Your Weekly Update for Monday, July 22, 2019
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Markets were down last week. The Dow Jones Industrial Average fell 0.65% to 27,154.20. The S&P500 ended down 1.23% to 2,976.61, and the Nasdaq Composite finished off 1.18% to 8,146.49. The annual yield on the 30-year Treasury fell 5.5 basis points to 2.578%.
Economic data for the week included positive surprises in retail sales as well as several regional manufacturing surveys, mixed results in industrial production and housing, while the index of leading economic indicators pointed to weakening conditions.
U.S. equity markets declined as earnings season kicked off for the most recent quarter. Foreign stocks fared slightly better, despite a stronger dollar. Bonds gained as investors moved away from risk during the week, and the Fed continued to hint at lower interest rates. Commodities declined as prices for crude oil and natural gas declined sharply.
(0) Retail sales for June rose at a 0.4% pace, a tenth below the 0.5% gain expected. Additionally, revisions for several prior months were positive by several tenths of a percent, improving the results. Gasoline station sales fell by almost -3%, which reflected lower petroleum prices. On a core/control level, separating out the more volatile gasoline, food and building materials segments, sales rose 0.7%, which was at more than twice the expected 0.3% gain. In the core segment, non-store (online) retail gained at a rate of nearly 2%, followed by pharmacies/drug stores, while department store sales fell by -1%. Overall, all but two of the dozen-plus categories experienced a positive month. It can be difficult to decipher longer-term spending trends based on smaller monthly changes in this series, but on a year-over-year basis, retail sales are up 3.4%, which points to decent consumer spending. This is especially so over the past six months, where the pace shows growth in the double-digits.
(+) Import prices for June fell -0.9%, which was a bit more than the -0.6%. Price declines over the month for petroleum of -6% accounted for at least half of the result, but import prices ex-petroleum still fell -0.4%—about twice the pace expected. In other areas, prices for industrial supplies and food also fell by up to several percent for the month, while consumer goods and autos were little changed. Year-over-year, import prices are down -2.0%, which could be surprising to some, who may have expected that the escalating trade war between the U.S. and China, as well as other nations, would have eventually trickled down to higher import costs. While true in some segments, oil prices continue to dominate as the largest trade component. Tempered import prices have also contributed to lower inflation readings over the past year, albeit this component being seen as ‘bad’ inflation—the component a nation has little control over and not the byproduct of increased economic activity—so lower readings are not necessarily distressing news.
(+) The New York Fed Empire State manufacturing index rose sharply, by 12.9 points in July, to an again-expansionary 4.3 level. This outperformed compared to the expected 2.0 result. Details were mixed, as new orders rose sharply, but remained slightly in contraction; at the same time, shipments declined a bit, but remained expansionary, and employment fell further into contraction. Interestingly, the assessment of business conditions six months into the future rose sharply higher to remain strongly positive, which could imply that respondents feel current weakness is transitory and/or the U.S.-Chinese trade issues could be resolved by then.
(+) The Philadelphia Fed manufacturing index for July bounced back by a dramatic 21.5 points to an expansionary 21.8 reading, surpassing expectations calling for a tempered 5.0. Underlying segments of the report were also solid, with shipments, new orders and employment all gaining, albeit at about half the pace of the overall index. Assessments of business conditions for the coming six months also rose by 17 points to nearly a 40-level, which is a significant improvement. To an even greater degree than the NY survey, this points to optimism and improved conditions in the manufacturing sector, which runs counter to the Fed’s slowing thesis.
(-) Industrial production for June was unchanged, falling just under the median forecast calling for a gain of 0.1%. The manufacturing production component rose by 0.4%, which did beat expectations by about a tenth, due to a 3% gain in auto production and half-percent gain in business equipment. The broader number was weighted down to a large degree by a -4% decline in the utilities sector, which tends to be largely weather-related (in this case, cooler than normal), while mining output rose by a few tenths. Capacity utilization for June fell by -0.2% to 77.9%, versus expectations for an unchanged result.
