Your Weekly Update for Monday, June 24, 2019
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Markets were up last week. The Dow Jones Industrial Average rose 2.41% to 26,719.13. The S&P500 ended up 2.20% to 2,950.46, and the Nasdaq Composite finished up 3.01% to 8,031.71. The annual yield on the 30-year Treasury was unchanged at 2.59%.
Economic data for the week included no action by the FOMC, although the communication was far more dovish. Other news included a sharp decline in several key regional manufacturing indexes, a flattish index of leading economic indicators, mixed to lower housing market metrics, while jobless claims improved again to low levels.
U.S. and foreign equity markets both experienced strong gains for the week, led by optimism for trade resolution and dovish central bank language about interest rates. Bonds fared well also, due to the recent ongoing drop in interest rates across the developed world, led by comments from the Fed and ECB. Commodities gained ground due to higher oil prices following rising tensions in the Middle East.
(0) The FOMC meeting resulted in no action, although the call appeared to be far closer than many predicted, with one dissent (vote to lower rates by a quarter-percent) and the bulk of members expecting easing later this year. As noted, this is based almost entirely on uncertainty over the global environment, as opposed to economic data showing specific deterioration in the U.S. In addition, there are some concerns over low inflation readings remaining more persistent than they originally thought, with areas such as internet, communications and other technology developments holding down prices across the retail landscape—in contrast to higher pricing for real estate, education and healthcare. Compared to their prior economic projections in March, the committee’s update showed downward expectations for rates (the dots) by 0.25-0.50% over the next two years, and lower estimates for near-term inflation, while economic growth and unemployment improved slightly.
(-) The Empire state manufacturing survey for June dramatically fell by -26.4 points (its largest one-month decline in history) to a contractionary -8.6 level, which was the opposite of the positive, and expansionary 11.0 level expected. The lowest level in about three years, new orders, shipments and employment all fell sharply. However, prices paid rose, as did expected business conditions for the next six months, which remained strongly positive. This was an especially poor report, although it seemed the data was compiled in the heat of the most recent potential tariff hike on goods from Mexico, which has since been taken off the table.
(0) The Philly Fed manufacturing index also fell more than expected, by -16.3 points to a barely positive 0.3 level, and far below the expected reading of 12.0. The details of the report included drops in shipments, employment, and new orders, although all retained more positive readings than the headline. Prices paid declined, but remained positive; expectations for business activity over the next six months rose, however, to sharply higher expansionary readings (over levels of 20). While the current results were not stellar, sentiment remains a bit more buoyant.
(+) Existing home sales for May rose by 2.5% to a seasonally-adjusted annualized rate of 5.34 mil. units, slightly besting forecasts calling for a 2.1% increase. The single-family variety rose by nearly 3%, while condos/co-ops gained 2%. Regionally, the Northeast experienced an increase of nearly 5%, followed by the Midwest, while the South and West rose by just under 2% for the month. Compared to a year ago, existing home sales are down -1.1%, indicative of the mixed bag housing as brought as of late. Inventories are also tighter than a year ago, at 4.2 months of sales, and median home prices were reported a shade under 5% higher.
(-) Housing starts for May fell by -0.9% to a seasonally-adjusted annualized rate of 1.269 mil., which fell behind the 0.3% gain expected, although the April number was revised higher by 50k. The details were weaker than the headline, as the larger component, single-family starts fell by -6%, while the multi-family group experienced a gain of 11%. Regionally, the South experienced the only gain, of 11%, while all other areas lost ground, especially the Northeast, down -46% from the prior month. Building permits, on the other hand, rose 0.3%, beating expectations of a minor 0.1% monthly gain. Here, single-family permits rose by 4%, which was partially offset by a -5% multi-family decline; the South saw gains in the upper single-digits, while permits in the Northeast fell -25%, in line with weaker starts. This series continues to disappoint, with housing starts year-over-year down -5%, although the single-family variety are down nearly -13%, only offset somewhat by strength in apartment building.
(-) The NAHB housing market index of homebuilding activity fell -2 points in June to 64, which ran counter to an expected increase to 67. All three key components fell, with future sales—at -2 points—falling by more than current sales and prospective buyer traffic. Regionally, The Northeast and West each fell by several points, while the Midwest gained a few. While a disappointment, the index level remain higher than during the slow winter period.
