The Market Today
Lower Rates Give Boost to Mortgage Applications, Trade Data Confirms Global Growth Concerns
by Craig Dismuke, Dudley Carter
Mortgage Applications Up for a Second Week in a Row: The recent downturn in mortgage rates seems to have provided some support for mortgage activity, a positive sign of potential stability for the reeling housing sector. The Mortgage Bankers Association’s 30-year contract rate estimate ticked back down 0.01% to 4.65%, matching its lowest level in a year. Total purchase applications responded with a 5.3% weekly increase that was the result of stronger interest in new purchases and the refinancing of old loans. Purchase applications were up 6.1% while refinancing activity rose 4.6%.
Trade Balance and Inventories: There were conflicting indications for 4Q growth in two separate reports this morning. Retail inventory growth for December was stronger than expected and Monday’s initial estimate of wholesale inventory accumulation was confirmed to be better than estimated in its final revision. And while those two reports are a net positive for economic growth in 4Q, a first glance at net external trade in December is not. The advance goods trade deficit widened three times what economists had expected to a new record -$79.5B in December. Exports dropped 2.8% from November amid slowing global growth with big declines in industrials supplies and capital goods. However, imports into the U.S. expanded 2.4%, evidence the U.S. economy continues to outperform. The strength in imports was the result of solid gains across food and drink categories and capital and consumer goods. The weakness in exports gives validity to the Fed’s and others’ concerns that global growth slowed notably into the end of the year.
A Second Round of Economic News at 9 a.m. CT: Another round of economic news will hit the wires later this morning at 9 a.m. CT. Pending home sales are expected to have rebounded in January after sliding in the final three months of 2018. The estimated 1.0% gain would provide a bit of hope for stability in existing sales, which last week were reported at their weakest level in more than three years. December’s Factory Orders report will be released alongside the pending sales data, and will include revisions to initial estimates for businesses’ spending on capital equipment. Estimates last week showed stronger shipments of business equipment but weaker orders. And Fed Chair Powell will wrap up the final day of his semiannual congressional testimony, this time before the House Financial Services Committee.
Yesterday – Stocks Held Steady as Yields Fell on Housing Woes and Heavy Demand at a Treasury Auction: U.S. stocks flipped between gains and losses Tuesday but had barely budged from their opening levels once the final trades had posted. The Dow slipped 0.1% while the S&P 500 and Nasdaq ticked down by even smaller amounts. Sectors pointed in different directions Tuesday as tech companies led the four gainers while materials companies led losses across the seven others. Consumer stocks closed up on the day despite mixed readings in related economic reports. Companies directly tied to housing were generally weaker after housing starts’ sharp December slump, but companies more generally linked closely to consumers were helped out by a better-than-expected rebound in consumer sentiment (more below). Part one of Fed Chair Powell’s semiannual Congressional testimony didn’t appear to move markets off of their early-morning trends as his remarks didn’t veer much from the Fed’s well-telegraphed plan of patience this year (more below). Yields did retreat on the day, however, but the biggest shifts occurred before and after Powell’s testimony. Yields tumbled after housing starts missed estimates and pulled back again following a strong auction of 7-year Treasury debt. The 7-year sale attracted the most direct interest since 2014 and stopped through by nearly a full basis point. The 2-year yield ended 1.4 bps lower at 2.48% and the 10-year yield dropped 2.7 bps to 2.64%.
Overnight – Global Equities Weaken Wednesday, Treasury Yields Inch Lower: Markets have traded cautiously overnight with a mixed session across Asia preceding an exclusively softer tone across Europe, the combination of which has nudged Treasury yields lower (2s -0.6 bps to 2.48%, 10s -0.4 bps to 2.63%) with U.S. equity futures. An uneventful testimony Tuesday from Fed Chair Powell (more below) and a lack of any significant news on trade kept headlines focused elsewhere. Tensions between India and Pakistan have escalated in recent days with the countries reportedly swapping airstrikes in response to a car bomb attack in India less than two weeks ago. Keeping with the geopolitical theme, President Trump is in Vietnam today meeting with North Korea’s Kim Jong Un in attempt to work out a more detailed plan for North Korea’s denuclearization. A first meeting between the pair of leaders last June led to a joint statement indicating the two “will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.” As for economic data, a measure of economic confidence in the Eurozone was better than expected but posted its eighth consecutive monthly decline. In other markets, U.S. crude prices were up more than 2% after Saudi’s energy minister said the country is planning further production cuts next month.
Confidence Bounced Back But Signs of Caution Remained: Consumer confidence bounced back in the Conference Board’s latest release. The headline index rose 9.7 points in February, the biggest gain since August 2015, to 131.4, a three-month high but below last October’s 18-year high of 137.9. Confidence had tumbled the three months prior amid the longest government shutdown in history and significant market volatility that led to concerns about the health of the global economy. The present situation index (+3.3 points) improved but the strong snapback in expectations (+14 points) stood out. With the government re-opened through the end of September and the Dow up nine weeks in a row (longest since 1995), consumers reported feeling better about business conditions and remained upbeat on the labor market. The assessment of current job opportunities edged to a new 18-year high, though net income expectations stabilized lower. Detracting somewhat from the better headline, consumers remained cautious about purchase plans for autos (seven-month low), homes (seven-month low), and major appliances (four-year low). With low inflation expectations a key focus of the Fed’s new policy of patience, most likely took note of one-year inflation expectations edging down to their lowest level in more than 15 years.
Powell Took His Patient Approach to Capitol Hill: In the first half of his two-day testimony before members of Congress, Fed Chair Powell was peppered with questions on a range of topics, including bank regulation, the SunTrust and BB&T merger, fiscal sustainability, Modern Monetary Theory (MMT), banks ‘involvement in the marijuana industry, global trade spats, disparate levels of recovery in rural and urban America, and the Fed’s exploration of alternative policy frameworks. But on the Fed’s role in carrying out current monetary policy, the Chair’s comment shed little new on the way forward. In his prepared remarks, he recapped how strong 2018 was for the economy but reiterated the outlook is now faced with “crosscurrents and conflicting signals”. He explained that as a result, and “with inflation pressures muted,” the Fed has elected to become patient in determining what its next rate adjustment will be. He also didn’t divulge any new details on the topic of balance sheet normalization. The most frequently covered topic seemed to be the labor market. Potentially capturing his most dovish tone, Powell referred to wage growth above 3% as a “welcome development,” not an inflationary concern, and said the pick-up in labor force participation indicated more slack existed than previously thought. “We have learned this year that there’s more slack in the labor market, because people are coming back in,” Powell said, adding “That tells us that there is more room to grow.”
Another Regional Fed Survey Perked Up: For a second time this week, a regional Fed survey perked up more than expected in February. After dropping 37 points from September to December, the Richmond Fed’s Manufacturing Index has rebounded 24 points in 2019 (18 in February) to its best level since September. A recovery in current orders and shipments led a broad improvement across most indicators tracking how manufacturers feel about current conditions. Employment indications were more mixed and expectations for conditions in six months saw more modest net gains. A recovery in equity markets in recent weeks, positive developments on trade policy, and the Fed’s shift to patience have combined to help drive a rebound across several more recent economic indicators.