Your Weekly Update for Monday, January 9, 2023.
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Click on the image below to go to https://vimeo.com/787387938 to see this week’s video in which Mike Elerath, Bill Roller, and Keller Williams Realtor Michael Harding discuss the financial markets and real estate.
Markets were up during the first week of trading for 2023. The Dow Jones Industrial Average rose 1.46% to 33,630.61 while the S&P500 ended up1.45% to 3,895.08. The Nasdaq Composite rose 0.98% to 10,569.29. The annual yield on the 30-year Treasury fell a bunch by 28.3 basis point(s) to 3.692
Economic data for the first week of the year included several reports continuing to show a strong labor market, although not as strong as it has been. However, ISM manufacturing fell further into contraction, joined by ISM services for the first time since the pandemic.
Global equities gained to start the first week of the year, with foreign outpacing domestic. Bonds also gained as interest rates pulled back on softer implications for inflation and growth. Commodities fell back along with weaker oil prices.
(-) The ISM manufacturing index for December fell by -0.6 of a point to 48.4, just below the 48.5 consensus forecast. New orders, production, and supplier deliveries all fell by several points, further into contraction; employment, on the other hand, rose a few points back into expansion. Prices paid also fell further into contraction due to lower energy costs, to the lowest level since Spring 2020. As a diffusion index, below 50 numbers signify contraction, so this index continues to move in a recession-like direction. Anecdotal comments from respondents noted a hesitancy in making new orders due to uncertainty over the economy. Ironically, such a drop in demand has naturally resolved prior supply chain pressures, which had been improving regardless. ISM manufacturing remains one of the most closely-watched long-term economic indicators, with some coincident relationship with the stock market—lows in ISM have often appeared around lows in the S&P 500. While this points to potential continued volatility for early 2023, low ISM readings (in the 40s) tend to result in stronger equity returns in coming years, as conditions improve from low levels.
(-) The ISM services/non-manufacturing index for December slowed by -6.9 points to 49.6, which was a sharp disappointment compared to the 55 level expected. After 30 consecutive months of growth since early 2020, this moved services into contraction, along with its manufacturing sibling. Several segments were down significantly, including business activity, new orders, and employment. Supplier deliveries fell, indicating faster deliveries, as did prices, although the latter remained at an elevated level. However, the report was dispersed by industry, with 11 growing and 6 contracting—half of which were real estate/construction-related. Anecdotally, many of the same factors seen throughout 2022 were at play, including continued high inflation weighing on costs (materials and labor), staffing issues, and difficulty in finding qualified workers. However, supply chain dynamics have improved. The coming months will show whether this is a temporary drop in seasonal activity or part of a longer slowdown trend, as with manufacturing.
(0) Construction spending rose 0.2% in November on a nominal basis, versus expectations of a -0.4% decline, along with several upward revisions for recent prior months. Private non-residential spending rose 2% to lead the overall index higher, with private residential and all private construction falling back. However, construction costs rose 1.8% for the single month alone, pushing ‘real’ spending into the negative, tempering the positive nominal news.
(+) The JOLTs government job openings index for November fell by -54k to 10.458 mil., above the 10.050 mil. expected by consensus, and included upward revisions for the prior month. By sector, professional/business services added 212k openings, along with gains in manufacturing and retail, offset by declines in accommodations/food services (-89k), finance/insurance (-75k), and healthcare/social assistance (-62k). The job openings rate was unchanged at 6.4% for the month, while the hiring rate fell by a tenth to 3.9%. On the other side, the layoff rate was unchanged at 0.9%, while the quits rate rose by 0.1% to 3.0%, continuing to demonstrate power in the hands of workers. JOLTs continues to show strength, with a demand for labor not reflecting economic slowing as of yet. However, should conditions deteriorate further, it is far easier and more desirable for employers to just remove posted openings than it is to trim staff. In fact, anecdotally, employers have discussed a reluctance to cut back on employees, even in a recession, due to the shortage of qualified workers available should conditions rebound.
(+) The ADP private employment report for December showed a gain of 235k jobs, above the 150k expected. This also included a revision upward for November. Services jobs rose 213k, with nearly 60% of these being in leisure/hospitality; goods-producing jobs rose a more tempered 22k, as a 41k gain in construction offset declines in natural resources/mining and manufacturing. On a separate note last week, the CEO of Amazon announced that up to 18k employees could be affected by layoffs, as the labor area of vulnerability appears to be tech and tech-related sectors.
(+) Initial jobless claims for the Dec. 31 ending week fell by -19k to 204k, well below the 225k consensus forecast. Initial claims rose by 9k in CA, while TX led with a decline of -7k. Continuing claims for the Dec. 24 week fell -24k to 1.694 mil., below the 1.728 mil. median estimate. It appears that seasonality distortions during the pandemic months and subsequent recovery continue to alter these series, which should slowly normalize over time. Regardless, claims remain low, which is a positive labor indicator.