(0) The Conference Board’s Index of Leading Economic Indicators for May was unchanged, continuing a path of slowing following minimal growth over the last several months. Of the ten components, positive financial conditions/credit and consumer sentiment were offset by weakness of stock prices, new manufacturing orders, and jobless claims. Over the past six months, this index rose at an annualized 0.5% rate, which was far below the 4.4% annualized pace of the prior six-month period.
On the other hand, the coincident indicator rose 0.2% for May, while the lagging indicator fell by -0.2%. The coincident indicator has also shown weaker growth over the past six months, relative to the prior period—in line with trends seen by the more widely-tracked leading indicator. Overall, while nothing in the inherent data is new, the trend of tempered growth is in line with worries of the market (and Fed) about increased possibilities of a downturn.
(+) Initial jobless claims for the Jun. 15 ending week fell by -6k to 216k, which was below the 220k level expected, and ended a stretch of rising readings. Continuing claims for the Jun. 8 week fell sharply, by -37k to 1.662 mil., falling below the 1.680 mil. expected and also reversing higher reports recently. However, no anomalies were reported for either measure and levels remain very low, indicative of a strong labor market.
|Period ending 6/21/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.44||5.66|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks fared especially well last week, as news was generally positive all around. ECB president Draghi hinted toward rate cuts if economic growth and/or inflation continue to worsen on the continent in addition to the President’s reports of a very productive telephone conversation with the Chinese President prior to the upcoming and highly-anticipated G20 meeting at the end of this coming week. Then, once the FOMC’s dovish message was released, alluding to rate cuts in coming months, equities rallied.
By sector, energy experienced the strongest gains, over 5%, on the back of higher oil prices resulting from the confrontation with Iran, followed by technology and health care. However, every sector ended in the positive, with materials and defensive staples lagging the pack with minimal gains.
Foreign stocks performed as well as, or better than, U.S. equities, with help from a weaker U.S. dollar. Emerging market stocks led the pack, as bullish comments about the upcoming G20 summit raised hopes for a U.S.-China trade resolution, followed by Europe. The ECB continued to hint at far easier policy to boost inflation and economic growth, possibly through additional purchases of corporate debt, in conjunction with reports of continued weak manufacturing and business sentiment data. The Bank of England left the overnight rate unchanged at 0.75%, interestingly, due to some calls for a rate hike—not necessarily for the reason of economic strength but to sustain the value of the pound. The Bank of Japan also kept policy unchanged, in a continued stimulative level, although export data showed new weakness.
U.S. bonds gained ground, symbolized by the 10-year treasury falling below 2% for the first time in three years, as yields continued to fall to new multi-year lows in conjunction with the Fed’s dovish tone. Investment-grade and high yield corporates both saw the sharpest gains, upwards of a percent, outperforming treasuries. Foreign bonds gained on net as well, thanks to a strongly weaker dollar, with developed and emerging market bonds ending with similar results on the week. More all-time low yield records were broken last week, with the 10-year in Germany reaching below -0.30% and France at 0%.
Commodities earned a positive return in the low single-digits on the week, led by strength in energy and precious metals. The price of crude oil jumped by 9% during the week to over $57/barrel. The shooting down of a U.S. surveillance drone by Iranian forces represented the key driver of prices higher, as the possibilities of a U.S. response and heightened conflict rose relative to the verbal rhetoric of prior weeks. Gold rose as fears of a recession remained strong, and the lower interest rates acted to trim real yields—as treasuries remain a prime competitor for assets when perceived macro risk rises.
Sam Khater, Freddie Mac’s chief economist, says, “While the continued drop in mortgage rates has paused, homebuyer demand has not. This is evident in increased purchase activity and loan amounts, indicating that homebuyers still have the willingness and capacity to purchase homes. Today’s low rates, strong job market, solid wage growth and consumer confidence are typically important drivers of home sales.”
The 30-year fixed-rate mortgage (FRM) averaged 3.84% with an average 0.5 point for the week ending June 20, 2019, up from last week when it averaged 3.82%. A year ago at this time, the 30-year FRM averaged 4.57%.
The 15-year FRM averaged 3.25% with an average 0.4 point, down from last week when it averaged 3.26%. A year ago at this time, the 15-year FRM averaged 4.04%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.48% with an average 0.4 point, down from last week when it averaged 3.51%. 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.
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 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.