Weekly Update 1/20/2020

Your Weekly Update for Monday, January 20, 2020

Markets are closed today in honor of Martin Luther King Day

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Mike Elerath

Bill Roller
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Markets were up last week. The Dow Jones Industrial Average rose 1.82% to 29,348.10. The S&P500 finished up 1.97% to 3,329.62, while the Nasdaq Composite finished up 2.29% to 9,388.94. The annual yield on the 30-year Treasury rose 1.2 basis points to 2.296%.

Economic news for the week included better results from several regional manufacturing indexes as well as stronger housing starts. On par with forecasts were tempered producer and consumer inflation readings, as were retail sales, while industrial production came in on the weaker side.

U.S. and foreign equity markets gained, with U.S.-China trade progress and the improved economic data. Bonds were little changed, although foreign debt was affected by a rise in the dollar. Commodities declined due to currency effects and lower energy prices.

Economic Notes

(0) Advance retail sales for December rose 0.3%, matching expectations. Sales for the month were led by strength in gasoline station sales, clothing/accessories and building materials/garden equipment, while autos and auto parts saw a decline of over a percent. Core sales gained 0.5%, which beat forecast by a tenth of a percent. On the downside, negative revisions for several prior months pulled down the positivity of the report somewhat. Over the past year, core retail sales are up 6%, which points to a stronger trend of growth than is visible in the choppy month-to-month data.

(-) Industrial production for December fell by -0.3%, which was a tenth lower than the forecasted decline, in addition to a downward revision for November. By component, manufacturing production ticked higher by two-tenths during the month. This was despite a -5% drop in auto production related to back-and-forth disruptions around the General Motors strike. In other areas, utilities production fell by -5% during a warmer month, to lead the overall index lower, offsetting a 1% increase in mining (including energy) output. While industrial production has fallen by -1% over the past year, the trend of the past few months has been significantly stronger. Capacity utilization for the month fell by -0.4% to a level of 77.0%, falling right in the middle of the 75-80% range this measure has fluctuated in since 2010.

(+) The Empire state manufacturing index for January moved upward by 1.5 points to a level of 4.8, beating forecasted calls for 3.6—moving further again into expansion. Under the hood, new orders rose sharply, further into expansion, as did prices paid. On the other hand, shipments and employment fell slightly, but remained expansionary. The assumed business conditions for six months out fell back by a few points, but remained solidly in expansion as well (with a reading of nearly 25).

(+) The Philadelphia Fed manufacturing index rose by a substantial 14.6 points to 17.0 in January, beating expectations for a smaller gain to a level of 3.8. In reviewing the details of the report, new orders and shipments both increased sharply, moving further into expansionary territory, as did employment and prices paid. The business conditions survey for the coming six months also showed a further gain into very positive sentiment, at a level of 38. Along with NY, these two key regional manufacturing surveys both show improvement, which has been encouraging to investors waiting for a turnaround in the manufacturing segment.

(0) Import prices rose 0.3% in December, matching the consensus forecast. This was led by a 2% gain in petroleum prices, resulting in a 0.2% increase for the ex-petroleum index, which surpassed expectations slightly. Prices for industrial supplies/materials and food also moved higher by a percent to drive overall results. Year-over-year, though, headline import prices are only up 0.5%, with core prices still down -1.5% from that time. This somewhat negates the early argument that strong tariff policy would lead to far higher U.S. consumer inflation, although firms have been eating some of these early costs, as opposed to passing them on to consumers.

(0) The producer price index came in 0.1% higher for December on both a headline and core (minus food and energy) level—a tenth slower than forecast for headline but in line with expectations for core inflation. On the headline side, energy prices rose more than a percent, offsetting a small decline in food prices, while in other segments were mixed, with highlights including ‘crude materials’ up 3%, while core intermediate prices were down a few tenths, as were medical costs. Final demand PPI rose 1.1% on a year-over-year basis, with finished goods PPI beginning to increase to 1.9%.

(0) The consumer price index for December showed a gain of 0.2% on a headline level and 0.1% for core—a tenth less than expected for each. Under the hood, energy prices rose 1.4% to lead the headline number. Shelter components decelerated a bit to a rate near the average, while airfares, household furnishings, used cars, and hotel prices fell back. Some of this could have been seasonal. On a 2019 year-over-year basis, both headline and core CPI came in at a rate of 2.3%, which largely equates to the Fed’s target, when adjusted for compositional differences with the PCE price index. Inflation highlights during the year included a 3% gain in energy prices and owners’ equivalent rent, and medical costs up nearly 5%, which is likely not a surprise considering the trends of recent years.

(+) Housing starts rose by 16.9% in December to a seasonally-adjusted annualized rate of 1.608 mil., far surpassing expectations of a 1.1% increase, and rising above the general estimate of 1.5 million required home starts each year. Single-family starts were up by a solid 11%, while the more sporadic multi-family group increase by nearly 30%. Substantial gains were seen in all four regions, led by the Midwest and Northeast. Building permits, on the other hand, declined by -3.9% for the month, beyond the -1.5% decline expected by consensus, led by the multi-family group down -10%. Regionally, declines in the Northeast and South offset gains in the West. Starts are up over 40% from levels a year ago, with permits for single-family homes also up 10% from that time, which has again stoked optimism in the sector for a breakout.

(0) The NAHB housing market index ticked down by -1 point to 75 for January, surpassing expectations for a decline of -2 to 74. In looking at the report details, current sales fell by -3 points, future sales were flat, while prospective buyer traffic rose a point to offset the other decline. Regionally, the West and Northeast each gained several points, the Midwest declined significantly.

