January 24, 2020 — After a few weeks of rising optimism, a holiday-shortened trading week and one with a dearth of significant new economic data seemed to leave investors to dwell on the more negative or pessimistic components of the current climate. As a result, there was a bit of a shift out of riskier assets like stocks, lowering benchmark bond yields and mortgage rates a bit. Although there is now a “phase one” trade agreement in place with China it looks as though there’s a realization that while having a deal in place is a good thing, it’s not as though the effects of it will be felt quickly or even necessarily broadly when they do show, and may not even undo the effects of the recent trade “war” between the two largest economies, since a wide range of tariffs remain in place. As well, there seem to be a bit of rising skepticism about the prospects for a more significant “phase two” agreement, which might not come to pass until after November’s election. It appears as though we will see the USMCA signed next week, which would solidify the parameters of trade with our largest trading partners and neighbors, so that would be a good thing. However, the trade and tariff troubles are by no means behind us, as President Trump has set his sights on the European Union for similar treatment. Overall, while the climate for trade may becoming somewhat clearer and more stable, it remains a source of discomfort for businesses around the globe.
Adding to global concerns this week is the worries about the impacts of a spreading coronavirus, which seems to be growing by the minute in leaps and bounds. China is taking extraordinary steps to address the growing crisis, even pledging to build a hospital for a 1,000 patients in only a weeks’ time while essentially quarantining 30 million people to help contain the spread of the disease to the extent possible. Still, the number of cases is rising there and being reported elsewhere, and there are reasons to think that the outbreak will diminish already soft growth in places around the world, although those effects may be short-lived. The slight bit of fresh economic data in the U.S. certainly didn’t help lighten the darker outlook, as most of it simply reinforced the message that all we might expect at the moment is modest growth at best. For example, the Federal Reserve Bank of Chicago’s National Activity Index moved from a pretty positive 0.41 reading in November to a decidedly negative one of -0.35 in December, reflecting a slowdown in economic activity. This amalgam of 85 economic indicators seeks to show if the economy is growing above or below it’s “potential”, or natural ability to grow without throwing off any excesses. This is thought to be a GDP level of perhaps 2.6% or so, possibly less, and the December value does suggest sub-par growth for the month. The NAI has been in a highly uneven pattern for months, with positive swings giving way to negative ones, but the trend effect continues to be less-than-stellar growth.
There may not be much improvement to be expected in the near term, either, if the forecasting ability of the index of Leading Economic Indicators is any indication. The Conference Board’s ostensibly forward-looking tool posted a reading of -0.3% for December, so there most definitely was a little slippage in activity to close out 2019 and little momentum to start 2020.With the two wide-ranging trackers finishing 2019 on a soft note, it would be a shock to see GDP for the fourth quarter of 2019 come in higher than the 2.1% notched for the third quarter. While we’ll get the first official (advance) figure on Q4 GDP next week, the current run rate as reckoned by the Atlanta Fed’s GDP Now tool suggests we’ll only see a rate of perhaps 1.8% or 1.9% for the period. That’s not enough softness for the Fed to become concerned enough to act, but the Fed does meet for their January two-day policy meeting on Tuesday and Wednesday next week. The Fed has made it plain it will hold rates steady unless things really turn sour, and a soft quarter isn’t enough to warrant concern, especially with a range of outlooks starting to improve for other economies. As reckoned by the future markets tracked by CME Group, there’s about an 87% chance that the Fed will make no move at next week’s meeting, but in an interesting turn, the remaining 13% of odds makers lean toward a quarter-point rate hike. That’s rather at odds even with longer-range futures forecasts, where a sizable majority expects one or more rate cuts before 2020 comes to a close.
The labor market should continue to be a source of comfort for the Fed and to investors, as there are no indications that a slowing job market is forming. High employment levels should keep consumer spending powering the economy forward, and this effort will hopefully be joined by manufacturing and agriculture spending to a greater degree before too much more time passes. The next employment report is a couple of weeks away yet, but the latest review of initial claims for unemployment benefits remains very solid, with just 211,000 new applications filed at unemployment offices in the week ending January 18. It’s to be expected that applications for mortgages would begin to tail off a bit after the usual post-holiday blast of pent-up demand is sated. That hasn’t happened just yet, but there was a 1.2% decline in overall application placed in the week ending January 17, according to the Mortgage Bankers Association of America. The dip was pretty equally balanced, with a 2% fall in applications for purchase-money mortgages and a 1.8% decline in those for refinances. Still, with mortgage rates edging down a bit more this week, there’s a good chance that refi activity will kick higher again.
It may be hard for purchase-money mortgage activity to move any higher, because there are increasingly fewer and fewer homes available for sale. In December, sales of existing homes rose 3.5% to a 5.54 million (annualized) pace, the highest level since March 2018, but the effect of the flare in sales last month is twofold: First, it depleted supplies of homes for sale to just 3 months, the lowest level in 20 years, and second, it caused a spike in the price of homes sold, with a year-over-year increase of 7.8% (up from an already firm 5.4% annual gain in November, and the largest year-over-year increase since January 2016). The lack-of-inventory-for-sale-leading-to-higher-prices issue doesn’t look like it will be solved quickly, as listings of homes for sale declined by 15.9% compared to November (probably some seasonal/holiday effect reflected there) but were also 9% below a year ago December’s tally. Simply, there are few homes for sale, what is for sale is commanding increasingly steep prices, and mortgage rates aren’t falling enough to provide an offset for those fast-rising prices. Failing a spurt of new inventory into the market, what’s likely to come next is a slowdown in sales, and that would put a drag on the soon-to-start spring housing season. More new construction will help with the inventory problem, and likely will to a degree, but as with most things it will take time. Even then, the $231.19 per month difference in monthly payment between the median price of a new home with 10% down and an existing one may prove too steep for potential homebuyers to make the leap to new construction.
One local look at the strength of manufacturing activity in the district covered by the Federal Reserve Bank of Kansas City showed a better grade of lousy, as their barometer sported a value of -1 in January. Still, that sub-par figure was good enough to be the best since September, and there was upward movement in measures of new orders (to -4 from -13) and employment (to +4 from -7), so the report did reflect at least some improvement in factory conditions this month. With disappointment in the air at the moment, mortgage rates seem poised to drift downward a little bit again next week. Perhaps the Fed will have some cheerier news for markets, something akin to the “green shoots” kinds of language we saw at times in the early days of the economy recovery and expansion. There’s a bit more data out next week for investors to consider, but most of the consequential reports come after the Fed meeting has concluded. With a soft end for markets this week and not too much to consider before the Fed, it looks like we’ll see mortgage rates fade a little more again next week. We expect that there will be a couple of basis point decline in the average conforming 30-year FRM that Freddie Mac reports next Thursday. If it’s more than three basis points, rates will have drifted back to where they were last September.