Your Weekly Update for Monday, September 9, 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
Markets recovered slightly last week on lessening fears of a trade war with China. The Dow Jones Industrial Average rose 1.49% to 26,797.46. The S&P500 ended up 1.79% to 2,978.71 while the Nasdaq Composite finished up 1.76% to 8,103.07.Ā The annual yield on the 30-year Treasury rose 5 basis points to 2.020%.
Economic news for the week included positive results for the ISM services index, while the ISM manufacturing index contracted. Employment results were mixed, with the nonfarm payroll report somewhat slower than expected.
Equities rose on optimism for a trade resolution last week, both in the U.S. and abroad. Bonds, however, lost ground as interest rates ticked higher. Commodities gained a bit, led by sharply higher prices for natural gas.
Economic Notes
(-) The ISM manufacturing index for August fell by -2.1 points to 49.1, representing five straight months of declines, and bucking expectations for a flattish reading at 51.3. Having fallen below the key baseline level of 50, it represented a move from expansion into contraction, for the first time since the last mid-cycle slowdown in early 2016. Under the hood, employment, new orders and production all fell a few points into contraction, in keeping with the broader index. Supplier deliveries also fell, but remained in expansion, while inventories ticked up to near neutral. This closely-watched reading does confirm the analysis of some, including the Fed, that the economy is weakening, so may provide fuel for continued easy interest rate policy. However, other indicators are not as ominous.
(+) On the other hand, the ISM non-manufacturing index for August rose by 2.7 points to 56.4, above the 54.0 level expected. The underlying components also showed similar robust results, with business activity and new orders up several points further into strong expansionary territory of 60+. Employment, supplier deliveries and net export orders declined, but remained in expansion. Being a far larger portion of the economy than manufacturing, this strong result offsets some of the recent weakness in goods production.
(-) Construction spending in July rose by 0.1%, but fell short of the 0.3% growth expected, in addition to mixed revisions for prior months that largely offset each other. Private construction ticked downward by a tenth of a percent overall, with gains in residential offset by declines in non-residential construction. On the other hand, public construction rose by almost a half-percent, despite a drop of several percent in the state/local road construction segment.
(0) The trade balance for July contracted by -$1.5 bil. to -$54.0 bil., which was still not quite as tight as the -$53.4 bil. level expected. However, it remains -$1.3 bil. wider than a year ago. Imports fell by a tenth of a percent during the month, and exports rose by 0.6%. Each category was led by goods other than oil, as petroleum imports rose and exports fell on the month. Other key imports included computers, while export activity was led by pharma and autos.
(0/+) Initial jobless claims for the Aug. 31 ending week ticked up by 1k to 217k, just above forecasts calling for 215k. Continuing claims for the Aug. 24 week fell by a more dramatic -39k to 1.662 mil., below the 1.688 mil. expected by consensus. No anomalies were reported, with claims levels continuing to remain at a tempered pace, indicative of a strong employment market.
(+) The ADP private employment report for the month of August showed a gain of 195k, beating expectations calling for 148k. As usual, services jobs led the way with an increase of 184k, led by education and health services comprising a third of the total. Goods-producing jobs rose only rose 11k, with the bulk of the figure resulting from manufacturing. Interestingly, smaller firm hiring rose to 66k, the highest in four months.
(0) The employment situation report for August came in a little weaker than expected, considering other signs of economic slowing, which continues to keep probabilities for another Fed rate cut high for this month. Nonfarm payrolls rose by 130k, compared to expectations calling for 160k. This was coupled with a net -20k revision downward for the two prior months of June and July. Hiring was focused in professional/business services (up 37k) federal government hiring (rising by 28k, largely due to temporary census workers), health care (up 24k) and finance/insurance. Mining jobs fell by -6k, which includes energy-related employment, while retail declined by -11k.
The unemployment rate was unchanged for the third straight month at 3.7%. The U-6 underemployment rate ticked up 0.2% to 7.2%, although it remains at the lowest levels since late 2000. The household survey component showed a gain of 590k jobs, with labor force participation again rising to a six-year high.
Average hourly earnings rose by 0.4% on the month to $28.11, resulting in a 3.2% gain on a year-over-year basis. Average weekly hours rose by 0.1 of an hour to 34.4; interestingly, in manufacturing, this rose by 0.2 to 40.6, indicative of high output.
In other data, the updated nonfarm productivity report for Q2 was kept unrevised, showing a 2.3% gain for the quarter and 1.8% year-over-year. Unit labor costs for that period were revised up slightly to 2.6% for the quarter and on a year-over-year basis. Overall compensation per hour has begun to rise to levels above inflation, which has helped some economists breathe a sigh of relief that the Phillips Curve isnāt dead quite yet. Labor shortages in certain industries, such as high-skilled segments of construction, have helped push wages higher, and have hampered efforts in the building of homes. On a positive note for many workers, the highest wage increases have taken place among the least-educated and lowest-paid in the economy, as well as in several demographic groups that had been lagging.
