Weekly Update 2/18/2020

Your Weekly Update for Tuesday, February 18, 2020

Markets were closed yesterday in honor of Presidents Day.

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Mike Elerath

Bill Roller
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Markets rose again last week. The Dow Jones Industrial Average rose 1.02% to 29,398.08. The S&P500 finished up 1.58% to 3,380.16, while the Nasdaq Composite finished up 2.21% to 9,731.18. The annual yield on the 30-year Treasury fell  2.6 basis points to 2.016%.

Economic data for the week included improvements in retail sales, jobless claims, and consumer sentiment; industrial production declined for the month, led by some idiosyncratic factors. Consumer and import price inflation remained tempered, in line with recent trends.

U.S. equity markets gained on the week as progress in containment of the coronavirus appeared to raise hopes for mitigating economic damage from the contagion. Foreign stocks gained slightly in local terms, but were held back by a stronger dollar. Bonds were little changed, with credit outperforming governments. Commodities gained, especially in energy and industrial metals, which are most sensitive to economic activity.

Economic Notes

(0/+) Retail sales in January rose by 0.3%, matching the pace of the prior month as well as median expectations. However, core/control retail sales (which exclude autos, gasoline, and building materials) were flat, despite consensus estimates of a 0.3% increase, which included downward revisions for several prior months. Overall, food services, building materials, and garden equipment segments were strong—likely a reflection of warmer-than-average temperatures—while clothing/accessories fell back from their usual holiday spike. Overall, due to winter being a bit more temperate than average has boosted retail activity a bit, although seasonal adjustments at year-end remain tricky on a month-to-month basis. Year-over-year, sales are up over 4%, which is considered a strong result.

(-) Industrial production for January fell by -0.3%, which was just a tick below the -0.2% decline expected by consensus. This was largely the result of weakness in utilities production, due to warmer conditions that required less need for heating need, along with a sharp drop in production of business equipment, while mining output (which includes oil) gained a percent. The shutdown in production of the Boeing 737 Max airplane played a larger-than-average role in this broader decline; it would have turned positive aside from this impact. Capacity utilization for the month fell by -0.2% to 76.8%.

(0) The consumer price index for January came in at a rounded 0.1% higher on a headline level, and 0.2% stronger for core, removing food and energy. Shelter costs served as a strong catalyst for upward price movement, due to both rising home values and rents, while apparel, personal care, and medical services prices also rising at a faster rate than the overall average. Energy commodities held back the headline number, due to a decline of nearly -2%, reflecting continued weakness in crude oil prices. Year-over-year, headline and core inflation indexes rose at rates of 2.5% and 2.3%, respectively. These are stronger inflation numbers than we’ve grown used over the past two years.

(0) Import prices were unchanged in January, relative to an expected decline of -0.2%. The headline was largely led by a -2% petroleum prices, as the core ex-petroleum measure experienced an increase of 0.2% for the month. In other segments, food prices rose by 0.5% on the month, as did prices for autos, while pricing for industrial supplies/materials declined by just over a similar amount. The recent phase one agreement between the U.S. and China, lowering overall tariff rates, should play a role in keeping import prices more contained than they otherwise would be (a good thing). Trade issues with Europe, however, continue to be in more flux, which affects certain industries, such as specialty machinery and autos.

(+) The Univ. of Michigan preliminary sentiment report for February showed a gain of 1.1 points to 100.9, beating the 99.5 level expected. Survey participant assessments of current conditions fell by just over a half-point, while expectations for the future rose by over 2 points. Inflation expectations for the coming year were unchanged at 2.5%, while those for the next 5-10 years fell by -0.2% to 2.3%. Inflation expectations are typically driven by recent shorter-term changes in gasoline prices, oddly enough.

(-) The JOLTS government job openings measure for December fell by -364k to 6.423 mil.—a two-year low and a disappointment from the expected increase to 6.925 mil. The hiring rate rose a tenth to 3.9%, the quits rate was flat at 2.3%, as was the layoffs rate at 1.2%, while the job openings rate fell by -0.3% to 4.0%. These figures point to a tighter labor market, demonstrated by fewer openings, but quits remain near 20-year highs (as job seekers have a variety of options), and layoffs remain low.