(-) The preliminary Univ. of Michigan consumer sentiment index for January ticked down by -0.2 of a point to 99.1, despite consensus forecasts calling for no change. Consumer assessments of current conditions ticked up by 0.3 points, while expectations for the future fell by -0.6 points. Inflation expectations for the coming year ticked up 0.2% to 2.5%, as did those for the next 5-10 years to the same level—at the higher end of their multi-year range.

(-) The government JOLTS job openings report for November showed a decline of -561k to 6.800 mil., falling below expectations calling for a reading of 7.250 mil. The job openings rate fell by -0.3% to 4.3%—the lowest rate in nearly two years—while the layoff rate also fell by a tenth to 1.1%. The hiring and quits rates were each unchanged at 3.8% and 2.3%, respectively.

(+) Initial jobless claims for the Jan. 11 ending week fell by -10k to 204k, below expectations calling for 218k. Continuing claims for the Jan. 4 week also fell sharply, by -37k to 1.767 mil., although that still came in higher than the 1.750 mil. level expected by consensus. No anomalies were reported to skew the results, other than continued likely seasonal adjustment issues that tend to affect the weeks near year-end. Overall, levels continue to indicate few layoffs and a generally strong labor environment.

(0) The periodic Fed Beige Book of regional anecdotes continued to note economic growth rising at a modest pace during the last six weeks or so of 2019, similar to the prior report. Manufacturing activity was the outlier, with flattish results, although apparently not as weak as depicted by some survey data. Employment markets also continue to be running at a tight level, with reports of labor shortages and rising wages in certain pressured segments, such as construction and other skilled positions. Overall inflation, though, was described as modest. Consumer spending rose at a ‘modest-to-moderate’ level, with seasonal sales strong. Home and auto purchases seemed to be buoyed a bit by the environment of lower interest rates.

Market Notes

Period ending 1/17/2020 1 Week (%) YTD (%)
DJIA 1.84 2.92
S&P 500 1.99 3.14
Russell 2000 2.54 1.90
MSCI-EAFE 0.85 1.04
MSCI-EM 1.16 2.89
BBgBarc U.S. Aggregate 0.06 0.50
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2019 1.55 1.58 1.69 1.92 2.39
1/10/2020 1.54 1.56 1.63 1.83 2.28
1/17/2020 1.56 1.58 1.63 1.84 2.29

So far in 2020, stocks have rallied in keeping with lower fears of recession, dampened escalation of the U.S.-Iran conflict, and, perhaps most importantly, the signing of ‘phase one’ of the U.S.-China trade deal, which boosted markets last week. Improved housing numbers also appeared to help sentiment. Earnings season is just beginning, with expectations for mid-single digit growth—below long-term levels, but certainly better than the flattish results from 2019. There are few hopes for a robust environment this year, but the ‘removal of hurdles’ appears to be a theme boosting overall market sentiment.

By sector, defensive utilities experienced the strongest performance, followed by communications and technology—all with gains upwards of 3%. Energy was the sole laggard again, with returns under -1%. In a change of recent trend, small cap stocks strongly outperformed large caps.

Foreign stocks fared positively, albeit at a slower growth pace than the U.S. Europe, U.K. and emerging markets all performed similarly, with the exception of Japan, which lost ground last week. It was announced that the German economy rose at a 0.6% rate for 2019, just over a fraction of the 1.5% growth seen in 2018. This lackluster performance of this weak economic growth, and accompanying lagging earnings growth, explains much of the return differential that has held back foreign equities. However, valuations remain more attractive, and bottoming of growth is often a sought-out catalyst for a turnaround. Chinese preliminary GDP growth came in at 6.0% for the full year, the slowest pace since 1990, with export-heavy activity continuing to decline in favor of more nuanced domestic consumer consumption, and lower-level manufacturing moving to other nearby nations with lower labor and infrastructure costs. Concerns over ongoing tensions with the U.S. persist, as does skepticism over the ability or desire to import $200 bil. of U.S. exports as agreed upon as part of the phase one deal.

U.S. bonds were little changed on the week, as indexes only moved a few basis points in either direction, in line with few changes in the treasury yield curve. By contrast, a strong dollar punished foreign developed market government bonds, which have minimal or negative yield to help buffet price fluctuations. Emerging market dollar bonds, on the other hand, gained sharply on the week.

Commodity prices declined overall on the week, in keeping with a stronger dollar. Agriculture and industrial metals gained, while energy prices declined. The price of crude oil fell by nearly a percent to around $58.50/barrel, with fewer geopolitical or supply reports to move the needle. Natural gas prices, on the other hand fell -10% upon reports of milder weather nationwide. Despite calls for higher demand from LNG exports and industrial use, the price of gas has fallen to nearly $2/unit.

Mortgage Rates

“Mortgage rates inched up by one basis point this week with the 30-year fixed-rate mortgage averaging 3.65%. By all accounts, mortgage rates remain low and, along with a strong job market, are fueling the consumer-driven economy by boosting purchasing power, which will certainly support housing market activity in the coming months,” said Sam Khater, Freddie Mac’s Chief Economist.

Khater continued, “While the outlook for the housing market is positive, worsening homeowner and rental affordability due to the lack of housing supply continue to be hurdles, and they are spreading to many interior markets that have traditionally been affordable.”

The 30-year fixed-rate mortgage averaged 3.65% with an average 0.7 point for the week ending January 16, 2020, up slightly from last week when it averaged 3.64%. A year ago at this time, the 30-year FRM averaged 4.45%.

The 15-year fixed-rate mortgage averaged 3.09% with an average 0.7 point, up slightly from last week when it averaged 3.07%. A year ago at this time, the 15-year FRM averaged 3.88%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.39% with an average 0.3 point, up from last week when it averaged 3.30%. A year ago at this time, the 5-year ARM averaged 3.87%.

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://beaconrwa.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.