(-) Housing starts fell -0.9% in June to a seasonally-adjusted average annualized rate of 1.253 mil., which fell a bit below expectations that called for a -0.7% decline. This was in addition to downward revisions for the two months immediately prior. Single-family starts, however, rose by over 3%, which was overwhelmed by the sharp drop in the more volatile multi-family sector, down -9%. Regionally, the South and West experienced declines in the -5% to -10% range, while the Northeast and Midwest saw gains of approximately 30%. Starts are up 6% over the last 12 months, which points to growth, albeit choppy, with multi-family consisting of all the growth, with single-family starts down -1% over the past year. Building permits fared even more poorly, declining by -6.1% for June, relative to an expected increase of 0.1%. A similar pattern ensued, with a gain of just under a half-percent in single-family was offset by a -17% drop in multi-family. Regionally, the South and West lost ground, up to -10%, while permits in the Northeast rose by over 20%. Over the last year, single-family permits are down -5%, while multi-family permits are -10% lower. No doubt, weather played a role in the regional component of the survey.
(+) The NAHB homebuilder index rose by 1 point to 65 for July, beating expectations calling for no change. The individual components of current sales, future sales and prospective buyer traffic all gained a point in keeping with the broader index. Regionally, the West index gained 6 points, while the Midwest and Northeast declined by several points to lag. It’s been noted that this index is higher than it was earlier in the year, although it fall behind the hopes some economists had for a stronger summer season.
(-) The Conference Board’s Index of Leading Economic Indicators for June declined by -0.3%, continuing a series of decelerating results over the last several months. According to the press release, the yield curve made a negative contribution to the index for the first time since later 2007, although weaker ISM manufacturing new orders, housing permits and jobless claims played a larger role. For the first six months of the year, the index still rose at an annualized rate of 0.4%, which was lower than the 2.9% annualized rate for the second half of 2018.
On the other hand, the coincident economic index rose 0.1%, and the lagging economic index gained 0.6% for the month. The coincident index rose at a 0.6% annualized pace over the past six months, which was also below the 2.7% annualized rate for prior six-month period. While the headline news isn’t promising, the second chart below reminds us that several fits and starts have been the norm for the series, with decelerating readings occurring more than once over the past decade.
(-) The preliminary July Univ. of Michigan index of consumer sentiment rose 0.2 points to 98.4, but fell just short of the 98.8 expected by consensus. Assessments of present conditions fell by nearly a point, while expectations for the future offset this by rising a point. Inflation expectations for the coming year fell a tenth to 2.6%, while those for the coming 5-10 years ticked 0.3% higher, from lower levels in prior months, to the same 2.6%.
(0/+) Initial jobless claims for the Jul. 13 ending week rose by 8k to 216k, which matched expectations. Continuing claims for the Jul. 6 week, on the other hand, fell by a sharp -42k to 1.686 mil., which was below the expected 1.700 mil. reading. No anomalies were reported, as the bulk of activity took place in the largest states, per normal weeks. Average levels for these readings continue to run at very low levels, suggesting minimal layoff activity.
(0) The Fed Beige Book, covering regional economic anecdotes for mid-May through early July period, reiterated that growth has progressed at a ‘modest’ pace—similar to the prior month period. Manufacturing activity was little changed from the prior period. Employment continued to grow, albeit subject to tightness in a few key sectors. Inflation, per broader national data statistics recently, showed little change, and even some signs of weaker prices. Consumer spending was generally positive, described as ‘modest,’ with decent tourist activity but flatter auto sales. Anecdotally, it did seem that the ongoing uncertainty about U.S.-China trade concerns continued to weigh on sentiment, which is difficult to quantify, but could certainly add to a reluctance by businesses to commit capital.
|Period ending 7/19/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.38||6.13|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks lost ground last week, with small caps faring worse than large, as earnings for the second quarter began to command investors’ attention. By sector, only consumer staples and materials gained slightly, while all other segments fell into the negative for the week, led by declines in communications services and energy. Executives from the technology & communications sectors, including leaders from Apple, Amazon, Facebook and Alphabet/Google, were grilled by Congress on anti-trust concerns, although tech recovered to minimal losses on the week.
