Your Weekly Update for Monday, August 19, 2019
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It was another tough week for markets last week but they recovered slightly on Friday. The Dow Jones Industrial Average fell 1.53% to 25,886.01. The S&P500 ended down 1.03% to 2,888.68, and the Nasdaq Composite finished down 0.79% to 78,895.99. The annual yield on the 30-year Treasury fell a whopping 25 basis points to 2.000%.
Economic data for the week included positive reports in retail sales, several regional manufacturing surveys, and a combination of several labor statistics. On the disappointing side were industrial production, housing starts, and jobless claims, which ticked up on the week.
Global equity markets in both the U.S. and overseas endured a volatile week, with several high percentage days in both directions, but ending only about a percent lower on net. Bonds fared more positively on the investment-grade side, due to lower interest rates and flows away from risk. Commodities were mixed to lower, mostly due to lower grain prices.
(+) The advance retail sales report for July showed a 0.7% increase on a headline level, sharply surpassing expectations calling for a 0.3% gain. This represented the third straight month of positive surprises, in addition to revisions higher for several prior months, which brought the year-over-year gain in retail sales to over 3%. On a core/control level, removing the volatile components of autos, gasoline and building materials, sales rose 1.0%, beating expectations calling for 0.4%. Core results seemed boosted by strength in non-store/online sales, rising 3% on likely strength from Amazon Prime Day, while department stores, food, clothing and grocery also gained around a percent for the month. Negatively, sporting goods and personal care declined a percent. Despite fears over economic growth and impact on spending, consumer sales continue to surpass expectations. Interestingly, despite continual headline discussions about online retailers bulldozing brick-and-mortar firms, the internet segment still only represents just over 12% of the total sales figure—but it’s steadily climbing.
(+) The New York Fed’s Empire manufacturing index rose 0.5 of a point to 4.8 in August, bucking expectations calling for a drop to 2.0. Within the report, shipments, new orders and employment all increased substantially, although the latter stayed in contraction. The index of business conditions over the next six months fell by -5 points but remained at a very solid level near 26.
(+) The Philly Fed manufacturing index similarly rose by 5.0 points to 16.8, bucking expectations for a drop to 9.5. Under the hood, new orders rose sharply; however, shipments and employment ended with strong declines, but remained in solidly expansionary territory. Here, the six-month ahead business conditions component fell by -5 points but also remained very solidly positive.
(-/0) Industrial production fell -0.2% in July, underperforming the expected gain of 0.1%, with June’s production number revised up from flat to a two-tenth gain. This is down -0.5% from levels a year ago, with sector results mixed—some a few percent higher, some lower. The manufacturing production component fell by -0.4%, with most of the drop caused by segments outside of auto manufacturing, as business equipment fell by nearly a half-percent. Interestingly, auto production is up nearly 4% from this time last year, which points to stronger, rather than weaker, growth. Utilities, however, rose by 3%, usually the result of weather effects (possibly hottest July on record); mining/energy extraction declined by -2%. Capacity utilization fell by -0.3% to 77.5% in July.
(0) The Consumer Price Index for July rose 0.3% on both a headline and core basis, after removing the impact of energy and food prices. Areas of the most change included a percent increase in energy prices, especially in gasoline), shelter costs and implied rent up several tenths, in addition to sharper increases in medical costs of all types, used cars and airline fares. New car prices fell however. It didn’t appear as if tariffs have forced inflation higher, other than an estimated 0.00-0.05% during the month, which was about half of the expected upward impact of 0.05-0.10%.
Year-over-year, the headline and core CPI measures increased 1.8% and 2.2%, respectively. Interestingly, while only a single month’s report, this higher inflation reading puts pressure on the Fed’s ‘lack of inflation’ argument as a rationale for further cutting of interest rates. Moreover, the annualized rate of change over the last several months has been a lot faster, adding more counterarguments for the Fed cutting rates.
