Friday Wrap: Analysis of News and Events for the Week

Yields Moving Higher This Week, China and Brexit Main Market Movers

The stock market continues to be moved by issues with global politics as the trade war with China remains temperamental and we’re seeing promise of a Brexit deal.

A final agreement between the United States and China is now contingent upon the U.S. removing all tariffs on Chinese goods, according to China’s Ministry of Commerce spokesman Gao Feng. 

Last week’s trade talks seemed to prove fruitful as the U.S. said it would suspend the planned tariff increase and President Trump said that China agreed to a “substantial” phase one deal. Trump also reiterated that China would purchase $40-$50 billion worth of U.S. agricultural products. That statement was backed up by Gao, although he was not firm on an amount. China spent $24 billion on American farm goods in 2017.

As we are waiting to see if tariffs on Chinese imports will be waived, President Trump signed an executive order hiking tariffs on Turkish steel up to 50%. He also stopped trade negotiations with Turkey. Trump recently ordered the withdrawal of all U.S. forces from Syria’s northern border with Turkey and on Thursday, a five-day cease fire was announced by Turkey to allow Kurdish fighters to retreat. Turkey says it has agreed that once the Kurdish fighters leave, they will commit to a permanent cease-fire.

Both the trade war with China, and imposed tariffs on Turkey, had an effect on the markets this week. Early in the week markets waned as doubt was cast on the President’s confidence that a phase one deal was certain and have since rallied back to within striking distance of record highs once again.

Last Friday, yields on the 10-year Treasury note dipped slightly, concurrent with worry about trade relations between the U.S. and China. This week, the 10-year Treasury note rose to a near term high of 1.79% when Bloomberg reported potential for a Brexit deal this week and have since settled in at 1.75%. The positive international news gives investors confidence to put their money into riskier assets, like the stock market, and avoid the relative investment safety of government bonds. 

That positivity was further supported on Thursday morning as word spread of a deal between the U.K. and the EU. The deal will be put before Parliament on Saturday, but there is no guarantee that it will pass. U.K. Prime Minister Boris Johnson tweeted on Thursday morning, “We’ve got a great new deal that takes back control – now Parliament should get Brexit done on Saturday so we can move on to other priorities like the cost of living, the NHS, violent crime and our environment.” The deadline for a Brexit deal is Oct. 31. 

The original referendum for Brexit happened more than three years ago, June 23, 2016. That week, we saw a drop in mortgage rates to 3.48% and rates stayed under 3.5% until September of that year.

So far this week we’ve seen rates jump up again with the 30-year fixed-rate mortgage average sitting at 3.69% according to Freddie Mac. This week last year, the average was 4.85%.

The Federal Reserve is undoubtedly watching these developments closely as members prepare for the Federal Open Market Committee meeting at the end of this month. Initially, the market was pricing in a high probability that the Fed would cut rates again at their meeting. However, there are a lot of mixed signals from FOMC members. Right now the Fed Funds Futures trade with an 83% probability of a rate cut which still indicates the market expects a cut.

The International Monetary Fund also weighed in on the U.S.-China trade war and how it’s affecting global economies as well as growth in the United States. According to the IMF, the global economy is likely to expand by 3.4% next year but gross domestic product for the U.S. is predicted to contract to 2.1% growth in 2020 down from 2.4% this year.

According to the report from the IMF, “Global growth in 2020 is projected to improve modestly. However, unlike the synchronized slowdown, this recovery is not broad-based and is precarious.”

American’s Spending Less?

Retail sales dropped unexpectedly in September with the Commerce Department’s data showing a 0.3% decline against an expected gain of 0.3%. That’s the first decline in retail sales since February as people spent less on cars, building materials and online purchases.

However, August’s data was revised up to a 0.6% gain which offsets the September decline. Also, the core retail sales were largely unchanged which still points to a slowdown but not at an alarming rate. That piece of data excludes more volatile measurements like car purchases, gasoline, building materials and food. 

A senior U.S. economist at Capital Economics, Michael Pearce, writes, “The drop back in retail sales in September was partly driven by a price-related fall back in gasoline prices, but the fact that underlying control group retail sales were unchanged provides another clear sign that consumption growth is slowing.” Pearce went on to predict that the overall GDP growth will show to be slowing to just 1.5% down from 2.0%. 

While Sept. 2019 numbers might look like they’re signaling a decline, when you look at retail sales year-over-year you see a distinct upswing. Sept. 2019 retail sales are 4.1% higher than Sept. 2018 with retail sales from July to Sept. 2019 up 4.0% over that same time period last year.  

Two Sides to the Housing Story

Consistent, low mortgage rates have helped homebuilder confidence surge to its highest level in nearly two years and caused a spike in refinance and purchase activity. Just last week, Joel Kan, president of the Mortgage Bankers Association, said purchase activity is up 10% year-over-year. 

This week, the National Association of Home Builders/Wells Fargo Housing index shows the homebuilder confidence sitting at 71, the highest level since February 2018. While the sentiment is high, the actual single-family housing starts are still slowing down. Builders say that while the interest rates are helping them sell homes, the actual building costs for materials are getting more expensive while labor is still short. Right now it’s difficult for builders to replenish a dwindling housing market, especially in the lower price points, because it’s just too expensive when you factor in all the costs including regulatory measures.

National housing inventory fell by 2.5% in September, according to realtor.com, and the supply of homes priced under $200,000 has dropped by 10% year-over-year. What’s even more interesting is that the “move-up” market is also seeing issues, with the inventory of that price range ($200k – $750k) falling stagnant in September with a decline expected on the horizon. The level of housing starts also declined overall in September but single-family starts increased by 0.3%. Building permits, an indicator of future housing starts, decreased by 2.7%. 

Right now, it’s estimated that the housing market in general is undersupplied by about 1 million units. That means, if mortgage rates stay under 4%, it’s likely home price gains will start to climb back up setting up a hyper-competitive Spring 2020. 

Meanwhile, refinances are still going strong. Ellie Mae reports that refis made up 49% of all loans in the month of September with purchases at 51%. Ellie Mae’s data also showed an overall closing rate of 78.1% in Sept. 2019.

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

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.