisition of Raytheon, also seemed to boost market sentiment. By sector, consumer discretionary stocks led with gains over 2%, followed by communications and utilities, while energy and industrials lagged with losses approaching a half-percent.
Foreign stocks ended the week similarly to those in the U.S., although a percent gain in the value of the U.S. dollar (mostly versus the euro and pound) pushed net returns into the negative. Returns in the Eurozone, U.K. and Japan were all in fairly close alignment, while emerging markets fared much better, with gains in Russia, China and Mexico, which offset a weaker Brazil and India. Gains in the Far East appeared to be driven by hopes for further Chinese government stimulus.
U.S. bonds experienced minimal change for the week, although investment-grade corporates and high yield outperformed treasuries to a small degree. Overseas, a stronger dollar punished net returns for developed market debt (which carries a minimal coupon in many countries to offset currency price declines), while emerging market bonds were mixed as local currency debt interestingly outperformed USD-denominated.
Commodities broadly were flat on the week, with strength in agricultural commodities wheat, corn and soybeans (helped by terrible flooding across swaths of the U.S. that has delayed or prohibited crop planting) offset by lower pricing for petroleum. The price of crude oil declined by a few percent to nearly $52.50/barrel, to remain within its recent range. Despite the bombing of several tankers in the Persian Gulf, attributed to the Iranian Republican Guard, that again increased regional tensions, a report by the International Energy Agency of far lower global growth in oil demand, as well as continued reports of large U.S. stockpiles, outweighed in terms of sentiment.
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, 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, T. Rowe Price, 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. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.