GDP Expected to Slow as coronavirus Hits Markets
Investors were already expecting to see gross domestic product take a hit this quarter with Boeing grounding its 737 program, but the latest wild card to be thrown into the mix will potentially make that hit pack more of a punch.
The coronavirus, which we talked about last week, has officially made its mark in the United States with the Centers for Disease Control reporting its first case of human-to-human transmission. That news on Thursday sent the Dow plummeting 200 points. That’s on top of the nerves the market has already experienced as the virus keeps spreading throughout mainland China.
This week the 10-year Treasury note yield slipped below the yield of the 3-month bill, causing another yield curve inversion. While not the main data point, any inversion of the yield curve is watched closely by the Federal Reserve as it can be an indicator of a recession. We are seeing the 10-year note yield drop back to levels similar to August and September of last year. Just a week ago the yield was trading at 1.762% at its high, while Friday morning’s yield opened trading at 1.553%.
Treasury yields continued to drop even after the GDP report showing the U.S. economy grew by 2.1% in December, which was expected. Now, with the news of the virus spreading paired with Boeing’s shutdown, GDP is predicted to show 1.5% growth to start 2020. Keep in mind, the American economy is still in the midst of an unprecedented expansion that is into its 11th year.
Asian markets also tumbled on the news of the coronavirus spread with Hong Kong stocks slipping by 2.62% on Wednesday. Travel is the main industry to see the effects of the virus spreading, as more people are opting to stay home instead of potentially contracting the disease on an airplane. On Thursday, the US State Department issued a release urging people to avoid traveling to China unless necessary. Chinese markets were closed on Thursday this week for a holiday.
With all of this news, the Federal Reserve Open Market Committee again decided to maintain the current overnight lending rate of 1.5%-1.75%. The FOMC did adjust its language to read that the goal is now leaning toward “inflation returning to the Committee’s symmetric 2% objective.”
That is slightly different language than previous meetings show, with the Fed pushing to hit the inflation goal instead of just getting “near” the goal. The main concern held by FOMC members is that if they don’t push for inflation, there will be little room to cut should the economy experience a downturn moving forward.
The lack of inflation pressure has been solid for consumers as they are spending more money, especially because they have more money to spend. December’s wages and salaries data from the Bureau of Labor Statistics shows that companies are paying 0.7% more in wages and from September 2019. Compensation costs for civilian workers saw an increase of 2.9% with private industry costs seeing a 3.0% increase.
Overall, personal income increased by 0.2% in December, according to the Bureau of Labor Statistics, with disposable personal income increasing by the same margin. Personal consumption expenditures, a measure of how much Americans spend on goods and services, increased by 0.3%. Core PCE, which excludes food and energy, increased by 0.2%.
Housing Competition Breeding Higher Prices
Redfin’s latest forecast shows a seller’s market in 2020 as continued demand with limited supply will drive home prices up at breakneck pace. Redfin Chief Economist Daryl Fairweather says, “Demand will be strong in 2020–just as strong as, if not stronger than, in 2018 and 2017.” He adds, “The big question for the housing market this year is supply. Will homeowners sit on the sidelines, content with their refinanced loans, or will they want to get in on the action too and move up, move down or cash out entirely?”
The Mortgage Bankers Association weekly report on mortgage applications has already seen activity tick upwards quickly, with January’s data hitting an 11-year mid-month high. Mortgage rates dropped again this week as U.S. Treasury yields dropped. The Freddie Mac 30-year fixed-rate mortgage average dropped to 3.51% this week, the second lowest in three years.
Data from the National Association of Realtors shows pending home sales suffered in December, a typically slow month anyway, with closings dropping by 4.9% month-over-month against an expected 1% increase. However, while we did see a month-to-month decrease, we saw a 4.6% spike in year-over-year data.
Lawrence Yun, the chief economist for the NAR, said “Due to the shortage of affordable homes, home sales growth will only rise by around 3%. Still, national median home price growth is in no danger of falling due to inventory shortages and will rise by 4%.”
The latest S&P CoreLogic Case-Shiller Home Price Index out this week supports Yun’s assumption, showing prices increased by 3.5% annually in November up from 3.2% in October. Overall, that means home prices are up 59% from the low point we saw in February 2012.
Essentially, says Yun, “The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market.”
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.