Earnings for Q2 have just begun to trickle in, with results mixed and overall expectations looking flattish overall from a year ago. In the communications sector, among the popular FANG group, Netflix fell sharply as domestic subscribers declined for the first quarter in eight years. This was not overly surprising, with sales expectations sky-high and valuations among the highest of any stock in the S&P by traditional cash flow-based metrics.
Recent commentary from the Fed continues to lay the groundwork for a possible rate cut by the end of this month—this appears to be well baked into expectations. The question now is: will a 0.25% cut be enough, or will markets be disappointed if it isn’t 0.50% (believe it or not). The Governor of the New York Fed, John Williams, made an interest speech last week implying that ‘preventative measures’ were preferred to waiting for a disaster to happen first, which was later echoed in similar language from Fed Vice Chair Clarida. However, the New York Fed later officially clarified/walked back on these remarks a bit, which created even more uncertainty about next week’s FOMC outcomes. While recent data don’t point to a sharply deteriorating economy, some quantitative metrics, which include more soft data from weaker business confidence surveys and lack of capital spending, do point to rising recession probabilities. This appears to be due to a tightening up of business activity due to the increasingly uncertain environment. Unfortunately, if such conditions perpetuate, this is how recessions have unfolded from a negative sentiment feedback loop.
In foreign markets, European and U.K. stocks were flat on the week, although a stronger dollar pulled these returns negative when translated back. Little news dominated, other than difficulties with the Italian government coming together, which could force new elections. Japan was negative in local and USD terms, as exports continued their streak of declines. There were also rising concerns in the U.K. over the chances of Boris Johnson taking over as prime minister and a harder line towards a no-deal Brexit.
Emerging markets, on the other hand, gained about a half-percent, with currency strength, which enhanced their returns. As expected historically, a dovish tilt to U.S. monetary policy and increased chances of lower rates elevated sentiment for the group, which has tended to behave favorably under such conditions. Additionally, several emerging market central banks cut key interest rates by a quarter-percent last week, including Indonesia, South Korea, and South Africa, to stem growing concerns over global economic slowing. The most surprising foreign news earlier in the week was the Chinese GDP reading for the 2ndquarter, which came in at 6.2%—the lowest growth rate in several decades. While global growth overall has been decelerating, economists have naturally been questioning the degree of negative impact on this growth from U.S.-imposed tariffs, although Chinese retail sales remains robust, so the story is mixed.
U.S. bonds fared decently on the week, gaining ground as investor cash flows moved away from equities. Investment-grade corporates outperformed governments slightly, although high yield debt ended with a negative return for the week, in keeping with their traditional correlation with stocks. A stronger dollar seemed to have minimal impact on foreign bonds, which gained in keeping with U.S. indexes, although emerging market local debt again outperformed.
Commodities fell by several percent overall, along with the headwind of a stronger dollar. Gains in industrial metals and precious metals were held back by weakness in agriculture and energy—both in crude oil and natural gas. The price of crude oil fell over -7% to just over $55/barrel, as crude inventories declined to a lesser degree than the market expected. This is in addition to rumors of Iran’s interest in a deal to help restart oil exports to revive their battered economy, offsetting the negative influence of a British tanker being seized.
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates moved higher after remaining at around the same level for about three weeks. The rise in rates was driven by continued improvement in consumer spending and partly due to optimism around a forthcoming cut in short term interest rates, which should provide support for business and investor sentiment.”
“Despite this slight increase in rates, homebuyers are taking advantage of the multi-year low rates in droves, which is evident in the consistently higher refinance and purchase application volumes. The improvement in housing demand should provide sufficient momentum for the housing market and economy during the rest of the year,” he said.
The 30-year fixed-rate mortgage (FRM) averaged 3.81% with an average 0.6 point for the week ending July 18, 2019, up from last week when it averaged 3.75%. A year ago at this time, the 30-year FRM averaged 4.52%.
The 15-year FRM averaged 3.23% with an average 0.5 point, up from last week when it averaged 3.22%. A year ago at this time, the 15-year FRM averaged 4.0%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.48% with an average 0.4 point, up from last week when it averaged 3.46%. A year ago at this time, the 5-year ARM averaged 3.87%.
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.