Tariffs go higher, rates go lower

Last Week in Review: US/China uncertainty

The biggest story in the financial markets and around the globe is the ongoing US/China trade negotiations.

At the moment, there is no resolution and it appears there will be no resolution for at least several weeks as the US and China are not expected to talk again until the G-20 Summit June 28-29.

The uncertainty surrounding the talks helped home loan rates improve this week, and are at lows seen in January 2018. 

The US, China and the entire globe would benefit from a deal and should it happen, Stocks will likely recover all of their recent losses and then some. At the same time, should the story drag on and escalate as higher tariffs are instituted — it would have a negative effect on global economies and Stocks may suffer as home loan rates improve further.

Looking at the US economy, it continues to do very well. Walmart posted incredibly strong corporate earnings this past week. Seeing they have $500B in annual sales — if Walmart is doing well, the US economy is doing well.

In housing news, April Housing Starts and Building Permits came in higher than expectations, providing further evidence of confidence in the sector.

Bottom line: The backdrop to housing could not be much better. The economy is strong and home loan rates are historically low. Today presents an incredible window to consider buying or refinancing a home.

Transitory

Last Week in Review: Is low inflation finally “transitory”?

Transitory = non-permanent or lasting a very short time

“Transitory” is the word Fed Chairman Jerome Powell used this week at the Fed Meeting to describe the current low inflation environment, meaning that inflation will likely pickup from this “temporary” low level.

The problem? Inflation has been relatively low for a decade and while the Fed called low inflation “transitory” many times in the past, it sure has been anything but transitory.

Nonetheless, both stocks and bonds didn’t like the “T” word, because if inflation does move higher from here, rates will move higher, and ultimately stocks would decline because they don’t like higher rates.

Just because inflation was low the last decade doesn’t mean it has to remain low. So what could make inflation rise from the “transitory” low level?

Wages are rising at the fastest pace in a decade, and unemployment is at 50-year lows. There are one million more job openings than there are available workers to fill them. And companies are firing people at the slowest rate in years. This is the strongest economy we have seen in quite a while — for many it’s the strongest in their lifetime. All of this, should it continue, could stoke higher inflation.

Bottom line — home loan rates held steady at one-year lows from week to week, despite ticking higher in response to the Fed Meeting. Now is a great time to purchase a home and take advantage of the strong economic backdrop and low rates.

The US economy remains durable

Last Week in Review: The US economy remains “durable”

Good news is typically bad news for Bonds and home loan rates. That has not been the trend of late, and certainly not this past week.

Durable Goods Orders is a report which shows buying demand for products with a life cycle beyond 4 years — think cars, washing machines and planes. And that buying demand of long-lasting goods is up at the highest levels since last summer, highlighting that the US economy continues to grow, and consumers and businesses feel confident in investing.

Adding to the good-news week were continued strong corporate earnings reports, and future guidance from the likes of Amazon, Microsoft and Facebook.

Finally, the first look at 1st quarter GDP showed the US economy grew at a blistering 3.2% pace — way above economists’ expectations of 1.9%. The US economy is reaccelerating.

In the face of all the good news, home loan rates held steady and remain near one-year lows.

Bottom line: when you consider the strong labor market, rising wages, growing economy, low inflation, high consumer confidence, and low rates — it truly is a Goldilocks situation in the economy and for anyone looking to buy a home.

Unemployment is at its lowest point in 50 years

Last Week in Review: Good times continue

Initial Jobless Claims is a weekly report that tracks how many people have filed for unemployment benefits. It is both a solid gauge on the state of the labor market and economy, and a leading indicator on what to expect in the months ahead.

So, what are Initial Jobless Claims telling us today? Last week’s 196,000 recorded was the lowest in over 50 years! This is what it’s telling us:

  1. The labor market continues to strengthen.
  2. The chance of a recession in 2019 is near zero.

Low Initial Jobless Claims also leads to continued higher wage gains, which is wonderful for consumer spending and housing.

Another great data point this past week was the JOLTS (Job Openings and Labor Turnover Survey) which showed the US economy still has a 1,000,000-person shortfall against the current 7,000,000 job openings. This is just another example of how tight the labor market remains.

Bottom line — the great story remains — low rates + great job market = nice housing market.

Inflation is not a threat

This past week we saw mortgage rates experience their largest one-week decline in 10 years!!! What caused the sharp decline in home loan rates? Recessionary fears, and the likelihood the Fed’s next move on rates may be a cut and as soon as this year.

The Treasury’s Two-Month Bill yielded 2.40% this past week and the 10-Year Note yielded a low of 2.34%. This “inverted yield curve”, where short-term Bonds yield more than long-term Bonds, elevated the recession talk.

Bond yield curve inversions are not always accurate, and the lead time to a recession can be as much as three years.

It will be more important to track how the 2-Year Note, presently yielding 2.23%, performs against the 10-Year Note in the weeks and months ahead, because a sustained inversion between them would be a more serious recessionary signal.

