Your Weekly Update for Monday, August 12, 2019
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National Social Security Advisor
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
It was another tough week for markets last week. The Dow Jones Industrial Average rose fell 0.75% to 26,287.44. The S&P500 ended down 0.46% to 2,918.65, and the Nasdaq Composite finished down 0.56% to 7959.14. The annual yield on the 30-year Treasury fell 14 basis points to 2.248%.
Economic news for the week included weaker but still-positive numbers from the ISM non-manufacturing index, tempered producer prices, and a strong jobless claims report.
Equity markets declined around the world, with trade tensions again escalating early in the week, before subsiding somewhat. Bonds fared well in the aftermath of poor risk asset performance, as interest rates declined across the yield curve. Commodities were mixed, as price declines in energy offset gains in precious metals.
(-) The ISM non-manufacturing index for July fell by -1.4 points to 53.7, below expectations calling for a gain to 55.5 and representing the lowest level in three years. While employment improved to the upper 50’s (strongly expansionary), business activity and new orders declined, as did net export orders and prices paid—while remaining in positive territory—and supplier deliveries were flat. Overall, despite the weaker numbers in several areas for the month, the overall level of the index and nearly three-quarters of underlying sub-components continue to point to decent expansion. The U.S.-China trade issues may be playing a negative role to some degree, but not nearly to the extent seen in manufacturing.
(0) The producer price index rose 0.2% in July, matching consensus expectations, although the headline number was driven by a +2% increase in energy prices and nominal increase in the prices of food. On a core price level, removing food and energy, however, PPI declined -0.1% despite a forecast of a 0.1% gain—the first such decrease for a month in two years. Among other areas, medical care prices were weaker and contributed to the broader decline on the core side. Year-over-year, headline PPI is up 1.7%, in keeping with a tempered result seen in other inflation measures, while core is 2.1% higher. The bulk of the rise over the last 12 months has been on the services side, with goods inflation only up less than a half-percent.
(0) The Federal Reserve’s Senior Loan Officer Opinion Survey for Q2 showed little change from the prior quarter. Overall lending standards on the commercial/industrial side were seemingly unchanged, while spreads fell a bit and credit line sizes expanded. Commercial real estate saw slightly tighter standards and mixed demand, especially on the construction side. Residential mortgage loans standards eased, while demand picked up (likely in keeping with lower interest rates), which reversed a trend of weakness over several prior quarters. Installment and credit card loan metrics were little changed, while demand for auto loans picked up a bit.
(+) The government JOLTS job openings report ticked down by -36k in June from an upwardly-revised number the prior month, to 7.348 mil., but still surpassed the 7.326 mil. level expected by consensus. The job openings rate fell by a tenth to 4.6%, as did the layoff rate to 1.1%. The hiring rate and quits rate were unchanged for the month at 3.8% and 2.3%, respectively. This was seen as consistent with strong underlying labor market conditions.
(+) Initial jobless claims for the Aug. 3 ending week fell by -8k to 209k, lower than the 215k median estimate. Continuing claims for the Jul. 27 week fell by -15k, to a level of 1.684 mil., which was below the 1.690 mil. expected by consensus. No anomalies were reported by the DOL, with continued low levels indicative of a healthy labor market with very little layoff activity.
Question of the Week: What is currency manipulation and what does a ‘currency manipulator’ do?
Financial markets began last week poorly, down several percent with a seemingly dramatic escalation of the ongoing trade war. This included China’s decision to let the yuan fall below a certain level expected by markets, with the U.S. subsequently labeling China a ‘currency manipulator’ officially for the first time since 1994 (although the threat of doing so has been mentioned many times). Such a label comes with economic ramifications and can serve as justification for additional punitive measures and sanctions.
What does this mean? Currencies have value only in relation to other currencies, such as U.S. dollars to Japanese yen, or Swiss francs to euros. Exchange rates fluctuate constantly, resulting in one of the currencies in each pair becoming richer or cheaper against the other at any given point in time. This results in a variety of pros and cons on either side, based on the situation.
A more expensive (or ‘strong’) currency offers stronger buying power for owners of that currency. For example, if the U.S. dollar is strong against the euro, U.S. citizens traveling to Europe will find their money ‘goes further’ by allowing them to purchase more goods and services for their exchanged dollars than they could have before. On the other hand, U.S. companies have to contend with exporting goods to other countries being more difficult, since these are now priced more expensively relative to cheaper alternatives from other nations, priced in their home currencies. If a machine part is priced at roughly $100 as a starting point, a 10% appreciation in the dollar will cause the part’s price to rise to $110. This will look less attractive to a European buyer of parts made in Europe where the price may not have changed as much in local currency terms.