(+) The employment situation for December came in better than expected, in a continuation of strong labor market performance in 2022. Nonfarm payrolls rose by 223k, a slower pace than the prior month’s 256k, but beating consensus forecast of 200k. However, Oct. and Nov. jobs were revised downward by -28k. Additionally, a strike by workers at the Univ. of California was thought to have lowered the count by -36k or so, and expected to reverse in coming months. By industry, the largest gains were in leisure/hospitality (67k, 40% being in restaurants/bars), health care (55k), construction (28k), and social assistance (20k). Lesser gains were seen in retail, manufacturing, and government, while professional/business services jobs fell back, as did temporary employment, which tend to be the first employees to be added or dropped in an economic cycle. Despite recent gains, leisure employment remains -5% below its pre-pandemic level, per the BLS.
The unemployment rate ticked down a tenth to 3.5%, contrary to an expected rise by a tenth (following revision); this was due to the labor force participation rate rising by a tenth. Unemployment remains on the low end of the 3.5-4.0% range seen in 2022, with continued expectations that a recession will move this higher. Household survey employment rose by 717k, also considered strong, albeit using a different methodology and including a significant number of multiple-job holders.
Average hourly earnings rose 0.3% for the month, a tenth less than expected and a tenth slower than the prior month. On a year-over-year basis, earnings decelerated by -0.2% to 4.6%, in contrast to an expected rise to 5.0%. Average weekly hours fell another tenth to 34.3. These both showed some tempering in wage strength as well as manufacturing activity, which improved financial market sentiment.
(0) The FOMC meeting minutes from December featured commentary that the group would ‘continue to make decisions meeting by meeting,’ and welcomed the recent slowing in inflation pressures, although levels remain ‘unacceptably high’. The comments were taken optimistically by markets, taking the implied flexibility to mean a potentially lower pace of rate hikes. No members thought it would be appropriate to lower the funds rate in 2023, which is not surprising, although the dot plot certainly showed fed funds falling in 2024. In fact, growth estimates for this year have fallen to ‘below trend’, with downside risks, and possibility of recession noted as ‘plausible’ relative to baseline expectations. The latter could be as close to an admission of a higher probability of downturn as one is likely to get from a central bank. At the same time, a Bloomberg quantitative index that reviews language in the minutes ranked the tone as slightly more hawkish than neutral.
|Period ending 1/6/2023||1 Week %||YTD %|
|Bloomberg U.S. Aggregate||1.85||1.85|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks started the year decently, but faded mid-week as stronger than expected labor data caused sentiment to weaken. Again, this appeared to be back to a ‘good news is bad news’ paradigm, related to a robustness in the economy that could let the Fed keep policy tighter for longer. While it appeared odd the markets would rally on the stronger Friday labor report, slowing wage growth and the ISM services index falling into contraction after nearly three years of expansion were more nuanced reasons, as these showed calming of inflation and further raised recession risk.
By sector, communications led with a 4% gain, followed by financials, materials, and industrials. Health care lagged with a minor decline. Real estate rose over 2% along with a tempering in interest rates.
Foreign stocks fared far better than domestic last week, continuing a stretch of outperformance, with leadership from Europe and emerging markets. European names were helped by positive trends in inflation falling (below 10%), and slightly stronger than expected economic data. Chinese stocks rose 10% to lead all other nations, due to additional relaxations on personal movement and the economy, such as a reopening of the border between Hong Kong and mainland China. Sentiment there continues to improve as hopes that the reopening will spur far stronger economic growth in Q1 and Q2.
Bonds gained several percent on the week, along with hints of weaker economic growth and falling wage growth. Credit spreads also tightened a bit, resulting in corporates outperforming treasuries slightly. Foreign bonds were also positive, led by emerging markets, despite a minor rise in the U.S. dollar for the week.
Commodities fell back last week in nearly all segments, led by a sharp drop in energy, while precious metals earned a small gain. Crude oil fell -8% to just under $74/barrel, due to a major U.S. refinery re-entering production. Natural gas spot prices fell over -17% on the week as warmer weather again appeared in the winter forecast.
“Mortgage application activity sunk to a quarter century low this week as high mortgage rates continue to weaken the housing market,” said Sam Khater, Freddie Mac’s Chief Economist. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
Khater continued, “Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.”
The 30-year fixed-rate mortgage averaged 6.48% as of January 5, 2023, up from last week when it averaged 6.42%. A year ago at this time, the 30-year FRM averaged 3.22%.
The 15-year fixed-rate mortgage averaged 5.73%, up from last week when it averaged 5.68%. A year ago at this time, the 15-year FRM averaged 2.43%.
Freddie Mac made a number of enhancements to the Primary Mortgage Market Survey® to improve the collection, quality and diversity of data used. Instead of surveying lenders, the weekly results are now based on thousands of applications received from lenders across the country that are submitted to Freddie Mac when a borrower applies for a mortgage. Additionally, the PMMS® will no longer publish fees/points or adjustable rates.
Freddie Mac’s Primary Mortgage Market Survey® is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. Average commitment rates should be reported along with average fees and
points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Mortgage Services Inc. dba Prestige Home Mortgage (NMLS#14216) in Vancouver, Washington we originate residential and reverse mortgages.
|Symbol||Name||Price||24h Volume||24h %||7d %||Market Cap|
|LEO||UNUS SED LEO||3.47||$2,064,314||0.43%||0.46%||$3,309,139,392|
Information current as of 5:55 AM PST, Monday, January 9, 2023. Source: https://coinmarketcap.com/
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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.