China Still Moving Markets as Fed Eases Rates Again
For the third time this year, the Federal Reserve Open Market Committee decided to cut its overnight lending rate by 25 basis points. Now, the overnight rate sits between 1.5% to 1.75%. The FOMC did make a notable adjustment in its language in its written statement as part of announcing this week’s rate cut. This time, they replaced the phrase “act as appropriate to sustain the expansion” with “continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”
That is a clear indication that this is the final rate cut of 2019 unless there is, as Federal Reserve Chair Jerome Powell said, “unless market conditions stray wildly from their current state.” This was not a unanimous vote by the members with two Fed Presidents voting in favor of keeping the status quo.
The rate cut was announced on Wednesday afternoon, after the third quarter GDP growth report from the Commerce Department showing an initial reading of 1.9% gain. That’s higher than the expected 1.6% gain that economists had predicted. This was only a slight decrease from the 2% mark of growth in the second quarter.
Consumers continue to bolster the economy with personal consumption expenditures (PCE) growing at 2.9%. That’s a measure of what American households are spending on goods. Government spending increased by just 2% in the third quarter. While consumers are spending, it does seem they slowed down in Q3 ahead of the holiday shopping season. Retail sales were down 0.3% in September with a noted decrease in online spending. Consumer confidence was also shown to have a slight decrease against expectations for a moderate increase.
Business investment continues to show signs of weakening, slipping by 1.5% in the third quarter. Residential investments buoyed the drop though, with a 5.1% gain in Q3.
A surprising jobs report this week from the Labor Department pumped some positivity into the market as nonfarm payrolls rose by 128,000 in October despite an ongoing strike at General Motors. Economists expected growth of just 75,000 jobs. The unemployment rate did go back up ever so slightly, from 3.5% to 3.6%.
Numbers for August and September were both revised up by 51,000 and 44,000, respectively. After those revisions, job gains have average 176,000 over the last 3 months.
The report also showed that, year-over-year, wages have risen by 3.0% with October’s average hourly earnings for employees on private nonfarm payrolls going up by 6 cents to $28.18.
Private payrolls grew by 125,000 in October according to the ADP Moody’s Analytics report, which was better than analysts expected. But when you dig into the data you see a reflection of the GDP with goods-production services adding just 13,000 jobs. Also, September’s payroll number was revised down by 93,000 jobs.
While the jobs report was positive, a lot of analysts were waiting to see the Institute for Supply Management manufacturing index which proved to be another disappointing number. The ISM reading came in at 48.3% for October, under expectations for a 49% reading. Anything that is under 50% is a sign of a contraction. September’s reading was 47.8%.
International Politics Still Simmering
A report that Chinese officials are casting doubt over a long-term trade deal with the United States caused stocks to drop on Thursday, with the Dow closing 140 points lower and the S&P 500 losing about 0.3%. Treasury yields started falling across the board after that report.
The 10-year Treasury note yield had already started to drop early in day Wednesday on the news that President Trump and Chinese President Xi Jinping would not be able to meet at the Asia-Pacific Economic Cooperation summit in Chile in the middle of this month. Protests in Chile forced the country’s president to cancel the summit in an attempt to focus concentration on solving the problems at hand in his own country. As of Friday morning, the 10-year note yield was sitting at 1.72%, down from 1.86% early Wednesday.
Meanwhile, the European Union granted an extension to the United Kingdom to allow more time for Brexit negotiations. The U.K. now has until Jan 31, 2020 to come to an agreement or face a hard Brexit. This is the third delay in the nearly three-and-a-half year negotiations.
This extension means that the U.K. is free to leave the E.U. at any point before Jan. 31 with the caveat that Parliament members approve the legislation decided upon by Prime Minister Boris Johnson and E.U. members in October. The Sterling rose by about 01% against the dollar on the news of the extension.
Mortgages: It’s All Relative
While mortgage applications for a refinance finally dipped last week, by 1% according to the Mortgage Bankers Association, they are still up a whopping 134% year-over-year. That is because interest rates still remain well below what we had at this time in 2018. Mortgage purchase applications rose by 2% this week, putting them 10% higher than a year ago at this time. The MBA’s chief economist, Joel Kan, expects to see the purchase applications continuing to show solid year-over-year gains.
This week’s Freddie Mac survey shows that the 30-year fixed-rate mortgage average is 3.78%, which is the third straight increase. This week last year, it was 4.86%. So while rates have started to creep back up from the lows we saw earlier this year, they are still staying well below 2018 levels.
Those low interest rates have proved very fruitful in 2019. At the annual MBA meeting in Austin, Texas this week, the group estimated that home-loan originations will reach $2.1 trillion this year. In 2007, just before the housing crash, the origination volume was a $2.3 trillion. Meanwhile, they expect refinance volume alone to hit $793 billion.
The MBA’s forecast also expected homebuilders to break ground on more than 878,000 homes in 2019, more than what we had last year and the highest number since 2007. However, that won’t necessarily solve the housing inventory issue because builders struggle to construct homes that will cost less than $300,000. Costs for materials, land and labor have increased thus making it very difficult to build homes that are more affordable for a first-time homebuyer.
Home prices are still going up with the S&P Case-Shiller home price index showing prices rising by 3.2% in August, up from July’s 3.1% growth pace. Looking at the 10 largest cities in the country, you will see home price gains slowing down to 1.5% appreciation with the 20-city composite index declining by 0.16% in August. Of the major metro areas, three cities in the Southeast were the ones to see major appreciation in prices. Charlotte, North Carolina, Tampa, Florida and Atlanta, Georgia saw price increases of 4.5%, 4.3% and 4% respectively.
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.