Weekly Update 10/7/2019

Your Weekly Update for Monday, October 7, 2019

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Mike Elerath

Bill Roller
NMLS #107972


Markets were mixed last week. The Dow Jones Industrial Average fell 0.92% to 26,573.72. The S&P500 ended down 0.33% to 2,952.01 while the Nasdaq Composite finished up 0.54% to 7,982.47.  The annual yield on the 30-year Treasury fell 10.9 basis points to 2.015%.

Economic data during the week included weaker-than-expected ISM manufacturing and services reports, in addition to a contractionary Chicago PMI. The employment situation report was mixed, with payrolls coming a bit below expected, but the unemployment rate fell to multi-decade lows.

World equity markets lost ground as concerns over global manufacturing slowdowns and economic weakness held back sentiment in the U.S. and abroad. Bonds, as usual, benefitted as rates fell in response. Commodities lost ground due to demand fears pulling down crude oil prices to their lowest levels in several months.

Economic Notes

(-) The ISM manufacturing index for September fell by -1.3 points to 47.8, disappointing compared to consensus expectations calling for a return back up to a neutral 50.0, and representing the weakest reading in ten years. Under the hood, new orders ticked up slightly but remained in contraction, while production and employment continued to drop further into contraction, as did inventories. Prices paid rose a bit, but remained below 50. This was obviously a sub-par result, as 15 of 18 industries reporting a contractionary results—with financial markets reacting negatively. The index, which is based on sentiment levels of respondents as opposed to pure production data, has no doubt been negatively influenced by a slowdown in global economic growth and weakness caused by U.S.-China trade issues. The question remains as to whether or not this lengthening manufacturing slump is a ‘mid-cycle’ slowdown, as the Fed has portrayed, or is morphing into a deeper decline, as recession mongers fear.

(-) In keeping with the ISM manufacturing index, the Chicago PMI index for September contracted by -3.3 points to 47.1, below the neutral 50 level expected, which represented a move back into contraction for the third time in four months. While supplier deliveries and employment provide the sole positive inputs for the month, production, new orders, order backlogs, and inventories fell sharply, further into contraction. The special question for the month involved expectations for supplier delivery times into the next quarter, with two-thirds of respondents expecting no change. It appears the strike at General Motors may have exacerbated the numbers, but time will tell how much impact this has on the slowing trend.

(-) The ISM non-manufacturing index for September fell by -3.8 points to 52.6, underperforming median expectations calling for a 55.0 level, but remaining in expansion. Business activity, new orders and employment all declined in keeping with the headline number, but also remained in expansionary territory. On the other hand, supplier deliveries and net export orders ticked up further into expansion, as did prices paid. From a narrative standpoint from respondents to the survey, it appeared, to no surprise, that U.S.-China trade issues and economic growth remained the key concerns.

(-) The August trade balance moved further into deficit by -$0.9 bil. to -$54.9 bil., wider than the -$54.5 bil. level expected. Imports rose by a half percent, led by segments outside of petroleum, as oil import levels fell by -4%. Exports ticked slightly higher, as a large petroleum increase of over 10% was neutralized by non-oil areas declining.

(-) Construction spending rose 0.1% in August, but underperformed expectations calling for a 0.5% gain, in addition to downward revisions for several prior months. Private construction was flat on net, with residential gaining a percent, while non-residential fell by the same degree. Public construction rose in both the residential and non-residential segments.

(0/-) The ADP private employment report showed a gain of 135k jobs in September, which fell just below the 140k forecasted level. On the negative side, the August report was also revised downward, by -38k to 157k. Services jobs rose by 127k, with strength in education/health at about a third of that total. Goods-producing employment gained 8k, with manufacturing only rising 2k, while construction jobs rose 9k. While not a terrible report, it does show signs of leveling off in employment growth, as seen in other data as well.

(0) Initial jobless claims for the Sep. 28 ending week rose by 4k to 219k, which was just above the median forecast of a flat 215k reading. Continuing claims for the Sep. 21 week fell by 5k to 1.651 mil., but fell below expectations calling for 1.654 mil. The claims were focused on certain states, notably auto-producing states, which were likely affected by the General Motors strike. On a broader level, though, claims levels remain extremely low.

(-/0) The employment situation report for September was a bit below expectations, but it could have been worse. At the same time, the slower pace of growth may help leave the door open for a Fed rate cut in October.

Nonfarm payrolls came in at 136k, which was below the 145k expected by consensus. It was below the 130k result last month, but that figure was revised upward by 45k, which was a positive data point. While not a blockbuster number, this release helped stem the negativity of recent manufacturing data. In the details, education/health jobs rose by 40k, business services by 34k, and leisure/hospitality by 21k. On the downside, manufacturing and retail employment fell by -2k and -11k, respectively. Government payrolls also declined by a few thousand, with hiring for census workers for 2020 slowing down a bit more than expected.