(+) Initial jobless claims for the Feb. 8 ending week rose by 2k to 205k, below the 210k level expected. Continuing claims for the Feb. 1 week fell by a substantial -61k to 1.698 mil., below the 1.734 mil. median forecast. No anomalies were reported, as claims levels remain very low, with some of the weekly claims volatility likely still due to year-end seasonality adjustment effects.

Market Notes

Period ending 2/14/2020 1 Week (%) YTD (%)
DJIA 1.17 3.34
S&P 500 1.65 4.87
Russell 2000 1.90 1.27
MSCI-EAFE -0.02 -0.30
MSCI-EM 1.34 -0.75
BBgBarc U.S. Aggregate 0.03 1.88
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
2/7/2020 1.56 1.41 1.41 1.59 2.05
2/14/2020 1.58 1.42 1.42 1.59 2.04

U.S. stocks showed further recovery last week, with the coronavirus appearing to look further contained. This boosted sentiment for risk assets due to a perceived shortened and lessened negative impact on consumption and manufacturing in affected markets (China directly, as well as nations relying on China for revenues and as a critical link in supply chains). In short, this negative blow to global GDP has overtaken U.S.-China trade woes as the key market ‘worry’ of the moment.

From a sector standpoint, the strongest results were split between defensive utilities and more economically-sensitive consumer discretionary and technology stocks—each gaining well over 2% for the week. Several other sectors, including materials and financials, brought up the rear with respectable gains of under 1%. Real estate gained sharply, by over 4%, with investors again seeking safety of strong fundamentals and positive sentiment from bullish acquisition activity.

Foreign equities in Europe and the U.K. were slightly positive on the week, but ended flat after accounting for a half-percent gain in the dollar. Aside from mixed sentiment surrounding the implications of the coronavirus, the Bank of England noted that interest rates were likely to remain low, and, at the same time, revised estimates of Eurozone growth for Q4 showed a meager rise of 0.1%, due to contraction in France and Italy, and 0.9% for 2019 as a whole. Japanese stocks fell over a percent, due to an expected severe economic decline in Q1, due to a close economic impact from coronavirus, tax hikes, and overall slowing trends globally. Emerging markets fared far better, with China unsurprisingly leading the way, up 2%, but also in developed market proxies for Far East trade, like Australia.

U.S. bonds ticked slightly higher on the week, with fewer flows away from equities toward safety, which caused minimal changes in the treasury yield curve. The curve is flat from the 10-year/3-month perspective, but remains slightly inverted from the alternative measure of 10-year/2-year. Interestingly, the 30-year treasury declined to nearly all-time lows reached last summer. Fed Chair Powell was guarded in his congressional testimony regarding economic impacts of the coronavirus, but markets continue to price in higher probabilities of another Fed rate cut this year, due to the overall negative global impact of the virus. Corporate high yield and senior loans outperformed, due to tighter credit spreads. Foreign developed markets fell back due to stronger dollar effects, while emerging market dollar-denominated and local currency bonds both ended as among the best performers of the week as investors again embraced risk.

Commodities generally rose on net, despite the headwind of a stronger dollar. The energy sector recovered sharply, by over 4%, as did industrial metals to a lesser extent as concerns over the magnitude and duration of the coronavirus impact faded a bit—implying less of a hit to energy demand in the near term from growing user China. After falling below the $50 level mid-week, the price of crude oil rose by 4% to $52/barrel.

Mortgage Rates

“With mortgage rates hovering near a five-decade low, refinance application activity is once again surging, rising to the highest level in seven years,” said Sam Khater, Freddie Mac’s Chief Economist. “This surge coupled with strong purchase activity means that total mortgage demand remains robust, reflective of a solid economic backdrop and a very low mortgage rate environment.”

The 30-year fixed-rate mortgage averaged 3.47% with an average 0.7 point for the week ending February 13, 2020, slightly up from last week when it averaged 3.45%. A year ago at this time, the 30-year FRM averaged 4.37%.

The 15-year fixed-rate mortgage averaged 2.97% with an average 0.8 point, unchanged from last week. A year ago at this time, the 15-year FRM averaged 3.81%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.28% with an average 0.3 point, slightly down from last week when it averaged 3.32%. A year ago at this time, the 5-year ARM averaged 3.88%.

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.