Friday Wrap: Analysis of News and Events for the Week

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Markets, Yields Soar on News of Tariff Cancellation

The three major United States markets reached record highs this week on the heels of a major development regarding the trade war between the United States and China. The confidence in the latest developments caused investors to dump bonds in favor of stocks on Thursday, causing a 15 basis point increase in the 10-year Treasury note yield.

The Dow rose by 240 points at the start of trading Thursday morning, reacting to an announcement that the U.S. and China would incrementally phase out tariffs. The S&P 500 hit an all-time high as it rose by 0.6% while the NASDAQ also hit a record high, trading 0.7% higher on Thursday morning.

A spokesperson for China’s Commerce Ministry, Gao Feng, said that both parties have agreed to cancel some tariffs that are already in place. The caveat is that the tariffs have to be for equal amounts and they have to be canceled simultaneously.

This was extremely encouraging news for phase one of a trade deal between the two countries, however, it may not happen officially until next month. A summit in Chile was canceled due to protests. President’s Trump and Jinping were scheduled to meet at that summit and potentially discuss finalizing phase one of the deal. Now, Reuters is reporting that meeting may not take place until early December. 

Analysts and traders are “already pricing in removal of the tariffs that were implemented Sept. 1”, says Tom Essaye, founder of The Sevens Report. Although this announcement is not an official removal of the tariffs, it does help take away some of the uncertainty around the trade deal allowing for more confidence in trading. On Thursday, investors ran with the positivity and fled the bond market to invest in stocks. 

Without significant economic data to balance the positive sentiment in the equity markets, the 10-year Treasury note yield increased Thursday as much as 15 basis points to an intraday high of 1.97% before settling down to a close of 1.93% (see chart below). That’s the highest one day increase since the 2016 election of President Trump when it jumped by 20 basis points. The last time the 10-year yield was at or above 2.0% was July 31 of this year. This is still significantly lower than the 3.239% we saw on this day last year. 

These yield levels have broken through several major support levels of 1.90% and 1.93%. The next stop is 1.95%. A close above 1.95% will allow the 10-year Treasury to make a run north of 2% with 2.15% as the next real support level. On another note, remember all the chatter of a recession headed our way with a 2-year Treasury note to 10-year Treasury note yield curve inversion as a leading indicator. That inversion was brief earlier this year and has since steepened to .24%.

Data Shows Consistent, Slowed Growth

The trade deficit declined in September, dropping by $2.5 billion to $52.5 billion, down from an upwardly revised $55 billion in August. Both imports and exports declined in the month of September, in line with expectations. Analysts at Goldman Sachs still have Q4 gross domestic product tracking at +2.1%. 

The ISM non-manufacturing index performed better than expected, rising by 2.1 points in October. A stark contrast to September’s three-year low. It showed increases in business activity, new orders and employment. 

The job openings and labor turnover survey (JOLTS) showed that the number of job openings decreased by more than 275,000 in September with the number of job quits going down and layoffs increasing slightly. This fits with the consistently steady, but slowing, job growth trend we are seeing. 

Rates Still Low, Home Prices Inches Higher

The Freddie Mac survey showed that mortgage rates declined this week, going back down to 3.69% on average for a 30-year fixed-rate mortgage. However, the data was compiled before the trade news with China so that is likely lower than the rate you would have seen Thursday mid-morning or afternoon. Also, it’s good to remember that the average is not necessarily what you would receive for your mortgage rate. Rates can fluctuate depending on loan type, down payment and credit score among other factors.  

The latest home price forecast from CoreLogic shows that home prices rose at a rate of 3.5% year-over-year for September. The group predicts that September of 2020 will show a home price gain of 5.6% compared to 2019.

The low mortgage rate environment, plus steady wage gains, have helped boost affordability, especially for first-time homebuyers. That’s part of the reason homeownership is at its highest level in five years, according to CoreLogic’s chief economist, Frank Nothaft. 

However, a lack of inventory in homes priced below $200,000 has stunted the homebuying process for many Millennials. A September report from Realtor.com showed that the number of homes for sale priced below $200,000 dropped by nearly 9% with mid-market homes showing no inventory growth. Rob Dietz, the chief economist for the National Association for Homebuilders, says “Right now only about 10% of newly-built home sales are priced under $200,000. Five years ago that share was 1 in 5, and 10 years ago that share was 40% of new home sales priced under $200,000.”

CoreLogic’s studies have shown that Millennials have reported spending more than they expected on their home purchases. The group’s market condition indicators (MCI) report in September showed that 36% of the nation’s metro areas had housing markets that were overvalued. On average, older Millennials spent around $383,000 on a home according to the latest data. 

The monthly homebuying sentiment survey from Fannie Mae echoes any concerns about affordability, showing in October that just 21% of Americans think now is a good time to buy a home. That’s down from 28% in September.  The problem is as simple as supply and demand. Buyers rushed in when mortgage rates dropped this summer and reduced inventory, thus pushing up home prices. 

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.