The financial markets were spooked this week when potential Federal Reserve Board Nominee Stephen Moore said if he were brought onto the Fed, he would immediately vote for a .50% cut to the Fed Funds Rate. This surprise statement brought uncertainty to the financial markets, which led to Stocks moving lower and Bonds moving higher in price.

Bottom line: Inflation is not a threat, and was evidenced in last Friday’s PCE reading of just 1.8% year-over-year. Plus, the idea that the Fed may now cut rates next means this complacent “wait and see” attitude may continue to keep home loan rates at low levels for the spring homebuying season, and more.

Home Loan rates hits 1 year low

Last Week in Review: Thank you Jerome Powell

The monetary authority of the United States, the Federal Reserve, meets 8 times a year to discuss the economy and adjust monetary policy to promote maximum employment and maintain price stability (inflation).

The Fed, led by Chairman Jerome Powell, met this past Wednesday and decided to leave the Fed Funds Rate unchanged at 2.50% – this was expected. They also issued their Monetary Policy Statement which includes their outlook on the economy and its interest rate forecast.

Overall the Statement was “dovish”, meaning stimulative to the economy. They forecasted slower US growth, and inflation running beneath their target, which led to them forecasting no more rate hikes for the remainder of 2019. This was a nice surprise to the financial markets.

The Fed, inflation, and higher interest rates are not an immediate threat. This continues to push Stocks higher and long-term Bonds, like Mortgage Bonds, to one-year highs. This helps bring home loan rates to one-year lows.

Bottom line: The spring housing market could be one of the best in years thanks to a solid economy, relatively low rates, a positive wealth effect thanks to the rise in Stocks and a Federal Reserve that said rates are not likely to rise anytime soon – if at all.

Complacency Heading into Spring

Last Week in Review: Complacency heading into spring

Volatility has disappeared in the financial markets and a sense of calm and complacency has emerged. Why?

Well thanks to the Fed, and inflation and higher rates not being a threat — both Stocks and Bond prices are moving higher.

For 2019, home loan rates have been stable at one-year lows (look at the chart below), and everyone’s stock portfolio is increasing in value. What’s not to like?

Complacency will change to volatility at some point, and what we are watching is rising wages and how that may increase inflation in months to come.

Should that happen, we could experience a real shock to the US Bond market and the present complacent interest rate market will be over — and in a hurry.

But for now, complacency is the theme as we head into the Spring housing market…meaning good times for us.

U.S. Economy showing solid growth

Last Week in Review: U.S. Economy showing solid growth.

This past week, the Bureau of Economic Analysis (BEA) reported the U.S. economy, as defined by Gross Domestic Product (GDP), grew at a 2.6% rate in the fourth quarter of 2018. Economists and the markets were expecting 2.0% to 2.3%, so this was a nice upside surprise.

This left GDP for all of 2018 at 2.9%. Consumer spending, which makes up nearly two thirds of GDP, expanded by a solid 2.8% in the fourth quarter – yet slower than the previous quarter.

Another solid number within the report was business investment which grew at a swift 6.2% pace.

This Q4 GDP reading was the first of three – so we will see some revisions in the months ahead.

Seeing the economy grow at such a nice clip despite high stock market volatility and the U.S. government shutdown is a good sign as we head into the spring housing market.

The increased wealth effect caused by the recent rally in Stocks along with one-year lows on home loan rates, rising wages and increased housing inventory sets the stage for an improved 2019 housing market.

No Rush to Hike Interest Rates

Last Week in Review: Minutes Revealed

The highlight of this past week was the Fed Minutes from the January Fed Meeting. The Minutes are a detailed record of the Fed’s monetary policy setting meeting, so the markets gain insight into the psyche of the Fed as it relates to interest rates, the economy and more.

What the markets heard loud and clear from the meeting Minutes was Patience — meaning, the Fed is in no rush to hike interest rates and they will watch the incoming economic data to determine when they might hike again. There is now a low probability for another hike in 2019.

What are the most important reports the Fed is watching which can influence rates?

  • Gross Domestic Product
  • Inflation (big report next week — more on that below)
  • Jobs Report
  • Consumer Confidence
  • Retail Sales

In response to the Minutes, mortgage bond prices and thus home loan rates are hovering near the best levels in a year.

Retail Sales hit a shocking 9-year low

Last Week in Review: Canary in the coalmine.

The financial markets are sensing a government shutdown and protracted trade war with China will be averted. This is good news and a reason why Stocks have continued to push higher and home loan rates have capped for the past few weeks.

But last Thursday, Retail Sales was reported at a shocking 9-year low. Combing through the report, a 3.9% decline in internet purchases was a huge negative surprise. With consumer spending making up nearly 70% of GDP, there is fear in the markets that this very poor Retail Sales number is an early warning sign that both consumer spending and thus economic growth are indeed slowing.

One thing we know for sure — Bonds love uncertainty and bad news. This Retail Sales report brought both and, as a result, pushed prices and home loan rates near the best levels in a year.

We will be watching future Retail Sales reports to see if this is just one bad report or the start of a negative trend.

In any case, reports like these support the Fed to not raise rates in 2019.

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