The stock market got off to a weak start suffering its worst day of the year last Monday as China retaliated against the $200 billion in tariffs levied against China by the Trump Administration with $60 billion in additional tariffs against U.S. imported goods. Consequently, fears of a full-blown trade war between the U.S. and China weighed on investor sentiment all week prompting a “flight to safety trade” benefiting bond prices. A mid-week rally erased some of Monday’s losses after President Trump tweeted the U.S. would “make a deal when the time is right” and highlighted his friendship with Chinese President Xi Jinping, calling the trade pressures between the two countries a “little squabble.” Stocks also benefited from news reported by The Wall Street Journal that Treasury Secretary Steven Mnuchin and chief trade negotiator, Robert Lighthizer, were likely to return to China for negotiations later this month.
The week’s economic data was “mixed” with Industrial Production (-0.5% vs. 0.1% forecast) contracting far greater than expected in April due to declining auto manufacturing. Retail Sales also declined (-0.2% vs. +0.2%) erasing expectations for modest increase. On a positive note, the University of Michigan’s Consumer Sentiment Index soared (102.4 vs. 96.9 forecast) to a 15-year high, and weekly jobless claims declined to 212,000 from 228,000 the prior week.
There is now a growing perception that if there is an economic slowdown triggered by a tariff war between the U.S. and China, the Federal Reserve will step in to stimulate the economy with a rate cut. The Fed Funds futures market is currently pricing in a 57.8% chance the Fed will cut rates by October.
In housing, builder confidence increased for newly built single-family homes according to the latest data released last Wednesday by the National Association of Home Builders (NAHB) and Wells Fargo. Their Housing Market Index (HMI) climbed three points in May to 66, the highest reading since last October and two points higher than forecast. Any reading over 50 shows improvement.
In May, the sub-index measuring current sales conditions shot three points higher to 72 while the component measuring expectations over the next six months moved one point higher to 72, and the index of buyer traffic increased two points to 49.
NAHB Chairman Greg Ugalde stated “Builders are busy catching up after a wet winter, and many characterize sales as solid, driven by improved demand and ongoing low overall supply. However, affordability challenges persist and remain a big impediment to stronger sales.” NAHB Chief Economist Robert Dietz added “Lower mortgage rates hovering around 4 percent in conjunction with ongoing job growth and rising wages have contributed to a gradual improvement in the market place. At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”
Thursday, the Commerce Department released their Housing Starts and Building Permits data for April showing Housing Starts increased 5.7% month-over-month to a seasonally adjusted annual rate of 1.235 million. This was higher than the consensus forecast of 1.200 million and largely due to a 6.2% increase in single-unit starts. Meanwhile, Building Permits increased 0.6% month-over-month to 1.296 million. This was higher than the forecast of 1.280 million, although single-unit residential permits fell 4.2%.
Regionally, April housing starts saw large gains in the Northeast (+84.6%) and Midwest (+42.0%) regions. However, the nation's two largest regions experienced declines in total starts with the South dropping -5.7% and the West falling -5.5%.
Building permits for single-unit housing were lower in the Northeast (-7.5%), South (-8.8%), and West
(-0.5%) regions. However, the Midwest saw a gain of +11.8%.
The number of units under construction at the end of April totaled 1.121 million, down 0.9% month-over-month and down 0.4% year-over-year. The data suggests declining mortgage rates were starting to provide some support for the housing market.
Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications decreased from the prior week. The MBA reported their overall seasonally adjusted Market Composite Index (application volume) declined 0.6% for the week ended May 10, 2019. The seasonally adjusted Purchase Index decreased 1% from a week prior while the Refinance Index also decreased 1%. Overall, the refinance portion of mortgage activity was unchanged at 37.9% of total applications from the prior week.
The adjustable-rate mortgage share of activity decreased to 6.3% of total applications from 6.4%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased to 4.40% from 4.41% with points decreasing to 0.40 from 0.47 for 80 percent loan-to-value ratio (LTV) loans.
For the week, the FNMA 4.0% coupon bond gained 12.5 basis points to close at $102.781 while the 10-year Treasury yield decreased 7.90 basis points to end at 2.394%. The Dow Jones Industrial Average dropped 178.37 points to close at 25,764.00. The NASDAQ Composite Index fell 100.66 points to close at 7,816.28. The S&P 500 Index lost 21.87 points to close at 2,859.53. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 10.44%, the NASDAQ Composite Index has gained 17.80%, and the S&P 500 Index has advanced 14.07%.
This past week, the national average 30-year mortgage rate fell to 4.15% from 4.24%; the 15-year mortgage rate decreased to 3.90% from 3.94%; the 5/1 ARM mortgage rate decreased to 4.06% from 4.14%; and the FHA 30-year rate remained unchanged at 4.00%. Jumbo 30-year rates declined to 4.07% from 4.14%.
Economic Calendar - for the Week of May 20, 2019
Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
Event /Report /Statistic
Existing Home Sales
MBA Mortgage Applications Index
EIA Crude Oil Inventories
Initial Jobless Claims
Continuing Jobless Claims
New Home Sales
Durable Goods Orders
Durable Goods Orders excluding transportation
Mortgage Rate Forecast with Chart - FNMA 30-Year 4.0% Coupon Bond
The FNMA 30-year 4.0% coupon bond ($102.781, +12.5bp) traded within a slightly wider 20.3 basis point range between a weekly intraday low of $102.719 on Monday and a weekly intraday high of 102.922 on Wednesday before closing the week at $102.781 on Friday. Mortgage bonds traded higher Monday through Wednesday on a bounce higher from technical support before giving back some gains on Thursday and Friday. There is a strong triple layer of technical support at the 50% Fibonacci retracement level ($102.618), the 25-day moving average ($102.601), and the 50-day moving average ($102.582). Technical resistance is found at $102.922, the intraday high of May 15 and $103.109, the intraday high of March 27. The bond remains “overbought” at a higher level and is trading on a stronger sell signal. The chart suggests a move lower toward support levels and this may result in slightly higher mortgage rates this coming week.