The unemployment rate, on the other hand, fell to a 50-year low of 3.5%, compared to expectations calling for 3.7%. The U-6 measure of underemployment dropped to 6.9%, which is just a tick above its multi-decade low. Labor force participation remained at a multi-year peak, while the household survey also experienced a strong rise of 391k.

Average weekly earnings were flat on the month, which disappointed compared to a 0.4% gain from last month, and 0.2% increase expected for September. This net results was the offset of gains in production/mining, while information jobs lost ground a bit. The year-over-year increase in earnings decelerated by three-tenths of a percent to 2.9%. Average weekly hours were also unchanged at 34.4.

Market Notes

Period ending 10/4/2019 1 Week (%) YTD (%)
DJIA -0.88 16.06
S&P 500 -0.30 19.59
Russell 2000 -1.28 12.49
MSCI-EAFE -2.16 10.74
MSCI-EM -0.49 3.19
BBgBarc U.S. Aggregate 0.81 9.35
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
9/27/2019 1.80 1.63 1.56 1.69 2.13
10/4/2019 1.71 1.40 1.34 1.52 2.01

U.S. stocks fared poorly early last week, before recovering somewhat by Friday—however, the net result was still in the red. During the early part of the week, stocks slid due to the weaker-than-expected ISM manufacturing report, coupled with the World Trade Organization’s decision to allow the U.S. to pursue additional tariffs on specific goods from Europe, which appeared to exacerbate broader global trade tensions. These tariffs, which could amount to up to $7.5 bil./year, on items such as single-malt Scotch, French wine, and other items up to 25%, were based on an allowed retaliation for inappropriate monies European governments provided to Airbus (whose products will also be subject to tariff). While the Presidential impeachment inquiry has not been noted as a significant source of equity volatility specifically, the indefinite timeline and overhang of uncertainty and potential outcome could be another source of background negativity in the near-term, absent a concrete resolution (Senate vote, etc.).

By sector, information technology and health care led with gains of a percent each on the week, while energy and materials declined with losses of several percent. Health care stocks benefitted from a plan to establish a trust (similar to that done for tobacco years ago), which could shield several manufacturers from further liability in the opioid crisis. This removes one open-ended point of uncertainty for several healthcare firms which have been sued in local courts for either manufacturing or distributing opiates around the country. For the third quarter overall, when measured by ‘factors,’ minimum volatility and quality fared best, which is in keeping with the trade woes story; value and momentum each fared positively but to a lesser degree.

Foreign stocks were also down, with Europe and U.K. faring worse than Japan. The U.K. manufacturing PMI fell below 50, which raised fears of recession, on top of seemingly never-ending concerns over Brexit’s conclusion. The German services sector also contracted, which added to already-poor results in the manufacturing segment, and ongoing negative sentiment surrounding trade. Chinese stock markets, a key driver of EM sentiment, were closed for the 70th anniversary of the current communist regime. Other markets on net were slightly negative, with weakness in Brazil due to delays in pension reform, India and other Asian nations due to continued poor sentiment driving global flows generally. Overall, it appears that recent economic data, especially in manufacturing, has been consistently slowing around the world—which explains the closer correlations in returns between domestic and foreign equity markets, not to mention central bank policy.

U.S. bonds fared well again, as economic worries stoked demand for fixed income, pushing down interest rates across the yield curve. Oddly, the 10y-2y curve remains positively sloped, while the 10y-3m curve remains fairly strongly inverted (with an implied rate cut in October, which would re-flatten the curve by this measure). Long treasuries, as expected, fared best, while high yield corporates and floating rate bank loans lost ground on the week. Developed market foreign bonds were generally flat in local terms, but were improved by a weaker dollar. Emerging market bonds fared a bit better, with gains in local and USD terms.

Commodities generally declined on the week, despite a weaker dollar, with losses in energy and industrial metals offsetting gains in ag and precious metals. The price of crude oil fell by over -5% to a shade below $53/barrel—the lowest price level in several months. Fears over economic slowing tend to threaten demand on top of concerns over short-term supply being recently alleviated, which has tipped the balance.

Mortgage Rates

“While mortgage rates generally held steady this week, overall mortgage demand remained very strong, rising over fifty percent from a year ago thanks to increases in both refinance and purchase mortgage applications,” said Sam Khater, Freddie Mac’s Chief Economist. “As economic growth decelerates, it is clear that low mortgage rates will continue to support the mortgage market and we expect that to persist for the remainder of the year.”

The 30-year fixed-rate mortgage averaged 3.65% with an average 0.6 point for the week ending October 3, 2019, slightly up from last week when it averaged 3.64%. A year ago at this time, the 30-year FRM averaged 4.71%.

The 15-year fixed-rate mortgage averaged 3.14% with an average 0.5 point, down from last week when it averaged 3.16%. A year ago at this time, the 15-year FRM averaged 4.15%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.38% with an average 0.4 point, unchanged from last week. A year ago at this time, the 5-year ARM averaged 4.01%.

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.

Mortgage Rates

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.