(-) Import prices for July rose by 0.2%, which bucked expectations for a -0.1% decline. A 2% rise in the price for petroleum was the primary driver, as the ex-petroleum reading was unchanged for the month. This was despite higher prices for industrial supplies/materials and consumer goods; these were offset by price declines of a half-percent for food, while those for capital goods and autos also fell. There appears to be a bit of a natural offset here between the impact of tariffs and a broader tempering of global economic activity.
(-) Housing starts for July fell by -4.0% to a seasonally-adjusted annualized rate of 1.191 mil., falling below expectations calling for a 0.2% increase and below the roughly 1.5 mil. required by demographic demand. This result represents growth in starts of 0.6% from a year ago. Under the hood, single-family starts rose by over 1%, which is seen as a stronger contributor, while the normally-volatile multi-family group fell by a more dramatic -16%. By region, starts in the West rose by a percent, while the other three saw declines of at least -5% or more. Building permits, on the other hand, rose 8.4% in July, beating expectations of a 3.1% gain. This was led by a 2% increase in single-family and 22% rise in permits for multi-family swellings. Regionally, permits in the South and West rose in the double-digits, while those in the Northeast and Midwest declined slightly for the month. Despite the drop, on the positive side, the strength of the report was in the single-family home segment.
(+) The NAHB homebuilder index rose by 1 point to 66 for August, surpassing expectations calling for no change. Current sales and prospective buyer traffic each rose by 2 points, which were offset by futures sales falling by a point. Regionally, the Midwest and Northeast gained by several points, while the West and South were little changed. Insofar as this index indicates upcoming building activity, the results were good news. Interestingly, a few homebuilder earnings calls referenced the labor shortage of construction workers being one of their strongest negative headwinds to stronger numbers. On the positive side, lower interest rates as of late typically translate to stronger homebuyer purchasing power.
(-) The preliminary August reading of Univ. of Michigan index of consumer sentiment fell by -6.3 points to 92.1, underperforming expectations calling for a more tempered decline to 97.0. The index was negatively affected by both assessments of present economic conditions, and more so by expectations for the future. Inflation expectations for the coming year rose by 0.1% to 2.7%, as did those for the coming 5-10 years to 2.6%—reaching a higher point in the recent range of estimates. The recent market volatility and trade war rhetoric picking up in early August most likely didn’t help sentiment measures.
(-) Initial jobless claims for the Aug. 10 ending week rose by 9k to 220k, surpassing the 212k level expected. Continuing claims for the Aug. 3 week also rose, by 39k, to 1.726 mil., which far surpassed the 1.685 mil. level expected by consensus. No anomalies were reported, other than a large initial claims report from Calif., while overall, the levels of implied layoffs remain very tempered.
(+) Nonfarm productivity for the 2nd quarter rose by 2.3%, which far surpassed consensus expectations of a 1.4% reading, and increased the year-over-year rate of change to 1.8%. Unit labor costs rose 2.4% in Q2, which exceeded a forecast of 2.0% growth. These figures beat estimates, which reinforces strong labor market dynamics and wage growth that has begun to outpace inflation, if only by a bit.
|Period ending 8/16/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.95||8.78|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks experienced a unique week, to say the least, with several sizable drops. Starting the week, stocks were pressured as protests in Hong Kong intensified, resulting in canceled flights and strong rhetoric from Beijing labeling it as ‘terrorist activity.’ However, risk assets were buoyed upward soon afterward by the U.S. administration’s delay in imposing additional tariffs from Sept. 1 to Dec. 15 for $150 bil. of certain items (due to ‘health, safety, national security and other factors’), although this also included selected consumer items such as cell phones, computers, toys and footwear). The Sept. 1 date, however, is still applicable for $100 bil. of goods at this time. While this satisfied hopes for some type of resolution to the ongoing trade crisis, it’s certainly not a permanent solution. Equities experienced the worst day of the year on Wednesday, with values falling -3% when the treasury yield curve finally ‘officially’ inverted. A recovery later in the week helped to reduce some of the losses, which appeared at least partially due to better rhetoric about trade resolution, again, as well as solid results in retail sales and several regional manufacturing surveys—which poke holes to some degree in the Fed’s argument that the economy is softening.
