Weekly Update 10/14/2019

Your Weekly Update for Monday, October 14, 2019

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Have a great week!

Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
NATIONAL SOCIAL SECURITY ADVISOR

Bill Roller
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
NMLS #107972

Summary

Banks and the bond market are closed today in honor of Columbus Day.  The stock market is open. Markets were up last week. The Dow Jones Industrial Average rose 0.91% to 26,816.59. The S&P500 ended up  0.62% to 2,970.271 while the Nasdaq Composite finished up 0.93% to 8,057.04.  The annual yield on the 30-year Treasury rose 22.15 basis points to 2.215%.

In a slow week for economic data, producer and consumer inflation measures were mixed, but remained in tempered ranges. Labor releases were mixed as well, with government measures of job openings falling, while jobless claims remained low.

U.S. and foreign equity markets both gained several days last week with positive sentiment towards U.S.-China trade meetings staying on track. On the flip side, bonds fell as flows moved toward equities, pushing up interest rates a bit. Commodities generally moved higher, along with a spike in oil prices in keeping with new Iranian flare-ups in the Persian Gulf.

Economic Notes

(0) The producer price index for September fell by -0.3% on both a headline and core (subtracting food and energy) level, which came in below the 0.1% and 0.2% increases expected. Energy prices fell over -2%, which contributed to the headline drop, which was led by sharply lower prices for gasoline. Within the core index, medical care services rose at a pace of over 0.3% as one of the leading segments, while core goods declines, as did airfares, by nearly -3%. On a year-over-year basis, PPI is up 1.4% on a headline basis and 2% for core, which includes a half-percent decline in the prices of goods and 2% increase in services. This is the slowest pace in about three years; however, it has tended to fluctuate over the past decade in line with several mid-cycle slowdowns, even moving into deflation on occasion.

(0) The consumer price index for September was unchanged on a headline basis, but rose 0.1% on a core level, subtracting food and energy prices. During the month, slightly higher prices for food were offset by -2% declines in prices for energy commodities. The core measure was influenced by a gain in shelter of several tenths of a percent, followed by medical care services, but a decline in prices for used cars, medical commodities and apparel. The impact of higher prices due to tariffs has been difficult to determine, implying the gains have been subtle; however, segments such as household furnishings have risen by several tenths of a percent. Year-over-year, headline and core CPI rose at rates of 1.7% and 2.4%, respectively, which are strangely each outside the Fed’s 2.0% target band in different directions. On that yearly measure, energy prices being down over -8% has played the key role, but inflation in other segments has stabilized upward a bit. Again, this lends less credence to the Fed using ‘lack of inflation’ as a rationale for an easing policy.

(-) Import prices rose 0.2% in September, relative to expectations for no change. However, removing petroleum from the equation, which rose over 2% in the month, prices fell by -0.1% on net. While prices for industrial supplies also rose over a percent, food prices fell an equivalent amount. Other segments, including capital and consumer goods, were little changed.

(+) The preliminary October Univ. of Michigan consumer sentiment index rose by 2.8 points to 96.0, beating median forecasts calling for a 92.0 reading. The survey was primarily driven by a rise in consumer assessments of current economic conditions, which rose nearly 5 points, although future expectations also improved. Inflation expectations for the coming year fell by a dramatic -0.3% to 2.5%, while those for the next 5-10 years fell -0.2% to match the all-time low of 2.2%. In consumer readings, inflation figures are often driven by recent changes in gasoline prices, so can be erratic at times.

(-) The JOLTs job openings report for August showed a decline of -123k to a level of 7.051 mil., which was below the 7.250 mil. expected by consensus, in addition to a downward revision of -43k for July. The job openings rate fell a tenth to 4.4%, as did the hiring rate and quit rate at 3.8% and 2.3%, respectively. The layoff rate was unchanged at 1.2%. While the job openings rate is down from its peak level, the overall data continues to appear indicative of strong labor market conditions.

(0) Initial jobless claims for the Oct. 5 ending week fell by -10k to 210k, below the flattish 220k level forecast. Continuing claims for the Sep. 28 week, on the other hand, rose by 29k to 1.684 mil., which surpassed the median forecast calling for 1.651 mil. These two results largely offset, but show some supposed impact from the General Motors strike in certain states. Otherwise, levels remain very low, and indicative of a strong labor market free of massive layoffs.

(0) The FOMC minutes from the September meeting showed a bit of the ongoing mixed sentiment about lowering rates—seen by the dissents in both directions. The key conclusions generally mirrored the formal statement released at the time, as would be expected, with growth rising at a moderate pace, and inflation described as muted, with few concerns over overstimulation on that front. All-in-all, the descriptions of household spending were based on a strong foundation of income and employment, which did not appear typical of easing regimes, although risks to recession were seen as increasing. The discussion around ‘conditions abroad,’ referring to global growth slowing and trade policy uncertainty appeared to be the primary drivers for action. This difference of opinion is likely to persist, with the economy continuing to straddle the uncertainties of possible trade intensification or de-escalation—with global growth being the variable hanging in the balance.

