A Trade War Twist Balanced by Stellar Jobs and Spending Data
Will the trade war with China last beyond 2020? That’s entirely possible according to President Trump. Early this week, stocks tanked with the Dow initially dropping 450 points Tuesday, after Trump told reporters that he is in no rush to make a deal. That is the biggest drop in the markets in two months.
“In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right,” said Trump. He added, “I have no deadline, no … In some ways, I think it is better to wait until after the election if you want to know the truth.”
Also, Fox News reported that the White House said the additional tariffs scheduled to be implemented on Dec. 15 were still on track. Last week, investors believed that those would also get delayed, giving them some positive sentiment. The tariff is a 15% rate on an additional $160 billion worth of Chinese goods.
On top of all of that, this week President Trump announced restoration of steel tariffs on Brazil and Argentina as well as threats of tariffs on luxury goods from France like champagne and cheese.
All of this activity caused a drop in the 10-year Treasury note yield. Starting the week trading at 1.85%, Tuesday’s yield dipped to 1.72%. Yields increased as the week progressed, with the Dow jumping 150 points Wednesday morning in reaction to Bloomberg’s report that China and the U.S. continue to inch toward a deal. The trade deal is the clear focus of the market and will continue to rise and fall depending on any news coming out of Washington and Beijing. As of late Friday morning, the benchmark 10-year was trading at 1.85% as equities are back in rally mode, cheering a very strong jobs report.
A sign of a continued economic contraction was the ISM Manufacturing Index showing a 48.1 reading for November. That’s a decrease from 48.3 in October and far below expectations of a 49.4 reading. Most importantly, inventories showed a decline of 3.4 points. Inventories are key in measuring gross domestic product. The Dow saw a small drop in points at the start of trading Monday in reaction to the report.
Friday’s November jobs report from the Bureau of Labor Statistics showed an eye-popping 266,000 jobs added for the month against expectations for 187,000 jobs That caused a 150-point jump in Dow futures to start Friday and up 350 points midday Friday. Unemployment also dropped to 3.5% down from 3.6% with wages rising 3.1% year-over-year. The wage growth was above expectations from Dow Jones Economists.
ADP’s private payroll report this week showed that private-sector employment slowed sharply with job growth increasing by just 67,000. In contrast, economists expected a gain of 156,000. This is the smallest increase since May. Manufacturing, construction and mining took the hardest hit, losing 18,000 jobs in November. Remember, ADP’s report does not include General Motors workers returning to work after a four-week strike.
However, sentiment was bolstered by a solid unemployment report showing better-than-expected jobless claims. Weekly jobless claims dropped to 203,000 against expectations of 215,000. The Dow, S&P 500 and Nasdaq all saw gains Thursday morning.
Consumer confidence also seems to be soaring. As we continue through the holiday shopping season, it’s clear that consumers are in a spending mood. Cyber Monday’s numbers were incredible, hitting a record-high $9.4 billion in sales for online vendors, according to Adobe Analytics. That’s a nearly 20% increase year-over-year. Black Friday online shopping was not as strong, but still hit a record of $5.4 billion. Over a one-month span, consumers have spent $81.5 billion online. Adobe predicts that in 2019, shoppers will spend $143.8 billion on online purchases.
OPEC Makes Deep Production Cuts
Members of OPEC and its allies agreed today to cut production by an additional 500,000 barrels per day through the end of March 2020. The 14-member group was expected to keep their current production through the first half of 2020, so this is a drastic change in strategy. This means that OPEC and non-OPEC allies, like Russia, will cut their total output by 1.7 million barrels per day.
It’s important to note there was no mention of an extension to cuts beyond the March 2020 deadline. There is another meeting scheduled for early March where the members say they will review this policy.
Brent crude was started trading at $63.21 Friday, down from earlier in the week. As of Friday morning, futures are 15% lower compared to April’s peak.
FED Considering ‘Makeup Strategy’?
If the Federal Reserve continues to see that inflation remains below the Fed target rate, it may consider enacting a “makeup strategy” which would allow inflation to run a touch above that target rate once the economy recovers from a low inflation period. According to a story this week in the Financial Times, “The idea would be to avoid entrenching low U.S. price growth which has consistently undershot its goal.”
Last week, Federal Reserve Governor Lael Brainard said she supports a “flexible” policy on rates, allowing the 2% benchmark to fluctuate and allow for an average that would level itself out over time. Basically, if the Fed sees that inflation was running below 2% for an extended period like it is now, then the Fed would allow the rate of inflation to rise above 2% for an equal amount of time to make up for the losses.
“’We are looking at all those make-up ideas to try and find a credible, practical, actionable, sort-of framework the public would understand and act on,” said Federal Reserve Chair Jerome Powell on Tuesday.
The final decisions, and potential changes, regarding the policy review are expected to come out in 2020.
Homebuilders Leading the Charge
Are homebuilders going to help bail out housing inventory? According to a forecast from the National Association of Realtors, single-family housing starts will hit a 13-year high in 2020 with roughly 1 million starts.
A Census Bureau report painted a little muddier picture, showing that October 2019 construction spending saw a 1.1% year-over-year increase. The first 10 months of this year saw a 1.7% year-over-year decrease. Despite all of that, the Housing Market Index, which measures current sales conditions, jumped by 78 points. That shows a positive future sentiment that coincides with the NAR’s prediction.
The NAR’s chief economist Lawrence Yun is also predicting that the median price on a new home in the United States will drop by 4% to $313,500 this year and have only slight appreciation in 2020. He expects existing home prices to appreciate at a rate of 4.3% and 3.6% in 2019 and 2020, respectively.
The reason the new-home start prediction is encouraging is that homebuilders typically lead economies out of recession. Yun notes that the small-time builders hesitating to get back in the game is what has prevented the housing cycle from reestablishing normal levels.
Another factor we’ve mentioned before that is affecting the inventory game is Baby Boomers aging in place. People who are 60 and older own about a third of the existing homes in the United States. While generations before them sold those homes, which allowed for healthy inventory, this generation is instead aging in place. Zillow recently predicted that it will take about another two decades before those homes are put back into the market. So by 2037, it’s expected that nearly 30% of owner-occupied homes will be available.
What has also helped balance the low inventory (just a 3.9 months supply currently, according to the NAR) are interest rates a full point lower than just a year ago. Freddie Mac expects mortgage rates to stay that low, if not lower, throughout 2019 and well into 2021! The group’s latest housing market forecast predicts mortgage rates will hover around 3.8% on average all the way through 2021.
Freddie is also predicting that purchase originations will rise to $1.299 trillion in 2020 and $1.369 trillion in 2021. As you might expect, with mortgage rates staying that low for that length of time, there will be a distinct drop in refi volume.
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.