Friday Wrap: Analysis of News and Events for the Week

Inflation Remains Soft as Strong Economic Data Rallies

Strong economic data boosted markets this week with retail sales leading the way. The Dow rallied another 267 points Thursday in reaction to the report from the Commerce Department showing retail sales went up for the third straight month. December’s retail sales showed a 0.3% increase with November’s data being revised up to 0.3% as well. Even better, the core retail sales which exclude automobiles, gasoline, building materials and food services, went up by 0.5% in December. \

Consumers continue to drive the economic expansion despite the rise in U.S. producer prices. The producer price index (PPI) rose by 0.1% in December and 1.8% year-over-year, according to the Labor Department. The rise was offset by weakening in services. Consumer prices also went up slightly. The consumer price index (CPI) rose by 0.11% in December with a year-over-year reading of 2.3%, which has remained mostly stable. 

The biggest expense to consumers in that month was energy with a 1.4% increase while food prices were led by a higher price for beef. Core prices however, which exclude the volatile energy and food industries, went up by just 0.11%. That’s its slowest pace since May of 2018. 

The strong data released on Thursday prompted a rise in the 10- and 30-year Treasury note yields. They closed Thursday at 1.812% and 2.262%, respectively. 

International Market News

The U.S. Senate overwhelmingly approved (89-10) the new trade deal between the U.S., Mexico and Canada on Thursday, helping send all three major markets to record highs. The U.S.-Mexico-Canada Agreement (USMCA) replaces the North American Free Trade Agreement, or NAFTA. All three countries initially signed the deal in Sept. 2018, but there were some tweaks made which Canada still needs to approve before it will officially go into effect.  

This week we also finally learned the terms of the “phase one” trade deal between the United States and China. The deal was signed on Wednesday of this week at the White House and featured an agreement for China to buy an additional $200 billion in U.S. goods. It would start with $77 billion of additional purchases this year and $123 billion in 2021. 

The bulk of those purchases will come in the form of manufactured goods, adding up to $32.9 billion in 202 and $44.8 billion in 2021. Agricultural, energy and services purchases will make up the remainder of the balance, respectively. 

If the numbers hold true, this would mark a massive acceleration of U.S. exports to China. In 2020, exports would theoretically climb to $263 billion and then $309 billion in 2021. Comparatively, China bought $186 billion worth of U.S. goods in 2017. 

Intellectual property theft and forced technology transfers were also discussed in the deal. 

Typically, good news on the trade front has boosted Treasury yields, but Wednesday’s deal also came with news from the White House that the U.S. will not lift tariffs on $250 billion worth of Chinese goods quite yet. 

Meanwhile, the Bank of England could potentially cut rates this quarter after seeing inflation grind to a three-year low in December. Consumer prices in the United Kingdom rose by 1.3% with inflation slowing to a crawl of 1.4%. That’s been great news for consumers, as in America, who have seen wages rise with the cost of goods not being affected by strong inflation.

Global economic fragility has taken a slight backseat with the recent news of deals for Brexit and the U.S.-China trade deal, but it’s hard to ignore the paltry economic growth in Europe. Germany posted its weakest growth since 2013, seeing just 0.6% expansion in 2019. Germany saw 1.5% and 2.2% growth in 2018 and 2017, respectively. Slowing car sales along with declines in industry as a whole have marked the recent downturn for Germany.  

Americans are Staying Put

This past year was an incredible year for borrowers to refinance their mortgage to lower rates, but it also means that people, quite frankly, didn’t move. The latest report from Buildfax shows that 2019 recorded the lowest mobility rate since 1947, the year that piece of data began being tracked. 

Buildfact managing director Jonathan Kanarek said, “The U.S. is facing a housing shortage, in part due to the slowdown in housing construction last year. This has been felt in both large metros and smaller cities across the country. Now, even though the economy is showing strong growth and mortgage rates remain low, those who want to buy a new home are experiencing challenges with increased competition on a tight housing supply.”

Rates continue to be low and steady at 3.65% for a 30-year fixed-rate mortgage average according to Freddie Mac. While those rates are ideal, and consumer spending is high, inventory will continue to be the bugaboo for the housing industry 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.