Market Notes

Period ending 10/11/2019 1 Week (%) YTD (%)
DJIA 0.93 17.14
S&P 500 0.66 20.38
Russell 2000 0.77 13.35
MSCI-EAFE 2.31 13.30
MSCI-EM 1.50 4.74
BBgBarc U.S. Aggregate -1.03 8.23
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
10/4/2019 1.71 1.40 1.34 1.52 2.01
10/11/2019 1.68 1.63 1.59 1.76 2.22

U.S. stocks fared well last week, with several days of upward movement due to perceived progress in trade talks between the U.S. and China, with the announcement of a light ‘Phase 1’ deal. This essentially included a decision to not move ahead with schedule Oct. 15 tariffs on China, along with China’s agreement to purchase up to $50 bil. of U.S. agricultural products. Obviously, the bar for something positive to happen at this point is quite low. While the Chinese were seen as capitulating a bit to U.S. demands for a deal, the intellectual property protection component remains a key sticking point yet to be resolved. As this is one of the most important elements for the U.S., hopes for a grand resolution could remain difficult to achieve. In addition, the creation of a ‘blacklist’ of Chinese firms, which would be locked out of U.S. company supply chains, continue to add negative pressure to the Chinese economy. However, threats of such lists and restriction of U.S. financial investment in Chinese companies has continued to wax and wane repeatedly in recent weeks.

By sector, materials and industrials led the way, while defensives utilities and consumer staples actually lost ground on the week, with bond proxy asset popularity falling, along with conventional bonds. Earnings results for Q3 will be coming out over the next several weeks, with expectations for a third straight negative quarter of earnings growth on a year-over-year basis. While equity market sentiment generally remains heavily glued to trade, per FactSet, corporate earnings calls have been more focused on the negative aspect of the strong U.S. dollar, in addition to weather effects last quarter and slowing growth in Europe. In particular, a strong dollar hurts exporters and also decreases revenues earned in foreign currencies.

Foreign stock returns were largely in line with those in the U.S., with continued risk-on/risk-off sentiment tied predominately to trade news. The only meaningfully local news was apparent progress in the Brexit debate, specifically the continued outstanding issue of Ireland-Northern Ireland border treatment, which pushed the pound up nearly 3% on the week. The Oct. 31 deadline is rapidly approaching, with expectations by many for another extension absent more progress. Odds continue to remain split among the various outcomes. Japanese stocks fared positively in local terms, but turned the opposite direction when translated to the U.S. dollar, with negative government sentiment about economic growth and a typhoon weighing on markets there compared to elsewhere in the world. Emerging markets underperformed developed markets slightly on the week, with mixed results across nations and little underlying theme. China fared strongly with last week’s hopes for trade progress, while Turkish stocks were pummeled following their military offensive into Syria. Aside from the natural uncertainty that arises during such actions, the probability of punitive sanctions from the U.S. and other nations has risen sharply.

U.S. bonds fell back in price last week, as investors felt more comfortable risk taking, which drove interest rates higher across the board. Long duration treasuries fared worst, as expected, while high yield ended as the sole positive returning bond sector, with a higher correlation to equities. The dollar fell back a bit last week, which tended to help foreign bonds a bit, although developed market sovereigns remained negative, while some emerging market indexes eked out small positive returns.

Real estate fell back last week in the U.S., along with higher interest rates and a movement away from defensive equity assets. By contrast, Europe experienced strong gains of several percent, more in keeping with broader equities, led by strength in the U.K.

Commodities generally rose with a weaker dollar, with losses in risk-sensitive precious metals offset by gains in all other segments—notably energy as the price of crude oil rose by over 3% to just under $55/barrel. Despite an easing of Saudi-Yemeni tensions in recent weeks, a missile strike on an Iranian tanker near a Saudi port city caused tensions in the Middle East to rise again, along with prices.

Mortgage Rates

“Despite the economic slowdown due to weakening manufacturing and corporate investment, the consumer side of the economy remains on solid ground,” said Sam Khater, Freddie Mac’s Chief Economist. “The fifty-year low in the unemployment rate combined with low mortgage rates has led to increased homebuyer demand this year. Much of this strength is coming from entry-level buyers – the first-time homebuyer share of the loans Freddie Mac purchased in 2019 is forty-six percent, a two-decade high.”

The 30-year fixed-rate mortgage averaged 3.57% with an average 0.6 point for the week ending October 3, 2019, slightly down from last week when it averaged 3.65%. A year ago at this time, the 30-year FRM averaged 4.80%.

The 15-year fixed-rate mortgage averaged 3.05% with an average 0.5 point, down from last week when it averaged 3.14%. A year ago at this time, the 15-year FRM averaged 4.29%.

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 3.38%. A year ago at this time, the 5-year ARM averaged 4.07%.

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.