Your Weekly Update for Monday, September 16, 2019
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Chartered Market Technician
Markets were up last week. The Dow Jones Industrial Average rose 1.58% to 27,219.52. The S&P500 ended up 0.96% to 3,007.39 while the Nasdaq Composite finished up 0.91% to 8,176.71. The annual yield on the 30-year Treasury rose a large 35.5 basis points to 2.378%.
Economic news for the week included largely-as-expected results for the producer price index and consumer price index, while retail sales surprised to the upside, and labor metrics were mixed.
Global equity markets gained on the week, as trade sentiment moved to optimistic once again. Bonds, however, suffered as interest rates corrected sharply higher with flows away from risk. Commodities markets were mixed, as crude oil lost ground, offsetting gains elsewhere.
(+) August retail sales rose 0.4%, which outperformed forecasts calling for 0.2%. The headline figure included a -1% decline in gas station sales, yet a 2% rise in automobile sales, and 1% increase in building materials. Therefore, on a core/control measure, removing the more volatile segments, sales still held up well, rising 0.3% for the month. Within core, non-store/online retail gained nearly 2%, followed by sporting goods/hobby/etc., while clothing and furniture lost ground on the month by up to a percent. Core retail sales have grown at more than a 10% annualized rate over the past five months, which represents a substantial increase over the several months prior. Total retail sales are up just over 4% from last year at this time (with non-store/online sales up 16% from last year), so remain somewhat of a bright spot in the economy, even if it doesn’t appear as such from the month-to-month reports.
(+) Import prices declined -0.5% in August, which was about on par with expectations, which included a -5% decrease in petroleum prices. Removing petroleum, however, prices were unchanged from the prior month, as prices fell for industrial supplies and food, while those for autos and consumer goods increased slightly.
(0) The producer price index for August firmly rose by 0.1% on a headline level, and 0.3% on a core measure, subtracting food and energy—each about a tenth of a percent more than expected. When removing the newer trade services category, PPI jumped 0.4%. The underlying segments included a -3% decline in energy, and half-percent drop in food prices, while core prices represented the primary drivers of the net increase, including metals and power. Year-over-year, this takes headline PPI to a rate of 1.8%, while core PPI rose 2.3%; however, finished goods PPI came in a lot lower.
(0) The consumer price index for August rose by just under 0.1% on a headline level and 0.3% for core, subtracting food and energy costs—each generally in line with the rates of change expected. While energy commodities declined over -3% to lead the weakness in headline inflation, while used vehicles and medical services rose nearly a percent on the month. Other segments, including shelter, rose generally in line with the core index. Year-over-year, the headline and core CPI growth rates have ticked up to 1.8% and 2.4%, respectively. While some segments have picked up steam over the past year, such as medical care, shelter and various services, this has been offset by a -7% drop in energy commodities, which has kept the headline number especially tempered. While headline consumer inflation is weaker than a year ago, it has leveled off a bit in recent months, not to mention the 2.7% year-over-year increase in ‘sticky price’ CPI measured by the Atlanta Federal Reserve (‘sticky’ being items that tend to be relatively persistent in price month-to-month). Signs of persistence in core inflation take away a bit of the rationale behind Fed rate cuts.
(+) The preliminary September Univ. of Michigan index of consumer sentiment ticked higher by 2.2 points to 92.0, beating expectations calling for a 90.8 reading. Within the report, assessments of current conditions and expectations for the future both rose, with the latter outperforming the former. Inflation expectations for the coming year rose a tenth of a percent to 2.8%, while those for the coming 5-10 years interestingly declined by -0.3% to 2.3%. This survey features some quirks not seen in other confidence surveys, such as a major delineation of responses by political party, where Democrats registered readings as low as those seen during the Great Recession, while Republican sentiment remains quite high.
(-) The government JOLTs job openings report for July showed a tick down of -31k in July to 7.217 mil., below the 7.331 mil. expected, in addition to a revision downward for the prior month. While the job openings rate fell by a tenth to 4.5%, the hiring, quits, and layoff rates each rose by a tenth to 3.9%, 2.4% and 1.2%, respectively. While not a great report, with a slowing pace of job growth, overall levels remain positive.
