Friday Wrap: Analysis of News and Events for the Week

Yield Curve Steepens as Trade Deal Breeds Positivity

The House of Representatives voted to officially impeach President Donald Trump this week. So that brought out lots of volatility in the markets, right?

Not so much.

A survey this month by the equity strategy team at RBC Capital Markets showed that professional investors are largely unnerved by the impeachment. RBCs survey displayed that, “A sizable majority of the investors who participated in our December 2019 survey believe that a Trump impeachment by the House (without conviction in the Senate) would be a neutral even for markets (74%).”

That first piece in parentheses is the key. It is expected that the Senate will acquit the president and he will remain in office. That is why markets and investors aren’t really looking at it as a potential economic mover. In fact, this impeachment process is tracking closely with what happened during President Clinton’s impeachment in 1998. Stocks rallied big time during Clinton’s impeachment, and so far, the S&P 500 is up close to 7% since House Speaker Pelosi formally announced the impeachment proceedings. 

One thing that is gaining because of impeachment is gold. According to MarketWatch, “Gold futures marked their highest settlement in more than two weeks on Thursday in the wake of President Donald Trump’s impeachment by the U.S. House of Representatives.” Gold gained four dollars basis and technically was the first time since Nov. 4 that it closed above the 50-day moving average. That average is fixed at $1480.80.

What’s really moving markets right now is progress with the trade deal and stabilization of global economies. The “Phase One” trade deal with China has infused stability into the market and pushed investors away from the relative safety of government-backed bonds. That means bond yields are on the rise and along with it the spread between the 10- and 2-year Treasury note yields, which inverted earlier this year, is now steepening. An inversion of those yields has typically indicated a recession. 

This chart from CNBC shows the inversion in August and the subsequent steepening we are seeing right now. If you remember, the yield curve inversion resulted in an 800-point drop in the Dow Jones Industrial Average in August. As of Friday morning, the benchmark 10-year yield was trading at 1.935%. The yield has risen close to 40 basis points since October and has jumped 11 basis points in a week. The 30-year yield has also increased significantly, climbing more than 30 basis points to 2.365%. That’s its highest level since Nov. 13.

There are still a lot of questions about the deal with China as the initial numbers are far less than what many economists expected. The U.S. has agreed to reduce tariffs on $120 billion worth of Chinese goods to 7.5%. Goldman Sachs analysts say that is half of what they had expected. 

Chief Economist for Goldman Sachs, Jan Hatzius, said, “The reduction is only half as large as our baseline assumption. There is still some uncertainty regarding the status of this agreement, as it appears once again that some technical and legal details are still in flux.”

The goal is to sign the phase one deal at the beginning of January, according to U.S. Trade Representative Robert Lighthizer. Lighthizer told reporters that as long as China negotiates in good faith, there will be no new tariffs imposed. 

Meanwhile, consumers are continuing to be the main drivers of economic growth in the U.S. While the Q4 gross domestic product estimate was unchanged at 2.1% growth, the Commerce Department’s numbers showed that consumer spending was stronger than what was reported previously. When you look at the average of the GDP and gross domestic income (GDI), economic activity increased at a rate of 2.1%. 

Purchases went up in November, rising by 0.3% month-over-month compared to an October gain of 0.1%, according to the Commerce Department. Also, nominal personal income rose by 0.5% in November month-over-month as wages and salaries rose by a robust 0.4%. 

However, the personal consumption expenditures index released Friday morning shows that inflation is still falling short despite multiple rate cuts this year. The PCE rose by 0.2% month-over-month and 1.5% year-over-year. That was minimally above expectations but still well below the 2% target rate. 

Another Wrinkle in Brexit

The positive sentiment about the latest British referendum has waned significantly as Prime Minister Boris Johnson added a wrinkle to the United Kingdom’s departure from the European Union. There were multiple reports saying Johnson is expected to add a revision to his Brexit bill that would make an extension for the transition period illegal. Currently, the U.K. is scheduled to exit the EU by Jan. 31, 2020. This reported addition would make it illegal to extend the transition period past Dec. 2020. 

That revision would allow less than a year to work out a trade deal between the EU and the U.K. It has taken more than 3 years for there to be a solid plan just for Brexit itself. The British pound dropped by more than 1% directly after the reports came out. 

Fannie Mae Takes a More Positive Outlook

A strong labor market means more consumers have money and, what helps, is that they’re spending it. Those are two of the main reasons that Fannie Mae economists have revised up their real GDP growth forecasts for Q4 2019 and full-year 2020. Fannie Mae’s Economic and Strategic Research Group also expects a significant uptick in single-family housing starts and sales in 2020.

The forecast was revised up by two-tenths for both Q4 2019 and full-year 2020, at 1.8% and 2.1% respectively. Housing will play a significant role in the growth in 2020, according to the ESR, because of a more positive homebuilder sentiment, low interest rates and “waning risks of a significant near-term economic slowdown.” However, just starting to build a house doesn’t automatically increase inventory, so the group is also expecting upward pressure in prices. This means that homes may become less affordable simply because of the supply and demand. 

The National Association of Realtors echoed the issues with inventory and pricing this week with a report that the number of homes for sale in November was the lowest on record for the month. There was just a 3.7 month supply at the end of November, a decrease of 5.7% from a year ago. The NAR started tracking this metric in 1999. Interest rates are a full point lower than they were in Nov. 2018, however, which led to the increase in purchases and decrease in inventory. This week’s average rate from Freddie Mac was 3.73% for a 30-year fixed-rate mortgage. Nov. 2018 ended at 4.81% on a 30-year fixed-rate average. 

The only price range where supply is growing is on the high end, which isn’t in demand. Meanwhile, homes priced between $100,00 and $250,000, which are ideal for first-time homebuyers, are down 7% annually. Because of that scarcity, home prices are starting to shoot back up. The median home price in November was $271,300 which is, again, the highest since the NAR started measuring these statistics in 1999. 

Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a release, “Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021. In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment. Risks to growth have lessened as of late, as a ‘Phase One’ U.S.-China trade deal appears to be in place and global growth seems likely to reverse course and accelerate in 2020. With these positive economic developments in mind, we now believe that the Fed will hold interest rates steady through 2020.”

In its highest reading since 1999, December’s builder confidence in newly built, single-family homes jumped 5 points to 76 according to the National Association of Home Builders/Wells Fargo Housing Market Index. For perspective, any reading above 50 is considered positive. Again, it’s the strong labor market and increased wages that have helped bolster confidence, however, labor availability is an issue along with land shortage. “Higher development costs are hurting affordability and dampening more robust construction growth,” said NAHB chief economist Robert Dietz.

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.