A cheaper (or ‘weak’) currency offers an equivalent balance of pros and cons. For owners of that currency, it results in the opposite effects, with prices for foreign goods suddenly appearing more expensive. This has often been the case in emerging market economies, with perpetually depreciating currencies. This has been associated with high prices for imported products and stoked bouts of perpetual inflation, particularly when prices for imported oil or food rise in price dramatically over a short time (which has necessitated these governments to often subsidize the prices of these goods to stem social unrest). On the other hand, a cheaper currency is a benefit to a nation’s global trade balance, since prices of exported goods will fall relative to similar producers in countries to which goods are being exported—resulting in a competitive advantage in the marketplace.
Per the last example, nations that export a large percentage of their output (such as China, historically) have an entrenched incentive to lower the value of their currencies versus others. But manipulation by governments considered an unfair advantage. The currency manipulation can be obvious or subtle, and is done by a nation selling its own currency in markets (causing its value to fall) in favor of foreign currency reserves of dollars/euros/yen/etc. (causing the prices of those to rise). This may not seem like much, but in high volumes, supply and demand effects can move prices for currencies fairly significantly.
As the week wore on, some of the rhetoric tempered a bit, so this may become a non-issue over time (at least relative to the broader trade frictions between the U.S. and China). However, it could be an element that emerges again, notably as the U.S. dollar continues to show strength against a variety of other global currencies. While a cheaper currency could help China offset the difficulties of imposed tariffs, there’s a limit to its likely effectiveness when considering the other repercussions of a weak currency, such as pressure of capital leaving the country to a greater degree and hesitancy of investors to bring capital in.
|Period ending 8/9/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.57||7.75|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks started the week terribly, due to an apparent breakdown in U.S.-Chinese trade negotiations, and the label of ‘currency manipulator’ being applied to the Chinese, as explained above. However, there appeared to be some smoothing over of this over the course of the week, despite more back-and-forth surrounding whether or not companies will be allowed to do business with telecom giant Huawei. By Friday, stocks had recovered somewhat as conditions remained choppy.
While large caps again outperformed small caps, exacerbating the poor sentiment for the latter, sectors were mixed last week. Defensive utilities and health care led the way, interestingly followed by gains in materials stocks. The worst performers were energy, financials and communications.
Per FactSet, about 90% of companies in the S&P have now reported earnings, with three-quarters of firms beating expectations, although the year-over-year growth rate remains negative at -0.7%. Revenue growth also remains at the slowest pace in a few years at 4.7% thus far. Concerns over tariffs have taken greater precedence in company earnings calls—mostly in the industrial, consumer discretionary, and technology sectors.
Foreign stocks underperformed U.S. equities, despite the tailwind of a weaker dollar. Europe fared best, followed by Japan and emerging markets, while the U.K. lost close to -2% on the week. In the absence of other news during a typically slow August trading season in Europe, Italian officials announced that the coalition government has fallen apart and new elections could be needed. Elsewhere, German industrial output declined to a greater degree than expected, while the British economy contracted for the first time in seven years, at -0.2%. Interestingly, Chinese trade data for the prior month came in stronger than expected, with pan-Asian trade filling in the gap for the lost U.S. component, with exports up 3% year-over-year. However, Chinese equities still struggled, down several percent as ongoing trade negotiation tensions remained high. A variety of central banks cut rates more than expected, including India and New Zealand, which appeared to help equity sentiment.
U.S. bonds fared well again as interest rates continued to drift lower, along with expectations for more Fed rate cuts. Treasuries (especially the long duration variety) outperformed investment-grade corporates, which were held back by wider credit spreads. For the same reasons, high yield bonds and floating rate bank loans lost ground during the week. Along with lower rates, a slumping U.S. dollar buoyed foreign developed market debt to gains of nearly a percent, with emerging market hard currency bonds not far behind, while local EM was flat on the week. Over the past three months, despite the dollar rising over a percent, foreign debt, especially in emerging markets, has fared as well as U.S. debt.
Real estate bucked the trend of other equities, with U.S. REITs gaining up to a percent for the week, led by the defensive sectors of healthcare and storage, while malls continued to suffer. International real estate declined, albeit to a far lesser degree than broader foreign stocks last week.
Commodities were mixed to lower as lower prices for crude oil and natural gas were offset a bit by another spike in precious metals, which tend to perform well as interest rates fall to lower real yield levels. The price of crude fell by -2% on the week to about $54.50/barrel, as higher recent inventory numbers offset rumors of OPEC’s push to coordinate limited production among members to elevate prices.
Sam Khater, Freddie Mac’s chief economist, says, “There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment. Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”
The 30-year fixed-rate mortgage averaged 3.60% with an average 0.6 point for the week ending Aug 8, 2019, down from last week when it averaged 3.75%. A year ago at this time, the 30-year FRM averaged 4.59%.
The 15-year FRM averaged 3.05% with an average 0.5 point, down from last week when it averaged 3.20%. A year ago at this time, the 15-year FRM averaged 4.05%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.36% with an average 0.3 point, down from last week when it averaged 3.46%. A year ago at this time, the 5-year ARM averaged 3.90%.
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.