Friday Wrap: Analysis of News and Events for the Week

Stocks Still Setting Records, Economic Data Looking Stronger

A flurry of activity in the stock market this week as China and the United States continue to trade barbs on the trade war, Disney hit it big with a streaming service and Federal Reserve Chair Jerome Powell addressed Congress. 

The 10-year Treasury yield, which nearly hit 2% last Friday, rallied back to 1.830% one week later as China reinforced its stance of rolling back tariffs as part of any “phase one” plan to come to a trade agreement. However, there was some enthusiasm as President Trump hinted at a positive future for the trade deal. 

The deal has also hit a snag with regard to agricultural purchases. President Trump previously announced that China had agreed in principle to purchase up to $50 billion in products like soybeans and pork, but Chinese officials are wary of putting a firm number to that commitment on paper. 

The uncertainty with regard to the trade war was offset on Wall Street thanks in large part to the release of Disney’s new streaming platform, Disney+. Chief Market Strategist at TD Ameritrade, JJ Kinahan, said, “There’s a lack of selling in the market, because we have optimism around trade, a better-than-expected earnings season and we’re heading into what appears to be a strong holiday shopping season. There’s a lot to like right now.”

Fed Chair Powell emphasized a “new normal” for the U.S. economy during his remarks to Congress on Wednesday. “I think the new normal is lower interest rates, lower inflation, probably lower growth, and you’re seeing that all over the world, not just in the United States,” said Powell. 

Government data from the Labor Department released on Wednesday showed the consumer price index (CPI) increased 1.8% year-over-year with a month-over-month of 0.4%. That’s slightly higher than expected. That reading shows underlying inflation has ticked back up slightly, supporting the Fed’s stance of no further rate cuts this year. The core CPI, which excludes volatile food and energy readings, increased 0.2% in October as opposed to 0.1% in September. 

The producer price index also saw an increase, albeit the numbers are softer when looking at the core PPI which excludes the more volatile readings like energy and food. Analysts with Goldman Sachs predict that the CPI and PPI reports will add up to a core personal consumption expenditure (PCE) index increase of 13% month-over-month. That would mean a year-over-year measure of 1.66% which is still well below the 2% inflation benchmark held by the Fed. 

Consumers also showed up in October with car purchases, along with higher gasoline prices, fueled a 0.3% rise in retail sales, according to the Commerce Department. Year-over-year, retail sales have seen an increase of 3.1%. There was some slowdown on big ticket items and clothing purchases, but core retail purchases went up by 0.3% which again supports the Fed’s stance of no more rate cuts this year. 

Powell also addressed the decade-long expansion of the U.S. economy, which is still ongoing, however, at a much slower pace. Powell remarked, “we are closer than we would like to zero.” He dismissed the idea of negative interest rates being a possibility for the U.S. 

Right now, analysts are calling this more than 10-year economic expansion the best ever and The Leuthold Group says it’s our country’s highest economic performance since WWII. Through the first day of November, the S&P 500 has seen a 468% gain since the expansion began on March 9, 2009.

Meanwhile, behind the scenes, a potential economic deal between 15 Asia-Pacific countries is set to be formalized in 2020. The deal would be called the Regional Comprehensive Economic Partnership, or RCEP. This deal has been in the works for more than six years and, according to Reuters, the 15 countries involved equal about one-third of the world’s population and global GDP. The United States is not part of this potential trade agreement.

The urgency to approve the RCEP intensified when President Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP) and subsequently enacted tariffs on multiple trade partners citing “unfair trade practices.”

India was initially part of the RCEP trade negotiations but is not one of the 15 countries set to sign the trade pact. 

Steepening Yield Curve, Good or Bad Returns?

Anxiety spread up and down Wall Street just a few months ago when we saw the yield curve between the 10- and 2-year notes invert. That meant the yield on the 2-year bond was higher than the yield on the benchmark 10-year Treasury note. That inversion is widely regarded as the sign of an impending recession.

That phenomenon was short-lived, however, as the yield curve has continued to steepen as we near the end of 2019. Bank of America Merrill Lynch’s quantitative team has been studying the steepening of the yield curve as it relates to stock prices and they have found strong correlations. 

The study, which looked at 1,300 stocks, showed that returns on energy, financial and material sector stocks are the most sensitive to the yield curve inversion. When the yield curve steepens, the returns on stocks in these sectors rise the most. In contrast, returns on gold increased during an inversion and decreased during steepening. 

The general consensus of the study from quantitative strategist Toby Wade, was that, “as the yield curve steepens, it has a positive impact on equity prices on a relative basis. As it inverts, it has a negative impact.”

Mortgage Applications Pick Back Up

The uptick in mortgage rates last week and this week may have lit a fire under potential homebuyers as mortgage application volume went up by 9.6% week-over-week according to the Mortgage Bankers Association survey. 

With positive economic news come higher mortgage rates, and that seems to be the driving force behind this increase. Consumers have realized that we may have hit bottom and are getting into before rates move too close to last year’s nearly 5% average. 

Joel Kan is the vice president of economic and industry forecasting for the MBA. He said, “Positive data on consumer sentiment, and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate.” Kan continued, “With rates still in the 4% range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

Refinances are particularly sensitive to any rate moves but that volume also increased week-over-week by 13%. Year-over-year, refis are up 188%. 

Freddie Mac’s weekly mortgage rate average shows that a 30-year fixed-rate is right around 3.75%. That is up from last week reflecting positive consumer sentiment and less worry of a recession. Remember, a personal mortgage rate depends on a lot of factors including, but not limited to, type of loan, credit score and down payment. 

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.