Weekly Update 11/4/2019

Your Weekly Update for Monday, November 4, 2019

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Have a great week!

Mike Elerath

Bill Roller
NMLS #107972


Markets were all up again last week. The Dow Jones Industrial Average rose 1.44% to 27,347.36. The S&P500 ended up 1.47% to 3,066.91 while the Nasdaq Composite finished up 1.74% to 8,386.40.  The annual yield on the 30-year Treasury fell 8  basis points to 2.212%.

Economic data during the week included the Federal Reserve lowering key interest rates by a quarter-percent for the third straight time. Insofar as data was concerned, several manufacturing metrics continued to show contraction, while housing/construction and the employment situation report for October came in stronger than expected.

Global equity markets rose in line with the U.S. Fed lowering rates, and extension of Brexit, and lack of any negative U.S.-China trade sentiment. Bonds rallied as rates across the curve ticked downward to reflect the newly-lowered short-term rate along with tempered inflation readings. Commodities were flattish overall, despite a drop in crude oil prices over the week.

Economic Notes

(0) As reported earlier in the week, the Federal Reserve Open Market Committee decided to cut key interest rates by another quarter-percent—making it a total of three over recent months. From the tone of the FOMC statement (removing the key phrase ‘act as appropriate’ to sustain the economic recovery) and press conference afterward, it appears the intended message is that this will be the last ‘insurance’ rate cut for the time being. This is, of course, barring any real deterioration in economic data, such as an accelerated drop in manufacturing or further weakness in inflation expectations.

For now, though it seems the Fed has found a decent ‘balance’ between providing some support given the uncertain geopolitical and weaker growth backdrop, and doing too much. As it is, there were several dissents, which follow the thinking of more than a few economists, who question the need and historical precedent for such insurance cuts. Chair Powell mentioned that future rate hikes were less likely as long as inflation remains so far below target, which buoyed hopes for an intended low rate cycle (again). Interestingly, estimates of the ‘Taylor Rule’, a quantitative model used by a variety of Federal Reserve Banks and other economists to determine an objective level for the fed funds rates, show a fed funds rate at least 1% higher than current levels.

(0/+) The advance report on third quarter GDP came in at 1.9%, a tenth lower than Q2 GDP, but outperformed the median forecast calling for 1.6%. The outperformance was led by decelerating but still robust personal consumption (which rose nearly 3%, down from close to 5% last quarter), which contributed nearly all of the GDP growth, absent other factors. Inventories were stable (which tend to be transitory from quarter to quarter). Business fixed investment continued to decline (down -3%), led by weakness in both equipment and mining/energy structures. On the positive side, intellectual property growth improved sharply from the prior quarter, as did residential investment and government spending. The core PCE price index for Q3 came in at an annualized 2.2%, which was a tick above the prior quarter, and in keeping with tempered expectations. A variety of estimates, including those from several Federal Reserve branches, have pegged GDP in the lower side of the 1.5-2.0% range for several quarters to come.

(0) Personal income for September rose 0.3%, which was largely as expected, in addition to a revision upward for the prior month. This brought the year-over-year increase to 4.9%. Personal spending gained 0.2%, a tick short of forecast, but also included an upward revision, bringing the year-over-year rate to 3.9%. This pushed the September savings rate 0.2% higher to 8.3%. The PCE price index in September declined minimally on a headline level and rose a few hundredths of a percent on a core level, to bring the year-over-year change to 1.3% and 1.7%, respectively, far below the Fed target.

(-) The Chicago PMI manufacturing index fell -3.9 points in October to a four-year low of 43.2, compared to expectations of a still-contractionary 48.3 reading. This represented the second straight sub-50 reading, with mixed component readings under the hood. New orders and order backlogs both fell sharply, further into contraction, which drove the index’s poor result. On the other hand, production, inventories, and employment all gained in for the month, but remained in contraction. This closely-watched index ratified concerns over manufacturing sector slowing, which was taken negatively by the equity market.