(+) Initial jobless claims for the Sep. 7 ending week fell by -15k to 204k, below the 215k level expected. Continuing claims for the Aug. 31 week also fell, by -4k, to 1.670 mil., which was below the 1.675 mil. level expected. No anomalies were reported, with the largest changes taking place in the largest states, demonstrating a continued strong employment environment with little layoff activity.
|Period ending 9/13/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-1.66||7.13|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks fared well last week, with optimism about a U.S.-China trade deal rising again. By mid-week, the Chinese published a list of products that would now be exempt from new tariffs this coming week, in addition to promoting greater purchases of U.S. agricultural products. In response, the U.S. administration deferred an upcoming tariff increase by 5% on $250 bil. in imported goods from Oct. 1 to Oct. 15. Equity results were led by small cap and value, which is a reversal of the large cap and growth tendencies we’ve become used to in recent years.
Stocks were unusually mixed by sector, with financials, materials and energy leading the way with gains over 3%, while consumer staples and technology lagged with minor losses on the week.
Foreign stocks in Europe, Japan, and emerging markets generally rose in line with domestic equities, once again driven by the sentiment tide of U.S.-China trade sentiment. The European Central Bank cut its key deposit rate by another -0.1% (further negative, from -0.4% to -0.5%) and has restarted quantitative easing measures of up to €20 bil./month, including purchases of corporate debt, beginning in November. This is smaller package than some had expected, and smaller than peak levels in 2016-17, but the shift in policy is meaningful. In fact, the question has turned to how much can be left to buy. After reaching a maximum allowable basket of sovereign government bonds, moving to corporates was the natural next step, but although this market in Europe is far smaller compared to the corporate bond market in the U.S. From a legal and practical standpoint, QE has and may become more problematic, as there are statutory limits as to the number of each nation’s bonds that can be purchased (due to this being a multi-country union) as well as the share of total bonds owned by the central bank. Japan has already encountered this issue, although it has gone further than Europe has, in buying risky assets in attempts to stimulate the economy—the BOJ now owns nearly 80% of Japanese ETF assets outstanding.
U.S. bonds experienced an atrocious week, with both treasuries and investment-grade corporates down close to -2%, as long-term yields corrected sharply higher. High yield bonds and floating rate bank loans actually gained some ground, the latter acting in their traditional fashion as a ‘contra-bond.’ Foreign bonds were mixed with developed market sovereigns declining, albeit to a lesser degree due to a weaker dollar. Emerging market bonds were sharply lower in USD terms, but local debt earned slight gains.
Real estate lost ground in the U.S., contrary to equities, hurt by the rise in long-term interest rates. However, global real estate outside of the U.S. ended slightly higher.
Commodities were mixed on net, with agriculture and industrial metals experiencing gains, while energy and precious metals lost ground for the week. While natural gas prices rose 5%, the price of crude oil fell by about -3% to just under $55/barrel, as markets absorbed an International Energy Agency report noting a global oil supply glut. However, over this past weekend, significant Saudi oil production assets representing up to half of export volumes were attacked (with early blame being cast towards the Yemenis and/or Iranians), which resulted in a 10% spike in prices first thing Monday morning. Likely more to come on that front if volatility persists.
Sam Khater, Freddie Mac’s Chief Economist says, “Pipeline purchase demand continues to improve heading into the late fall with purchase mortgage applications up nine% from a year ago. The improved demand reflects the still healthy underlying consumer economic fundamentals such as a low unemployment rate, solid wage growth and low mortgage rates. While there has been a material weakness in manufacturing and consistent trade uncertainty, so far, the American consumer has proved to be resilient with solid home purchase demand.”
The 30-year fixed-rate mortgage averaged 3.56% with an average 0.5 point for the week ending September 12, 2019, up from last week when it averaged 3.49%. A year ago at this time, the 30-year FRM averaged 4.6%.
The 15-year fixed-rate mortgage averaged 3.09% with an average 0.5 point, up from last week when it averaged 3.0%. A year ago at this time, the 15-year FRM averaged 4.06%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.36% with an average 0.3 point, up from last week when it averaged 3.3%. 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.