China Deal Pending Signature, Tariffs to be Phased Out
A breakthrough this week in the trade deal with China as reports say President Trump and China have agreed on a phase one deal to cut tariffs in half in exchange for China purchasing more U.S. agricultural goods. CNBC’s sources said that Trump had agreed to cut tariffs by 50% on $360 billion worth of Chinese goods in an agreement in principle. However, Friday morning saw another wrinkle as President Trump tweeted that a report on the trade deal was “completely wrong.”
The trade-off is that China would agree to purchase a good portion of American agricultural goods. Trump reportedly wants that number to be $50 billion while the Chinese are closer to $40 billion.
In a press conference Friday morning, Officials with the Chinese State Council Information Office said in that press conference that they have agreed in text to the deal, the only thing left is to sign it.
Markets jumped at the news Thursday afternoon and continued to climb Friday with stocks nearing record territory once again. Once the press briefing started, the Dow jumped by 100 points with all major averages hitting record highs. The 10-year Treasury yield hit a recent high of 1.95% on Thursday evening, but quickly reversed course Friday morning to settle in at 1.884%, following a weaker-than-expected retail sales number.
FED Holding Steady
In a rare unanimous decision, the Federal Reserve Open Market Committee members voted at their meeting this week to keep interest rates unchanged at 1.50% to 1.75%. Barring any unforeseen economic windfalls, the Fed members expect to keep rates steady through 2020.
Fed chair Jerome Powell continues his stance of a solid, still growing economy with the trade deal with China the main question mark. “Business investments and exports remain weak, and manufacturing outlook has declined over the past year,” Powell said at his press conference after the FOMC meeting. “Sluggish growth abroad and trade developments have weighed on those sectors.” Powell added that the FOMC will need to see a significant move in inflation before considering raising interest rates.
Underlying inflation appeared to firm up as the consumer price index rose by 0.3% in November with a year-over-year increase of 2.1%. Americans continued to pay more for energy and food for the third month in a row. The core CPI, which does not factor in the volatile factors like food and energy, stayed in line with October, rising by 0.2%. Year-over-year, core CPI has increased by 2.1%. The Fed closely tracks the core personal consumption expenditures index, or core PCE, to gauge true inflation. That data comes out later this month.
The producer price index (PPI) told a different story on inflation as prices went unchanged in November. According to the Labor Department, the year-over-year PPI gained just 1.1%, matching the smallest increase since Oct. 2016. The core PPI, which excludes food, energy and trade also saw a small gain of just 1.3% year-over-year.
Retail sales saw a somewhat disappointing 0.2% gain against an expected 0.5% gain in November, according to the latest report from the Commerce Department. This was, however, a significant increase from Nov. last year, with a 3.3% gain year-over-year. That lower-than-expected number might cause economists to lower their GDP growth estimates.
America’s CEOs are already adjusting their estimates for economic growth in 2020, predicting just 2.1% growth, in line with a 2% growth prediction by the Fed. The downgrade was due in large part to questions about trade with China and how that will affect jobs moving forward. Union Pacific CEO Lance Fritz released a statement, saying, “Free and fair trade agreements are vital to economic prosperity for American workers, families and communities. Nearly 39 million American jobs-one in every five-depend on international trade. Because growth in trade-dependent jobs far outpaces job growth as a whole, we urge lawmakers to engage in more trade agreement negotiations.”
United Kingdom Prime Minister Boris Johnson will remain in power following a winter referendum, the country’s first December election since 1923. The Conservative party secured 364 parliamentary seats, the party’s best election result since the late 1980s.
Not long after the vote on Thursday, Johnson announced that the country will leave the European Union on Jan. 31. The initial Brexit referendum happened in June 2016. This most recent election, paired with the announcement of an impending Brexit, caused European markets to jump with the sterling rising 2% against the U.S. dollar. U.K bonds also had a good day, with their 10-year bond rising by 7 basis points and hitting their highest levels since summer.
The Issue of Housing Inventory
New data from Realtor.com shows that housing inventory dropped nearly 10% from November 2018 to November 2019, with the most significant decrease in inventory shown in homes priced under $200,000. Those typical “starter-homes” saw inventory drop by 16.5%.
In its article, Realtor.com notes that it wasn’t just lower-priced homes that were affected, rather inventory dropped across the board. “Mid-tier inventory priced between $200,000 and $750,000 also decreased by 7.4% year-over-year compared to October’s year-over-year drop of 4.3%, while high-end inventory priced above $1 million decreased by 1.7% year-over-year, compared to October’s year-over-year increase of 1.3%.”
So while many Millennials may be qualified to buy a home, many times there quite simply aren’t home available to buy in their price range. It doesn’t help that home prices are still increasing yearly. The latest Case-Shiller home price index showed that, on average, home prices rose by 3.2% annually in September. As of September, the median price for a home across the United States is $270,900 according to the National Association of Realtors. That’s up 6.8% from a year ago.
The NAR predicts that some markets in America will exceed expectations and see home prices go well past the average. Those markets include places like Charlotte, North Carolina, Ogden, Utah, Columbus, Ohio and Tampa-St. Petersburg, Florida among others.
However, at this week’s Real Estate Forecast Summit, top economists predicted that home prices will not accelerate past 3.6% in 202 and will move back down to 3.5% in 2021. The report from the meeting states, “The average annual 30-year fixed mortgage rates of 3.8% and 4.0% are expected for 2020 and 2021, respectively. Annual median home prices are forecasted to increase by 3.6% in 2020 and by 3.5% in 2021.”
Currently, interest rates are staying under 3.8% on average, with Freddie Mac’s 30-year fixed-rate mortgage average at 3.73% this week. Again, the issue is not necessarily financial readiness nor is it lack of desire, it’s the fact that there quite simply aren’t enough homes out there at an affordable price-point.
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.