(0) The ISM manufacturing index for October rose by 0.5 points to 48.3. This is the first increase in the closely-watched index in nearly six months, but it fell just below expectations for a more extensive rise to 48.9. New orders and employment led the way, each rising over a point to move closer toward a ‘neutral’ 50 position (neither contracting nor expanding). Production, supplier deliveries, and prices paid all declined to all remain in the contractionary area. While obviously not showing expansion in the segment, some of the weakness might be attributed to the GM strike; the ‘less negative’ result otherwise could be taken as a sign of manufacturing improvement if trends continue in this better direction.

(+) Construction spending reversed course as well, by gaining 0.5% in September, beating forecasts calling for 0.4%; the report included several positive net revisions for prior months over the summer. On the private spending side, single-family residential rose by more than 1%, continuing a multi-month trend in growth, while multi-family residential and non-residential each declined for the month. Public spending rose on net, with non-residential (notably highways/streets) gained sharply, which was partially offset by a drop in residential.

(+) The advance edition of September’s goods trade balance report showed a decrease of -$2.7 bil., to a deficit of -$70.4 bil., which was far tighter than the expected widening to the -$73.5 bil. level. Imports fell by -$5 bil., including a consumer goods decline of -5%,  as well as capital goods and autos—all exacerbated by the imposition of Sept. 1 tariffs on items from China. This surpassed the drop in exports of just over -$2 bil., which included -13% in agricultural products and -7% in autos.

(-) The S&P/Case-Shiller home price index for August fell by just under -0.2%, which was a tenth beyond the expected drop of -0.1%. In the 20-city index, prices rose in all but two, led by gains of at least a half-percent in higher-flying markets of Phoenix, Miami, and Seattle; on the other hand, New York prices declined by nearly a half-percent. Most importantly, the year-over-year rate continued to decelerate, coming in at 2.0%—the slowest pace in seven years. However, this minimal inflation-adjusted gain is more in line with long-term historical averages calculated by Robert Shiller himself when expanding on long-term housing data in his academic work.

(+) Pending home sales for September rose 1.5%, which outperformed forecasts calling for a 0.9% increase. Regionally, the Midwest and South experienced gains of 3% for the month, while pending sales in the West fell by -1%. Year-over-year, the metric improved by several points to 6%, reflecting other improving housing stats. Typically, pending home sales translate to ‘existing’ home sales over the subsequent few months.

(-) The Conference Board consumer confidence report ticked down by -0.4 of a point to 125.9 in October, below expectations calling for 128.0. While perceptions of current conditions ticked upward by nearly two points, future expectations declined by roughly the same amount. This widening gap is considered a negative from the standpoint of economic predictions. The labor differential, which measures how plentiful jobs are versus how difficult they are to get, ticked up by a few points as well.

(+) ADP employment for October showed a gain of 125k jobs, beating expectations calling for 110k. However, there was a revision downward for the prior month by over -40k to offset some of the positive change. Services jobs rose by 138k, with education and health services again leading with 41k. On the negative side, goods-producing employment fell by -13k, with a minor drop in manufacturing jobs.

(-) Initial jobless claims for the Oct. 26 ending week rose by 5k to 218k, which surpassed the 215k expected. Continuing claims for the Oct. 19 week also rose, by 7k to 1.690 mil., which was above the 1.679 mil. expected. No anomalies were reported by the DOL, with claims spread among a variety of states, and overall levels remaining low.

(+) The employment situation report for October came in a lot better than expected, given the recent flattening of general economic conditions as well as a few other idiosyncratic variables that affected the results.

Nonfarm payrolls rose by 128k, which was a sharp deterioration from the revised 180k from September, but far better than the 85k expected. In addition, 95k jobs were added to recent months via revision. Service employment increased by 157k, with strong results in leisure/hospitality, education/health and trade/transports/utilities. Employment in goods production fell by -26k; it seems the General Motors strike played a major role, in removing about -46k jobs from that segment. Government jobs declined by nearly -20k, which appeared largely due to a drop in Census employment. Construction jobs rose by 10k.

The unemployment rate ticked up a tenth of a percent, back up to 3.6%, largely the result of an increase in labor force participation to a 6-year peak, but was in line with consensus expectations. Similarly, the U-6 underemployment rate rose a tenth to 7.0%. The household survey component showed an increase of 241k, which was also a strong result. Average hourly earnings increased by 0.2%, a tenth below the pace expected, while the year-over-year rate of change was steady at 3.0%. Wages for production/non-supervisory workers rose at a slightly stronger 12-month trailing pace of 3.5%, which reflects strength in lower-end employment seen in other data. Average weekly hours were unchanged at 34.4.

