Your Weekly Update for Monday, August 5, 2019
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Mike Elerath
National Social Security Advisor
Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
NMLS #107972
Summary
It was a tough week for markets last week. The Dow Jones Industrial Average rose fell 2.60% to 26,485.01. The S&P500 ended down 3.10% to 2,932.05, and the Nasdaq Composite finished down 3.92% to 8,004.07. The annual yield on the 30-year Treasury fell 21 basis points to 2.391%.
Last week saw the Federal Reserve reduce interest rates, largely as expected, although the official statement language was mixed. Positively, consumer confidence rose last week, as did personal income and housing, while manufacturing results showed some weakness. The employment situation report for July came in largely as expected, showing decent growth, although the pace of improvement has slowed.
Equity markets in the U.S. and abroad declined several percent during the week, due to announcements of new tariffs on China and Fed policy language being less accommodative than expected. Conversely, bonds fared very well as interest rates across the yield curve declined sharply. Commodities also declined on net, with energy and industrial metals falling in price.
Economic Notes
(0) As noted earlier in the week, the FOMC decided to cut rates by 0.25%, which was largely expected. This was largely seen as a way to temper the headwind brought about by tighter global conditions, including uncertainty about trade and slowing foreign growth. However, the Fed did tamp down its guidance for further easing, which is likely a reflection of reported strength in some recent economic data (which erodes its case for making the cuts in the first place). This action was described by Chair Powell in his press conference as a ‘mid-cycle policy adjustment,’ as opposed to being necessarily the start of a full rate easing regime. Financial markets were not as thrilled with the tempered language, as this harkened back to prior periods where rates were temporarily lowered a few times, before a hiking policy resumed. There may not be a mathematical difference between the types of easing, but no doubt the continued policy will remain data dependent, with no hints at obvious conclusions one way or the other quite yet. Following the Fed’s action, the announcement of upcoming tariffs on China to take effect in a month further enhanced the downside risks in the global economy, and likely raised the probability of another insurance cut or two. Unfortunately, Fed’s intense focus on communication has made comments difficult to get right in real time—resulting in every utterance and word being sliced and diced for meaning, and often requiring later clarifying comments (or even backtracking).
(-) The ISM manufacturing index for July fell by -0.5 of a point to 51.2, below expectations for a minimal increase to 52.0. Under the hood, new orders gained slightly, as did supplier deliveries, but these were outweighed by declines of several points in the production and employment segments—although all stayed in expansionary territory. New export orders also fell by a few points and fell into contraction—perhaps no surprise with current trade policy. Overall, it appears manufacturing remains challenged, as this was the weakest report in three years. But, it is still in expansion, so time will tell if this is a ‘soft patch’ or a slow deterioration indicative of end-of-cycle behavior.
(-) Construction spending for June fell by -1.3%, falling below expectations of a 0.3% increase, although spending for several prior months was revised higher. In June, private construction spending for both residential and non-residential fell by under a percent, while public construction fell by several percent.
(-) The Chicago PMI for July deteriorated further into contraction, falling -5.3 points to 44.4, which is only the second such reading over the last three years. With the exception of supplier deliveries, which expanded, the other four segments contracted, including production, new orders, order backlogs, and employment. The anecdotal question posed to respondents focused on expectations for the 2nd half of 2019—nearly half expected no change from current conditions, while roughly 40% expected slower growth, largely due to continued trade and global growth concerns.
(0) Personal income for June rose 0.4%, due to a 0.5% increase in wage and salary income, while personal spending rose 0.3%—each meeting analyst expectations. These brought the personal savings rate up a tenth to 8.1%. PCE inflation rose 0.1% on a headline level, and just over 0.2% for core on the month. Year-over-year, this brought the change in inflation to 1.4% and 1.6% for headline and core, respectively. Each of these remains well below the Fed’s target level and serves as one excuse for a more accommodative monetary policy.