(0) The Fed Beige Book of anecdotal economic conditions from July through August around the country showed a continued expansion of growth at a āmodestā paceāwhich was little changed from recent prior reportsāalthough a few regions reported some deceleration. Uncertainty around trade and levels of tariffs continued to weigh on sentiment broadly, and put a damper on any business expansion plans, but it appeared that optimism generally persisted otherwise across the nation. Manufacturing activity appeared to be mixed, with slight increases or decreases depending on region. As has been discussed previously, labor growth remained modest, held back a bit by tighter worker availability, while wage growth proceeded at a modest-to-moderate pace. Consumer spending was also mixed across the country, with auto sales growing modestly, and tourism reported as āsolid.ā Inflation was also described as modest, slightly more robust than prior reports, with some concerns over how any tariff costs can be passed through without major disruption.
Market Notes
| Period ending 9/6/2019 | 1 Week (%) | YTD (%) |
| DJIA | 1.53 | 16.90 |
| S&P 500 | 1.83 | 20.50 |
| Russell 2000 | 0.71 | 12.64 |
| MSCI-EAFE | 2.23 | 12.11 |
| MSCI-EM | 2.40 | 4.37 |
| BBgBarc U.S. Aggregate | -0.15 | 8.93 |
| 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 |
| 8/30/2019 | 1.99 | 1.50 | 1.39 | 1.50 | 1.96 |
| 9/6/2019 | 1.96 | 1.53 | 1.42 | 1.55 | 2.02 |
Last week, as with most weeks recently, was driven by rumors and news reports surrounding the U.S.-China trade situation. It began negatively, with China reporting U.S.-imposed tariffs to the WTO as a proposed violation. While mainly a formality, or attempt to circumvent the stalled negotiation channels, it did serve as a way to antagonize U.S. officials. Though, by mid-week, positive sentiment flowed from reports of a proposed U.S.-China meeting in Washington in October. This was coupled with the Chinese agreeing to withdraw the Hong Kong extradition treaty, which was the catalyst for recent ongoing protests there. While not related to the trade skirmish per se, Hong Kong is a potential East vs. West flashpoint, adding a wildcard to the increasingly-chilly U.S.-China relationship. There are already several areas of potential conflict, including the sovereignty of Taiwan (claimed by China in concept as part of the mainland, rather than its current status as an independent entity), and oversight of critical shipping lanes in the South China Sea.
Every sector ended in the positive last week, led by communications, consumer discretionary, energy and technology; defensive bond proxy utilities lagged with a minimal gain.
Foreign stocks in developed markets gained in keeping with U.S. equities, helped by a rare weaker U.S. dollar. Fears of a āno dealā Brexit seemed to decline over the past week, which helped ease fickle U.K. sentiment, although the political situation there remains fluid and very convoluted. Emerging markets outperformed all other groups in the back of improved trade sentiment which could benefit those regions to a more substantial degreeādemonstrated by gains that were widespread and similar among key EM nations. The Chinese central bank also decided to cut bank reserve requirements by 0.50-1.00% (depending on the type of bank), effectively easing monetary policy, which typically pleases markets hoping for relief from the strains of the U.S. tariffs.
U.S. bonds pulled back last week as interest rates stabilized and rose only slightly across the yield curve. Treasuries fared a bit better than investment-grade corporates, while high yield and floating rate bank loans outperformed by earning positive returns. Despite the dollar falling, which is usually a tailwind, developed market sovereign bonds lost ground as interest rates edged up from more negative levels, while risk-taking pushed emerging market bonds to the highest gains of the week for any group.
Real estate gained, in keeping with broader equity sentiment in the U.S., while international REITs rose to a lesser degree, outside of Europe, which saw negative returns.
Commodities as a whole gained last week, helped by the slight weakening in the dollar, more optimistic economic prospects, and difficult weather conditions. The price of crude oil ended up gaining by over 2% to around $56.50/barrel, with lower U.S. supplies and comments from Iran indicating possible movement away from the nuclear deal of recent years. Natural gas prices rose nearly 10%, presumably due to uncertain impacts from Hurricane Dorian on the East Coast.
With Labor Day having passed, markets have now moved into the āwinterā period, which has historically been characterized by higher volatilityāboth on the downside and upside. In fact, September ranks as one of the markets weakest months over the past century, while, on the other hand, Q4 has ended as the highest-performing of all calendar quarters. While the reasons for market seasonality tend to remain mysterious, aside from traders classically going back to work from vacation in the Hamptons or elsewhere, investors have seemed to cast the current yearās prospects aside and look at the new year ahead (usually) with greater optimism, although the past year has been sullied by guesses regarding timing of the current business cycleās inevitable end.
Mortgage Rates
Sam Khater, Freddie Macās Chief Economist says, āMortgage rates continued the summer swoon due to weaker economic data. While economic growth is clearly slowing due to rising manufacturing and trade headwinds, economic fundamentals are still solid for U.S. consumers. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, and home price growth is stable.ā
The 30-year fixed-rate mortgageĀ averaged 3.49% with an average 0.5 point for the week ending September 5, 2019, down from last week when it averaged 3.58%. A year ago at this time, the 30-year FRM averaged 4.54%.
The 15-year FRMĀ averaged 3.00% with an average 0.6 point, down from last week when it averaged 3.06%. A year ago at this time, the 15-year FRM averaged 3.99%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgageĀ (ARM) averaged 3.30% with an average 0.4 point, down from last week when it averaged 3.31%. 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 theĀ 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 & Poorās, 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.