Friday Wrap: Analysis of News and Events for the Week

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Volatile Week Ends with Disappointing Jobs Report

As tensions with Iran eased near the end of the week, the Dow rebounded 500 points from the intra-day low Monday of 28,483. The Nasdaq and S&P continues the rally and closed at record highs on Thursday.

This is in sharp contrast to what happened earlier in the week after attacks on Iraqi military bases housing United States soldiers. Once news of the attacks surfaced, the Dow sharply dropped with futures dipping by more than 400 points overnight. The S&P 500 and Nasdaq also saw sharp declines.

Because of that, the benchmark 10-year Treasury note yield has been on a rollercoaster ride since the beginning of the new year. On Jan 2, the yield was above 1.96%. Jan. 3, the day that the U.S. drone strike killed Iranian Major General Qasem Soleimani, the yield tanked to 1.72%. Now, one week later, the 10-year note yield is trading at 1.849%. You can see in the chart below just how volatile the 10-year note has been this week alone (first chart) and over the last year (second chart).

Oil prices also cooled off which warded off a potential scare in the rise of gas prices for American consumers. Up 4% at one point, crude futures eventually settled down 5%.

Helping push the markets higher this week were strong payroll numbers in the private sector. Thursday’s report from ADP and Moody’s Analytics showed a surge in employment numbers to end the year. Private payrolls rose by 202,000, against expectations for a gain of 150,000. This report also revised up November’s report to 124,000 from 67,000. What’s interesting for our line of work is that construction saw an increase of 37,000 jobs, it’s largest gain since April 2019.

The December jobs report from the Labor Department was not nearly as positive. Both payroll and wage growth missed the mark with non-farm payrolls adding just 145,000 jobs to close out the year. The unemployment rate is still steady at 3.5%, however. Jobs numbers for October and November were also revised down to show decreases of 14,000 and 10,000, respectively.

Wage growth also fell below what economists expected with average hourly earnings increasing by just 2.9% year-over-year against a 3.1% prediction. The less than ideal reading caused Dow futures to turn negative Friday morning.

One encouraging note in the report was data on the jobs rate which includes discouraged or underemployed workers. That fell to 6.7% which is the lowest it has ever been going back to records started being kept in 1994. The total employment level reached another high of 158.8 million which is good. But the unemployment rate for African Americans went up to 5.9% from 5.6%.

The Labor Department shows that the increase in December primarily came in the retail sector with leisure and hospitality plus health care not far behind. Construction jobs went up by 20,000 in the public sector but manufacturing jobs as a whole took a hit. Manufacturing saw a net gain of 46,000 in 2019. In 2018, manufacturing saw a net gain of 264,000. This decrease is attributed to the trade war between the U.S. and China.

China Deal, Brexit Set for Signing

The conflict with Iran is currently on the forefront of everyone’s minds, but remember that next week, the United States and China are set to sign phase one of a trade deal. Vice Premier Liu He will be in Washington, D.C. from Jan. 13-15 to sign the agreement.

While it’s expected that this deal will reduce tariffs as well as increase purchases of U.S. goods, no text has been released outlining specifically what the parameters will be. Also, there has been no public commitment to the terms by China. President Trump has previously stated that the deal will be signed on Jan. 15 at the White House and he will travel to Beijing afterward for further negotiations.

It is interesting to look at the overall effect that the nearly two-year-long trade war is having on the U.S. economy. November was the first time that analysts actually saw the trade deficit decline. Economists expected a deficit of $43.6 billion, but the actual numbers saw the deficit much lower at $43.09 billion. That is the lowest deficit reading in more than three years and much lower than the grim October 2019 reading of a $46.9 billion deficit.

Specifically with regard to China, the trade deficit dropped by $2.2 billion in November.

Because of that October reading, many economists have changed their minds with regard to Q4 gross domestic product. Most were expecting a weak fourth quarter with little to no gain. Now, they are predicting that the final tally will show growth of 2%.

After more than 3 years of political indecision, it looks like Brexit might finally happen. The House of Commons voted in favor of Prime Minister Boris Johnson’s Brexit deal with a vote of 330 in favor to 231 against. The bill now moves to the House of Lords and is expected to be put into legislation in the coming weeks.

Jan. 31 is the date for the United Kingdom’s exit, however the next phase of the process is expected to be a little tougher. The U.K. will have to negotiate a new trade agreement with the European Union. The trade rules will not be changed this year and the U.K. will remain under the E.U.’s rules until Dec. 31 to give them ample time to come to a trade agreement.

Mortgage Rates Stay Low, Steady

Freddie Mac’s 30-year fixed-rate mortgage average for this week went down again and is now sitting at 3.64%, its lowest level in 13 weeks. A lot of that is due to uncertainty regarding the recent conflict with Iran which forced many investors to retreat to U.S. bonds.

Those low rates combined with a strong labor market (meaning more purchasing power) contributed to a strong housing market sentiment reported this week by Fannie Mae. December’s reading came in at 91.7, closing in on August’s record high of 93.8.

People looking to sell their home are also more optimistic. According to the report, 65% of people surveyed believed that it was a good time to sell. That’s up 7% year-over-year. Fannie Mae’s economic group predicts that home sales will go up by 1.9% in 2020 compared to 2019’s rate of 1.7% growth. Most of that will come in new home sales as the group predicts builders will start work on 975,000 homes this year.

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.