(0) The trade balance for June moved slightly tighter in June by -$0.1 bil. to -$55.2 bil., but not as much so as the median forecast of -$54.6 bil. Both imports and exports declined by around -2% for the month. Import declines were led by a -9% decline in petroleum, while the other segments fell by just over a half-percent; export declines were driven by a -3% in the non-petroleum segments, while petroleum exports actually jumped by 10%.
(-) The S&P/Case-Shiller home price index for May rose 0.1%, which was half the gain expected. Prices increased in nearly three-quarters of the 20 cities in the index, led by half-percent gains in San Diego, Charlotte and Los Angeles; on the other hand, New York and Chicago prices declined by a few tenths. On a year-over-year basis, home prices continued to decelerate by this measure, coming in a tenth of a percent lower than last month at 2.4%.
(+) Pending home sales gained 2.8% in June, beating expectations calling for a more tempered 0.5% increase. The metric rose in all regions, led by the West at over 5%, while the South eked out the smallest gain at just over a percent. While the pending status doesn’t necessarily mean fully closed sales, it does tend to bode well for existing home sales activity a few months beyond the report.
(+) The Conference Board index of consumer confidence for July saw a sharp increase of 11.4 points to 135.7, beating expectations of a more moderate change to 125.0. Household assessments of present conditions increased by 7 points, while expectations for the future improved by nearly 15 points on the month. The labor differential, which measures the difficulty in finding employment, rose by 5 points, which was very close to another high point for this cycle. Overall, this is an encouraging report, with a correlation between consumer confidence and economic spending activity.
(0) The final July edition of the Univ. of Michigan consumer sentiment index was unchanged from the preliminary version, at 98.4, which was just a tenth below expectations for a slight improvement. While assessments of current conditions fell by a point, this was offset by raised expectations for the future up a point. Inflation expectations for the coming year ticked down by -0.1% to 2.6%, as did those for the coming 5-10 years to 2.5%.
(0/+) The ADP employment report for July showed a gain of 156k jobs, which slightly outperformed the 150k expected; the June data was also revised up, by 10k jobs. Of the total, 146k originated from service-sector jobs, led by professional/business services. Goods-producing jobs rose by 9k, with construction increasing by 15k, which implied a decline in other manufacturing sectors. Interestingly, jobs in the smallest businesses fell for another month, which has become a trend during the last several months.
(-) Initial jobless claims for the Jul. 27 ending week moved up by 8k to 215k, just above expectations calling for 214k. Continuing claims for the Jul. 20 week rose by 22k to 1.699 mil., which was above the 1.674 mil. expected. No anomalies were reported by the DOL, and per recent trends, claims and implied layoff levels remain extremely low.
(0) The employment situation report for July came in largely as expected, with some tempering of constant improvement we’ve become used to. Accordingly, there was nothing seemingly extreme enough to alter the Fed’s new dovish path, and likelihood of another rate cut or two this year—based on current market expectations.
Nonfarm payrolls rose by 164k, which lagged by only a thousand jobs compared to expectations calling for 165k. However, numbers for a few prior months were revised downward by a total of -41k. Leading areas of job creation in July originated from education/health up 66k, business services up 38k, and manufacturing up 16k. On the weaker side, leisure/hospitality jobs rose 10k, construction only gained 4k, while information-based jobs declined by -10k.
The unemployment rate was unchanged at 3.7%, with labor force participation rising a bit and tempering the job growth proportion in the ratio. The accompanying household survey was solid, showing a gain of 283k jobs, despite a reduction in jobs due to weather/hurricane effects that brought down the entire employment report somewhat. The U-6 underemployment rate also fell by another -0.2% to 7.0%.
Average weekly earnings rose by 0.3% in July, which was a tenth better than expected, and pushed the year-over-year earnings growth rate to 3.2%, which is over a percent higher than the broader consumer inflation rate at this point. The average workweek length declined by a tenth of an hour to 34.3.
