Weekly Update 7/15/2019

Your Weekly Update for Monday, July 15, 2019

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Have a great week!

Mike Elerath
National Social Security Advisor

Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
NMLS #107972

Summary

Markets ended up last week. The Dow Jones Industrial Average rose 1.51% to 27,332.03. The S&P500 ended up 0.85% to 3,013.77, and the Nasdaq Composite finished up 1.03% to 8,244.14. The annual yield on the 30-year Treasury jumped  8.4 basis points to 2.63%.

Economic news for the week included a slightly stronger-than-expected consumer price inflation reading, mixed jobless claims, and slightly weaker government job openings. The minutes from the June FOMC meeting noted some economic concerns and raised expectations for possible interest rate cuts sooner than later.

U.S. equity markets fared well in the U.S., led by a variety of sectors, outperforming foreign stocks, which largely ended in the negative for the week. Bonds lost ground globally as interest rates ticked higher. Commodities gained in almost all segments, led by energy due to oil prices rising back above $60.

Economic Notes

(0) The June FOMC meeting minutes from June indicate that several members acknowledged greater uncertainty in the broader economy, with higher potential downside risks. This was noted in their downgrade in describing the current environment from ‘solid’ to ‘moderate’. In addition to some weakness in recent numbers in areas such as manufacturing ISM, concerns over impact of a continued U.S.-China trade spat have policymakers considering the usual step of monetary easing in advance of an actual deterioration in conditions. However, it did not seem to be unanimous, as ‘a few’ members expressed concerns about such actions overheating labor markets unnecessarily and raising the chances of other financial imbalances building. Overall, the views on cutting rates at present appeared mixed. In recent speeches since, one Fed member noted that lower inflation expectations as of late could warrant deeper cuts in order to solidify higher inflation, but that opinion appears to be more dovish than consensus.

Additionally, Chair Powell appeared before the Senate to deliver his semi-annual Monetary Policy Report. Interestingly, he described the economy in more positive terms, notably labor markets and consumer spending, although housing and manufacturing appear to have hit a soft patch. While inflation was described as muted, he also noted that ‘cross-currents’ such as trade policy and/or slower global growth could warrant a more accommodative monetary policy—which markets took as meaning rate cuts were upcoming. Expect this debate to continue in coming weeks.

(0) The producer price index for June rose by 0.1%, which was just above expectations for no change. However, the composition was more convoluted, as core PPI (without food and energy) rose 0.3%, while excluding trade services from the core ended with a flat reading. Under the hood, it appeared that medical care prices were large contributors. Year-over-year, the broader PPI index rose 1.7%, which is the slowest rate since early 2017—serving as another indicator of tempered inflationary pressures upstream.

(0) The consumer price index (CPI) for June rose by an upwardly-rounded 0.1% on a headline level, while the core measure gained 0.3%—each was about a tenth faster than expectations. Headline prices were mostly affected by an over -2% pullback in energy, while several core price segments showed more strength than expected. These included shelter and medical services, which each rose at three times broader CPI. Interestingly, it appeared that recent tariff policy had only filtered through to furniture/bedding, which gained a percent on the month. Weaker pricing was seen medical commodities and hotel lodging during the month. Year-over-year, this moved headline and core CPI to 1.6% and 2.1%, respectively. Shelter inflation is up 3.5% to lead all segments, with medical care not far behind, in keeping with trends of recent years. While this report was a slight upward surprise, overall levels remain tempered, which has continued to cause some economists to scratch their heads at the Fed’s language toward policy easing.

(-) The government JOLTs job openings report for May fell by -49k to 7.323 mil., below the 7.473 mil. level forecast by consensus. The job openings rate fell by -0.1% to 4.6%, and hiring rate by -0.2% to 3.8%. The quits rate and layoff rate each were unchanged at 2.3% and 1.2%, respectively. While results for the month lagged, underlying job growth appears to remain intact.

(0) Initial jobless claims for the Jul. 6 ending week fell by -13k to 209k, far lower than the 221k level expected. Continuing claims for the Jun. 29 week, on the other hand, rose by 27k to 1.723 mil., above the 1.683 mil. expected. No anomalies were reported for the week, with the largest changes taking place in the most populated states generally. Overall, levels remain low, on par with status quo of the last several months.