By sector, defensive groups consumer staples and utilities outperformed by earning positive returns in a poor week—partially due to strong earnings results from Walmart. Conversely, energy and financials lost the most ground, with the former down nearly -4%. Consumer discretionary and communications stocks were also weak, while technology losses were not as severe.
Foreign stocks performed similarly to those in the U.S., notably in Japan and U.K., while Europe fared worse, with a stronger negative reaction to trade sentiment and a GDP report showing the continent barely achieved positive growth in Q2 at 0.2%, while Germany contracted. Emerging markets fared similarly. Inerestingly, China saw gains as sentiment improved a bit as additional stimulus measures were announced in response to weaker credit growth. On the other hand, Brazil, Russia and Turkey all experienced losses in the mid-single digits.
The emerging market group was highlighted by the unique news of a near -50% drop in Argentina’s stock market in one day (and 25% drop in USD-denominated bonds)—following the primary presidential election where incumbent present Macri, a proponent of financial reforms, was trounced by a populist/leftist candidate. To boot, the challenger’s running mate was former present Cristina Kirchner, who is facing corruption charges in her own right. The Kirchner regime (which includes her husband, another former president) is blamed for many of the current economic problems in the nation, including continuing a legacy of spending issues and debt defaults, which explains the poor financial market response. While considered a frontier market nation on the equity side, with marginal ownership, a fair number of EM debt funds have been enticed by the extremely large yields offered on Argentinian bonds. This is another reminder as to why large credit spreads are demanded for a reason.
U.S. bonds experienced another unique week, with the inversion of the 10-year to 2-year parts of the yield curve. The broader government and investment-grade corporate indexes each gained over a percent, due to a strong duration effect, as yields again reached multi-year lows before rebounding back somewhat by Friday. The 30-year treasury bond (which has a more sporadic trading history than the more common bellwether 10-year note) reached an all-time low yield level of just below 2%. High yield and floating rate experienced minor losses on the week.
Yield curve inversions have tended to be one of the more accurate recession predictors (seven of the past nine), and have been widely written about academically, which explains the negative equity market response. However, for the true signal, the inversion must stay in place for several weeks. Of course, many pundits are already claiming ‘it’s different this time,’ and the current inversion is no way representative of the upcoming direction of future economic growth.
Foreign developed market debt fared similarly to U.S. government, gaining despite a stronger U.S. dollar. Emerging market bond prices fell, with investors generally moving away from credit spreads of all kinds.
Real estate bucked the general trend of negativity, with gains in the U.S., while foreign REITs were mixed for the week, as Asia fared positively, and Europe declined, along with weaker sentiment there.
Commodities lagged generally with a stronger dollar and movement away from most economically-sensitive assets. Gold and industrial metals gained nearly a percent, while agriculture lost several percent as the USDA crop production report showed a sharper-than-expected increase in supply. This is on top of fears about China pulling back on purchases in retaliation for U.S.-imposed tariffs. The price of crude oil ticked a fraction of a percent higher to a shade under $55/barrel, down from highs earlier in the week; natural gas rose by nearly 4%.
Sam Khater, Freddie Mac’s chief economist, says, “The sound and fury of the financial markets continue to warn of an impending recession, however, the silver lining is mortgage demand reached a three-year high this week. The decline in mortgage rates over the last month is causing a spike in refinancing activity – as homeowners currently have $2 trillion in conventional mortgage loans that are in the money – which will help support consumer balance sheets and increase household cash flow. On top of that, purchase demand is up seven% from a year ago.”
The 30-year fixed-rate mortgage averaged 3.60% with an average 0.5 point for the week ending Aug 15, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.53%.
The 15-year FRM averaged 3.07% with an average 0.5 point, up from last week when it averaged 3.05%. A year ago at this time, the 15-year FRM averaged 4.01%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.35% with an average 0.3 point, down from last week when it averaged 3.36%. 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.