Weekly Market Update


Week of December 2nd, 2019 in Review

Last week was all about Jobs…And there were certainly many more individuals working in the month of November.  Additionally, the US and China trade talks continued to spin the markets “Right round baby right round, like a record baby, right round, round, round” like the Dead or Alive song goes.

 

Conflicting Jobs Data

The first of two jobs reports that were released last week was the ADP Employment Report.  This report showed that there were only 67,000 job creations in the month of November, which was the slowest growth in 6 months and a big miss from market expectations of 150,000.  Adding to the weakness, the October report was revised lower by 4,000 from 125,000 to 121,000.

When we peel back the curtain and look deeper into the report, goods producing companies lost 18,000 jobs, with 6,000 coming out of manufacturing and 6,000 out of construction and natural resources/mining.  The service side saw 85,000 job creations, leaving us with 67,000 in job growth.

After receiving the weak ADP report, you might think that the more important Bureau of Labor Statistics (BLS) Jobs Report would also show some weakness.  After all, the two reports do correlate well over time.  This was not the case – The BLS reported that there were 266,000 jobs created in the month of November, which was much higher than the 180,000 expected. 

Even when factoring the approximately 50,000 in jobs we got back from the GM Strike being over, there were 216,000 jobs created, which is very strong.  Additionally, there were 41,000 in positive revisions to the previous two months – September was revised higher by 13,000 from 180,000 to 193,000 and October was revised higher by 28,000 from 128,000 to 156,000.  This brings the average over the last 3 months to 205,000.

The Unemployment Rate ticked down from 3.6% to 3.5%.  Let’s take a look at why - There are two different surveys within the Jobs Report – The Business Survey, where the headline jobs figure is derived from, and the Household Survey, where the Unemployment Rate comes from.  The Household Survey also has a job creation component, which said that there were only 83,000 job creations…conflicting data even within their own report!  But there is another component that goes into the Unemployment rate – The labor force increased by 40,000 and since the job creation component was double than the gains in the labor force, the unemployment rate decreased.

Average hourly earnings increased from 3.0% year over year to 3.1%.  Average Weekly earnings, which we focus on more, increased from 2.7% to 3.1% year over year. 

Overall, it’s hard to poke any holes in this report.  The strength was broad based and showed some real strength in jobs.

 

More Strong Housing Data

CoreLogic reported that home prices rose 0.5% in October and 3.5% year over year.  The year over year reading remained stable from last month’s report and is a sustainable and meaningful level for wealth creation.  The states with the highest increases year-over-year were Idaho (10.9%), Maine (7.5%) and Indiana (7.1%).

CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which is a slightly lower pace than the 5.6% forecasted in the previous report.  How significant is 5.6% appreciation?  If you bought a home today for $250,000 and that home appreciated by 5.4% over the next 12 months, you would gain $13,500 in appreciation.

Another widely followed measure of appreciation from Black Knight showed that home prices appreciated 4.25% year over year in October, which was the biggest year over year gain in 9 months. 

 

Media Screw Up of The Week

There were some reports that had to be taken with a grain of salt last week due to the Thanksgiving Holiday the week before.  The media sure did not catch on and touted significant weakness in Mortgage Applications and strength in Initial Jobless Claims, but incorrectly so.  Let’s break this down -

The Mortgage Bankers Association reported that Mortgage Application volume was down 9.2% last week.  Applications to purchase a home were up 1.0%, but were down 24% year over year.  This is a huge change from the previous week, where purchase applications were up over 50%.

Refinances were down 16.0% and up only 61.2% year over year.   Again, this was a big change from the previous week where refinances were up 314%.  Why?  Thanksgiving fell a week earlier in the previous year.  That means that the year over year figures from last week, which were a holiday, are being compared to a regular week in the year prior.  Of course, you could expect less individuals to be applying for mortgages during Thanksgiving week.  For these reasons, we have to throw out the year over year figures and wait for next week where we are betting there will be some big gains. 

Another report affected by the holiday was Initial Jobless Claims, which showed that there were only 203,000 individuals that filed for unemployment benefits for the first-time.  This was 10,000 lower than the previous week, and 15,000 lower than estimates.  But don’t be fooled by the lower reading…The period measured in this report was Thanksgiving week, where many were likely not filing for unemployment benefits.  Expect a spike higher next week. 

 

What to Look for This Week

The themes of this week will be the Fed and inflation.  The Fed’s two-day meeting will start on Tuesday, with the Fed Statement and Press Conference on Wednesday.  We don’t expect anything of substance here, as the Fed made it clear that they are going to pause after cutting rates three consecutive times at the previous three meetings.  Additionally, the strong Jobs data shows strength in the economy and supports not cutting rates.

Inflation data is always important to follow, as it has a direct correlation with interest rates.  Think about it – If you were to purchase a Bond, let’s say for 30-years, you would receive a fixed interest payment over that time period.  But if inflation is on the rise, that fixed payment could purchase less and less.  As a result, in a rising inflation market, the investor must be compensated with a higher rate of interest.  As a result, when inflation is on the rise, interest rates rise.

The Consumer Price Index (CPI) report will be released on Wednesday, with the Producer Price Index (PPI) on Thursday.  The really important report to watch will be the CPI, which measures inflation as felt by the consumer.  The CPI report has two components, headline inflation and core inflation.  The core strips out food and energy prices and is our main focus.

The previous readings, which were for October, headline inflation was reported at 1.8% and core at 2.3%.  If inflation surprises to the upside, it could apply pressure on Bonds and send rates higher.  Another interesting component within the report is rental increases.  The last release showed that rents, across the US, are going up at 3.7%.  Einstein once said that the 8th wonder of the world was compound interest.  Those that understand it, earn it, those that don’t, pay it.  Many renters would likely be surprised to see the impact that has over time on their rent payments.

 

Technical Analysis Breakdown

Mortgage Bonds were pressured lower after strong economic data and optimism surrounding the US and China’s initial trade deal.  As a result, Bonds broke beneath an important triple floor, formed by the 50, 100, and 25-day Moving Averages.  These levels will now act as a triple ceiling and will make it hard for Bonds to move higher.  There is support nearby that is prevent Bonds from moving much lower on Friday.  The level is a trend line that can be drawn by from the close of September 13th to the close of November 7th to the low of Friday’s candle.  While this level did hold Friday, it may be fickle.  And if Bonds break beneath it, there is significant room for Bonds to move lower until reaching the next floor at 100.547.  Because of this, Bonds could move lower next week.