Weekly Market Update

Week of February 17th, 2020 in Review

The markets may have been closed Monday for Presidents Day, but the rest of the week brought a bevy of economic data. Housing news was at the forefront, with reports on January Housing Starts, Building Permits and sales of existing homes. And despite a slight drop from January, builder confidence remained strong in February per the latest National Association of Home Builders (NAHB) Housing Market Index. 

But the manufacturing sector wasn't left out of the headlines, as the Philadelphia Fed Index had its best reading in two years, while the Empire State Index also came in strong.

The markets are still wary of the coronavirus. Both Apple and Walmart noted that it will impact corporate profits and the global economy. In addition, Cass Freight reported that their shipments index for January fell 9.4% on an annual basis, noting that the coronavirus is creating uncertainty around its eventual impact on global supply chains.

Any stories about the coronavirus worsening will cause a flight to quality trade where Stocks will move lower and Bonds will move higher. Continuing to monitor these developments remains important.

The "Start" of Something Wonderful?

Housing Starts, which measure the start of construction on a home, were down 3.6% to a rate of 1.567M units in January. But there is more than meets the eye to this decline.

December's reading was a 14-year high, that was revised even higher from 1.608M units to 1.626M units. It’s natural to expect a pullback from such a huge number, which is why the market expectations were for the reading to come in down over 13%. But when you factor in the revision from last month, Starts actually dropped just 2.5%, so they really exceeded expectations.

Single-family homes, which are the real heart of the housing market, were down 5.9% from December but up 21.4% when compared to January 2019.

Building Permits, which are a good forward-looking indicator of Starts, were up 9.2% from December to an almost 13-year high and are 17.9% higher on an annual basis.

While this is a positive sign for future buyers, January's Existing Home Sales report, which measures closings in January and likely represents buyers shopping for homes in November and December, showed that inventories remain tight. There were only 1.42M units for sale in January, down 10.7% on an annual basis. At the current pace of sales, this represents just a 3.1-month supply.

The headline figure showed that overall, sales of existing homes decreased by 1.3%, which is a minor pullback from the highest sales pace in 2 years. Additionally, sales are up 10.8% when compared to January of last year.

The median home price was reported at $266,300, up 6.8% year over year. It should be noted that even with inventory levels near the lowest on record and the median home price up 6.8% annually, sales are still very strong.

Last week also gave us a near real-time reading on builders' confidence via the NAHB Housing Market Index. February's reading decreased 1 point to 74 but is still at a very strong level and only 2 points off a 20-year high.

The report showed that current sales decreased 1 point to 80, sales expectations fell 1 point to 79, and buyer traffic was down 1 point to 57. Remember that a reading above 50 signals expansion so this was still a strong report.

"Curve" Ball Coming for the Economy?

The yield curve turned upside down last week, with 3-month yields moving higher than 10-year yields. This is unusual as typically you would expect to get a higher rate of return if you put your money away for 10 years when compared to just 3 months.

Why does this matter?

An upside-down yield curve has been an historically accurate recession indicator, as it is a symptom that the economy is slowing and something is wrong. It's important to note that the yield curve was also inverted last year, though it was righted thanks in part to the Fed's buying almost $100 Billion per month in Treasury Bills, which helped to steepen the yield curve. It will be important to keep an eye on this as the year progresses.

A "Minute" of Your Time

The Minutes from the Fed's January 29th meeting showed that the current policy was likely to remain appropriate, which means that interest rates will remain unchanged for a while. But there are several factors that could change this, including inflation falling short of the Fed’s target or if the economy begins to slow more than the Fed expects. The Fed will also closely monitor the risk posed by the coronavirus.

So what is significant about this statement?

It's in contrast to the market expectations, which are pricing in a 100% chance of a Fed rate cut by the summer. And on that note, Fed Vice Chair Richard Clarida suggests markets pricing in a rate cut are wrong. Clarida noted the majority of economists do not expect a rate cut soon from the Fed. But we should take this with a grain of salt, as the Fed has not been accurate on forecasting rates.

Travel Hack of the Week

Does winter weather have you dreaming of travel this spring? These easy hacks courtesy of BuzzFeed are great to remember any time of year!

If you forget your phone charger, and the hotel concierge doesn't have a spare, check your hotel TV for a USB port.

If you're traveling internationally, scan your passport and email it to yourself so you have a digital copy in the event anything happens to it.

Stop shampoo and other liquids from leaking by placing plastic wrap over them and sealing with the cap. As an extra precaution pack these in sealable plastic bags.

Contact lens cases are perfect for small amounts of lotions, while eye glass cases can keep all of your chargers in one place. Plus, wrapping headphones around a gift card can help keep them untangled.

What to Look for This Week

Tuesday brings news on home prices with the release of both the Case-Shiller and FHFA Home Price Indices. But it's the second half of the week that will definitely garner attention. The second estimate for GDP for the 4th quarter of 2019 will be released Thursday followed on Friday by the Fed's favorite measure of inflation, Personal Consumption Expenditures. Both of these reports have the potential to move the markets.

Technical Analysis Breakdown

Mortgage Bonds made a nice move higher last week within the range they have been trading in since mid-January.  Bonds are now testing overhead resistance at 102.344, which is a very important level.  If this ceiling holds and pushes Bonds lower, there is quite a bit of room till the next floor of support at the 25-day Moving Average.  But if Bonds can break through this ceiling, the next resistance level is all the way up at 102.703.