Friday Wrap: Fed Focused on Trade Deal, ReFi’s Booming

Potential for Trade Deal Stokes Market

Trade continues to be the main concern for the policy makers at the Federal Reserve, as shown in the minutes released from September’s Federal Open Market Committee meeting. The minutes also showed that some of the FOMC members are concerned that the market is expecting more rate cuts than the Fed is willing to deliver.

The dot plot, showing the expectations of committee members, shows an intriguing split between five members who favor no additional cuts, five who favor an increase and seven who believe more cuts are needed. 

Members mentioned the 15-month trade battle with China a total of 28 times in the minutes and expressed that while the United States is still showing solid growth, forecasts were “tilted to the downside.” They also noted, “a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged.”

This week we saw U.S. producer prices decline by 0.3% in September, the biggest drop in eight months. The numbers from the Labor Department show the smallest annual increase, just 1.4%, in nearly three years, meaning inflation is staying soft. This also keeps the door open for the Fed to cut rates again at their FOMC meeting Oct 29-30. 

The Dow futures took a dive Wednesday evening, dropping as much as 300 points, amid reports that trade talks between the U.S. and China had once again stalled. The Dow regained more than 100 points on Thursday on news that President Trump would meet with Chinese Vice Premier Liu He on Friday. Then, Friday morning, Dow futures were up around 300 points as talk of a limited trade deal between the two countries could be struck soon. The meeting between Trump and He is scheduled to take place at 2:45 p.m. Eastern on Friday. Expect more market moves surrounding any news regarding the potential trade deal. 

The 10-year Treasury note continued to hover around 1.55% on Wednesday before jumping to 1.743% as of Friday morning on the reports of Trump’s meeting with China. 

The consumer side of the finance picture is still strong despite the weakening manufacturing and corporate investment numbers. However, consumer prices were their weakest since January, remaining unchanged in September. The Labor Department’s study shows consumer prices went up for food and rent but were offset by lower prices for energy as well as used automobiles. This shows that underlying inflation continues to slow down and supports the argument for another rate cut by the Fed this month. 

A quick note on international politics as there is some positive news about Brexit. The Sterling increased Friday morning, rising about 1.3% to $1.26, on the heels of the optimism about Brexit negotiations. A spokesperson on the European side called this week’s Brexit discussions “constructive” as negotiators from the European Union and the United Kingdom met this week for “last-ditch talks.” The deadline for Brexit, either through a deal or through a hard Brexit, is Oct. 31. 

Also, Friday morning, oil prices jumped by 2% as Iran claimed two missiles sank one of its oil tankers. The tanker had been traveling off the coast of Saudi Arabia. Brent crude futures were up 2.07% at $60.33 a barrel with West Texas Intermediate showing similar gains Friday morning. 

ReFi’s Still Booming, Rates Remain Low

We are still in the midst of a refinance boom with rates sitting around 3.57% in this week’s Freddie Mac survey of 30-year fixed-rate mortgage averages. What’s really intriguing about Freddie Mac’s survey is that, “the first-time homebuyer share of the loans Freddie Mac purchased in 2019 is 46%, a two-decade high.” You can see Freddie Mac’s chart going back to November of last year and how significant the rate drop has been. 

Loan activity is still going strong thanks to the consistent, low rates. The Mortgage Bankers Association showed that mortgage applications ticked up by 5.2% for the week ending Oct. 4, 2019.

The MBA’s Vice President of economic and industry forecasting, Joel Kan, said “As seen a few times this year, the large drop in rates caused another surge in refinance applications. The refinance index increased 10% to its highest level since late August, with both conventional and government refinances experiencing an upswing.”

According to HousingWire, that means the refi market is up a whopping 163% from this time in 2018. As expected, however, the purchase index is showing that it’s starting to slow down as purchase applications declined by 1%. However, Kan says purchase activity is still 10% higher year-over-year. 

Fannie Mae’s Home Purchase Sentiment Index shows a different story with the American consumer. The HPSI decreased by 2.3 points in September. There was a drop in the “Confidence about not losing a job” category as well as the “Home prices will go up” component. There were increases in both the “Good time to buy” and “Good time to sell” categories. 

In a press release from Fannie Mae, Senior Vice President and Chief Economist Doug Duncan said, “Consumer sentiment remains relatively strong overall, though uncertainty about the economy and individual financial circumstances appears to be weighing on housing market attitudes a bit more than a month ago.” 

Duncan continued, saying, “Views about the direction of the economy held relatively steady, and the share of respondents who say it’s a good time to buy or sell a home rose slightly. However, consumers who are pessimistic about current housing market conditions are more likely to cite unfavorable economic conditions than the prior month. Job confidence remains high but still well shy of its July reading. Despite some added uncertainty, the September HPSI indicates continued strength in housing market attitudes and is consistent with recent data on housing activity.”

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.