Market Notes
| Period ending 8/2/2019 | 1 Week (%) | YTD (%) |
| DJIA | -2.59 | 15.05 |
| S&P 500 | -3.07 | 18.32 |
| Russell 2000 | -2.85 | 14.61 |
| MSCI-EAFE | -2.65 | 10.61 |
| MSCI-EM | -4.28 | 3.93 |
| BBgBarc U.S. Aggregate | 0.98 | 7.14 |
| 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 |
| 7/26/2019 | 2.12 | 1.86 | 1.85 | 2.08 | 2.59 |
| 8/2/2019 | 2.06 | 1.72 | 1.66 | 1.86 | 2.39 |
U.S. stocks experienced their worst week of the year so far, ending in losses across the board. After a decent start upon hopes for an accommodative Fed, markets reversed and declined Wed. following the Fed policy move, with language that was a little more tempered and hesitant to continue with further cuts as some may have expected. Then again, with economic growth in terrible shape, such a measured approach shouldn’t be overly surprising. Worse yet, this was coupled with the administration’s surprise announcement, via Twitter, of a 10% tariff on the $300 bil. in remaining imports from China, to take effect on Sept. 1, absent any agreements or postponements put forth before then. (This would be in addition to the $250 bil. of items already subject to a 25% tariff level. This new round would affect a far broader swath of consumer goods, including a larger proportion of consumer items, such as apparel and shoes.)
By sector, utilities ended as the only positive performer, with a minimal gain, while consumer discretionary and technology stocks lost the most ground, down over -4% each—the latter due to perceived impacts from the new round of any tariffs. The Russell 2000 small cap index was actually pushed back into the zone of a -10% correction from its high point from August a year ago.
Foreign stocks lost ground to a slightly greater degree than U.S. equities, despite little change in the dollar. Japan fared best in a bad week, outperforming the U.S., Europe and the U.K., while emerging markets fared worst. The Bank of Japan elected to leave monetary policy unchanged, with short rates in negative territory and longer-term bond yields pegged at zero. Aside from weakening economic data, the trade issues between the U.S. and China have continued as the primary drivers of European sentiment, although the rising chances of a no-deal Brexit in the U.K. have risen with the new prime minister. In emerging markets, stocks in Asia were hit with losses of up to -5% due to perceived trade effects, while commodity exporters also suffered, such as Russia and selected Latin American nations. South Africa and Turkey continued to be negatively affected by country-specific policy concerns.
U.S. bonds experienced one of their better weeks, with gains of nearly a percent for the Bloomberg BarCap Aggregate. Treasuries outperformed corporate credit slightly, while high yield and bank loans ended the week with minor losses. Internationally, developed market treasuries fared similarly to U.S. government bonds, up around a percent, while local emerging market debt lost nearly -2%.
Real estate ended the week as one of the few risk assets to fare well, with falling interest rates acting as a tailwind in the U.S.; foreign real estate lost ground, but to a lesser degree than broader equities. Per usual, defensive segments such as healthcare and self-storage outperformed, while cyclical lodging/resorts lost ground.
Commodities lost ground on the week, led by negative results in the economically-sensitive components, including energy and industrial metals. Precious metals were the sole gaining group, with gold benefitting from stock market volatility and lower real interest rates. Despite a major drop mid-week, the price of crude oil fell by only -1% on net to end at just under $56/barrel, blamed on the less accommodative Fed language and trade frictions that threaten economic growth—and oil usage.
Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates have essentially stabilized over the last two months, which reflects the recovery and improvement in the economy from the malaise earlier in the year. Going forward, the combination of low mortgage rates, tight labor market and high consumer confidence should set up the housing market for continued improvement in home sales heading into the late summer and early fall.”
The 30-year fixed-rate mortgage (FRM) averaged 3.75% with an average 0.6 point for the week ending Aug 1, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.60%.
The 15-year FRM averaged 3.20% with an average 0.5 point, up from last week when it averaged 3.18%. A year ago at this time, the 15-year FRM averaged 4.08%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.46% with an average 0.4 point, down from last week when it averaged 3.47%. A year ago at this time, the 5-year ARM averaged 3.93%.
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.