Market Notes

Period ending 7/12/2019 1 Week (%) YTD (%)
DJIA 1.54 18.66
S&P 500 0.82 21.54
Russell 2000 -0.34 17.28
MSCI-EAFE -0.55 13.99
MSCI-EM -0.85 8.81
BBgBarc U.S. Aggregate -0.21 5.73
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
7/5/2019 2.23 1.87 1.84 2.04 2.54
7/12/2019 2.14 1.84 1.86 2.12 2.64

U.S. stocks began the week lower, a reversal of the optimism of prior weeks concerning perceived probabilities for the Fed lowering rates at one or more of their upcoming policy meetings. Instead, concerns over the recent strong jobs report and other indicators showing more positive results point to the rate-cut story being less of a given. However, stocks improved and the Dow Jones Industrial Average and S&P 500 each reached historical milestones of 27,000 and 3,000, respectively, which have tended to be a positive from a sentiment perspective. Since the national media tends to acknowledge such things as headline news, the ‘fear of missing out’ can sometimes spur hesitant retail investors on the sidelines to reconsider and allocate towards equities.

By sector, energy recovered sharply, followed by consumer discretionary up nearly 2% for the week, while health care lost the most ground, of over a percent. The latter was affected by mixed results for various sub-sectors following the administration’s proposed plans for lowering drug prices through changes in rebates to pharmacy benefit managers. Conversely, small cap stocks lost ground again, although year-to-date results remain in competitive territory with large caps. Earnings season for Q2 begins this coming week, with some mixed results expected, and could weigh on equity sentiment in the absence of higher-level macro news, such as trade.

Foreign stocks generally lost ground across the board last week, despite the positive influence of a slightly weaker dollar. Emerging markets tended to fare better than Europe, the U.K. and Japan—which all performed similarly. Despite a greater likelihood of stimulus by the ECB, the positive of lower rates appeared to be outweighed by sparks of U.S.-European tariff tensions. Notably, France imposed a 3% digital tax on global technology companies (most of the impact being felt by firms from the U.S.).

U.S. bonds lost ground last week as interest rates ticked higher across the yield curve, with the market experiencing a bit less conviction about the Fed dramatically lowering rates in coming months. Governments and corporates in the U.S. fared similarly, while high yield and senior loans outperformed, with flattish results. Despite a weaker dollar, which tends to be a positive influence on foreign bonds especially, with today’s extremely low yields, developed market debt fared as poorly as U.S. bonds, although emerging market local bonds earned a positive return on the week.

If the environment for foreign bonds weren’t strange enough, with all-time low yields for 10-year German debt reaching -0.40%, they’ve been floating the idea of a 100-year zero-coupon bond. In recent weeks, Austria issued a similar security (locking a rate of 1.05% coming century), with German yield largely expected to be somewhere around 0.7%. This is far below the ECB inflation target of 2%, so the assumption is that the German government (not bondholders) would be paid in real terms for borrowing money over that period. Needless to say, this is very strange thing.

Commodities performed positively for the week, with gains in all major segments. Energy fared best with the price of crude oil rising by nearly 5% to just over $60/barrel. The increase was largely due to the U.S. oil inventory report showing far lower levels than anticipated, in addition to questions over whether the U.S. will extend waivers for U.S. companies to continue to operate in Venezuela—a major producer.

Mortgage Rates

Sam Khater, Freddie Mac’s chief economist, says, “While rates have moderated, we’re still at nearly three-year lows, which is good news for buyers looking to purchase a home before school starts.”

“The recent stabilization in mortgage rates reflects modestly improving U.S. economic data and a more accommodative tone from the Federal Reserve to respond to the rising downside economic risk from trade tensions and soft global economic data. On the housing front, the latest weekly purchase application data suggests homebuyer demand continues to rise, which is consistent with the slowly improving real estate data from the last two months,” he said.

The 30-year fixed-rate mortgage (FRM) averaged 3.75 percent with an average 0.5 point for the week ending July 11, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.53 percent.

The 15-year FRM averaged 3.22 percent with an average 0.5 point, up from last week when it averaged 3.18 percent. A year ago at this time, the 15-year FRM averaged 4.02 percent.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.46 percent with an average 0.4 point, up from last week when it averaged 3.45 percent. A year ago at this time, the 5-year ARM averaged 3.86 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.

Mortgage Rates

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.