Friday Wrap: Analysis of News and Events for the Week

With Trade Deal Stalemate, Will Housing Drive Economy in 2020?

There is a lot of talk but not much action as the United States and China seem to have reached another stalemate in trade deal negotiations. There is still an expectation that a deal will get done, it’s just a matter of when. A report in Reuters this week says that it might be until 2020 before a deal is reached.

If no deal is accomplished, another set of previously delayed tariffs on $156 million worth of Chinese goods are set to be enacted Dec. 15. Those tariffs were initially pushed back to offset any impact on holiday spending. It is still likely that those tariffs will be delayed again. There are reports quoting a source close to the President saying if a phase-one trade deal is not reached by then, there will be another action that will delay tariffs. 

That constant back and forth has left the stock market in flux. All three major indices were down on Thursday with Amazon sliding by 0.6%. That’s the third straight day of declines for stocks. The 10-year Treasury note yield dipped to a low of 1.70% Thursday after starting the week at a high of 1.857%. Friday morning the 10-year note opened at 1.757%. 

Randy Frederick, vice president of trading and derivatives at Charles Schwab, says, “The U.S. and China don’t know what they want to do on a trade deal. Every single day it’s something different. They’re close to a deal. Then they’re not close to a deal. As long as these rumors go back and forth, how will the market know what to do? It’s confusing.”

While that situation remains unclear, it is a near guarantee the Federal Reserve will not ease rates again this year. The wording the Fed committee members used was the current rates were “likely to remain” adding, “as long as incoming information about the economy did not result in a material reassessment of the economic outlook.”

Many members noted that while there were multiple rate cuts this year, it can take time for them to truly show up in the economy. Therefore, the Fed has gone back to its wait and see approach, closely watching key data markers before making a decision and stressing they are not on “a preset course.” It is interesting to note that while an official tally of votes for and against was not readily available, various speeches from Fed committee members show a divided opinion. 

The main question is whether the global economic slowdown and trade issues are big enough problems to warrant financial action. While one can assume the sentiment of the Federal Open Market Committee members from speeches, the Dec. 11 meeting will give everyone a much clearer picture of how members feel about potential rate cuts in 2020. 

Government Funding Bill

The House and Senate are still trying to hash out a long-term government funding bill as they passed a temporary measure this week. The temporary plan, signed by President Trump on Thursday evening, funds the government at current levels through Dec. 20. This bill also included a 3.1% wage increase for military members. 

The last government shutdown started Dec. 22 of 2018 and ended 35 days later. That shutdown was due in large part to the fight between Trump and Congress about funding for his border wall. That battle is still happening right now and will likely be a point of contention during negotiations for a long-term government funding bill. 

If the government does shut down again, akin to last year, it’s expected there will be little impact on the stock market as it historically has not affected markets. Studies from LPL Financial spanning the last 18 shutdowns show the media change in the S&P 500 was 0.0% over the course of a shutdown. However, studies have shown that budget debates do have significant impact on stock performance. 

Will Housing Lead the Economic Way?

October was a busy time for the housing industry as permits for new construction jumped by 5%, a post-recession high. Year-over-year, building permits are up 14%. The report from the Commerce Department also shows that housing starts increased by 3.8%. 

Builders continue to be generally optimistic about the outlook for the housing industry as mortgage rates continue to stay low and steady. This week, the Freddie Mac 30-year fixed-rate mortgage average was at 3.66%. One year ago, the average was 4.81%. As a reminder, that rate is just an average. Mortgage rates depend on your credit score, type of loan and down payment among other factors. 

Chris Rupkey, chief economist at MUFG in New York, said, “It is cheaper than ever to finance the cost of a new home and home builders are sitting up and taking notice assuming that if they build it, buyers will come.” He continued, “There won’t be a recession if residential housing construction has anything to say about it.”

Many financial analysts agree that housing will be the catalyst for an improved economy in 2020. Goldman Sachs’ forecast predicts that global growth will speed up and the U.S. economy will expand at a 2.3% pace in 2020 moving to 2.4% in 2021.

Fannie Mae’s Economic and Strategic Research Group (ESR) holds a bit more conservative prediction, forecasting 1.9% GDP growth in 2020. That growth would be boosted by easing trade tensions, stimulating fiscal policy and continued consumer spending. 

Fannie Mae Senior Vice President and Chief Economist, Doug Duncan, said “Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth.”

“A stronger-than-expected third quarter contributed to the downward revision to our fourth quarter forecast, as some of the previously expected weakness in trade and inventories appears likely to have been pushed back into this quarter. Still, consumer spending is likely to continue driving the expansion forward, and with the passage of the budget act and a reprieve in trade tensions we’ve revised upward our forecast for full-year 2020 growth. We also continue to expect the Fed to cut interest rates only one more time in the foreseeable future, in early 2020, as a hedge against the sizeable downside risks and to counteract muted inflation.”

Existing home sales rose by 1.9% in the month of October with single-family units leading the way, according to the National Association of Realtors. Year-over-year, existing home sales are up 4.6% reflecting the positive sentiment with lower interest rates.

However, inventory continues to be a headwind for home sales and part of the problem is people, quite simply, aren’t moving. The latest migration data from the Census Bureau shows that a paltry 9.8% of the U.S. population moved from March of 2018 to 2019. That’s the lowest percentage of migration going back to 1947 in Census records. 

As of October, inventory of existing homes for sale fell to 3.9. Typically, a 6-month supply of homes for sale is considered to be a balanced market. Part of the issue is the Baby Boomer generation making the decision to age in place and not downsize. 

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.