Market Notes

 Period ending 11/1/2019 1 Week (%) YTD (%)
DJIA 1.44 19.51
S&P 500 1.49 24.36
Russell 2000 1.99 19.21
MSCI-EAFE 1.18 17.53
MSCI-EM 1.29 8.64
BBgBarc U.S. Aggregate 0.47 8.68
 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
10/25/2019 1.66 1.63 1.62 1.80 2.29
11/1/2019 1.52 1.56 1.55 1.73 2.21

U.S. stocks fared strongly last week, with earnings results better than feared, along with an easing Fed and positive surprise from the Friday jobs report; these offset less favorable manufacturing numbers that could have played more poorly. Oddly, the week was largely devoid of any major U.S.-China trade news, other than a ‘constructive’ conference call between the two nations later in the week. Overall, the month of October ended in a very benign way, with U.S. stocks up 4%, with little of the volatility that is historically characteristic of the month.

By sector, health care rose over 3% with strong earnings results from blue chips Merck and Pfizer, while tech and industrials also fared well. Energy was the worst-performer on the week, losing ground along with oil prices.

Earnings results for Q3 continue to roll in, with nearly three-quarters of firms in the S&P having finished their reporting. In turn, about three-quarters of these firms have reported earnings numbers above projections, although the net year-over-year earnings change remains negative, at -2.7%. Revenues, however, have improved to just over 3% growth for the year. While uncommon, the index also reported three straight quarters in a row of earnings declines from late-2015 through mid-2016, so this is not unprecedented outside of weak economic environments.

Foreign stocks appeared to readily accept the EU’s extension of the Brexit negotiations for another three months, allowing several sticking points to be potentially ironed out, not to mention a general election in the U.K. in about a month. The ECB held steady with no rate changes, although it did re-commence its program of asset purchases of €20 bil./month; similarly, the Bank of Japan also held rates unchanged. Emerging markets rose to a stronger degree in local terms, with gains in most of the BRIC nations, due to an unexpectedly stronger PMI reading in China—seen as a proxy for global growth to a large extent.

Fixed income gained across the board, as the Fed’s easing of monetary policy again last week pulled down general yield levels. U.S. investment-grade bonds in both the government and corporate segments rose largely in line with each other, while high yield and senior loans each lost a bit of ground. Foreign bonds rose as well, especially developed market sovereign governments, which benefitted from the dollar falling roughly a half-percent. Now that the market yields now reflect the Fed’s third and possibly ‘final’ cut for the time being, the yield curve has again ‘un-inverted’ and resumed its normal positive slope.

Commodities experienced an uncommon flattish week, despite the tailwind of a weaker U.S. dollar. Agriculture, industrial and precious metals gained slightly, but were offset by a minor decline in energy. While the price of crude oil fell by nearly a percent to just over $56/barrel, based on fears of excess supplies, natural gas prices spiked by nearly 10%. Cooler-than-expected weather on the East coast seems to be one catalyst, in addition to speculative activity being unwound by those betting on further gas price declines.

Mortgage Rate

“This week marks the third consecutive week of rate increases, which hasn’t happened since April of this year. That said, purchase activity continues to show strength, indicating obvious homebuyer demand,” said Sam Khater, Freddie Mac’s Chief Economist. “However, the lack of housing supply remains a major barrier to not just the housing market, but the overall economic recovery.”

The 30-year fixed-rate mortgage averaged 3.78% with an average 0.5 point for the week ending October 31, 2019, up from last week when it averaged 3.75%. A year ago at this time, the 30-year FRM averaged 4.83%.

The 15-year fixed-rate mortgage averaged 3.19% with an average 0.6 point, up from last week when it averaged 3.18%. A year ago at this time, the 15-year FRM averaged 4.23%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.43% with an average 0.4 point, up from last week when it averaged 3.4%. A year ago at this time, the 5-year ARM averaged 4.04%.

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.