Valentine’s Day may have come and gone but that wasn’t the only love in the air last week. The Mortgage Bankers Association latest figures showed that last month was the strongest January for purchase applications in 11 years. Meanwhile optimism was also on the rise among small businesses last month, per the National Federation of Independent Businesses Optimism Index for January. Key inflation was reported via the latest Consumer Price Index figures, plus Fed Chair Jerome Powell testified in front of Congress.
One thing Stocks didn’t love late last week was the news that confirmed coronavirus cases spiked to over 60,000, with the death toll around 1,367 as of last Thursday. Some of this spike was due to a new diagnosis methodology that has been put in place.
The news did spook Stocks when it was initially reported Thursday, though they did move higher early on Friday. Mortgage Bonds and the home loan rates tied to them sometimes benefit from global uncertainty if investors make “safe haven” trades and move their money into fixed investments like Bonds, which are considered safer than Stocks. We will be closely watching this situation and how the markets continue to react to it.
What’s at the Heart of Consumer Inflation?
The Consumer Price Index (CPI), which measures inflation on the consumer level, came in just below expectations at 0.1% in the month of January, while the year-over-year reading increased from 2.3% to 2.5%.
More importantly, the Core rate, which strips out volatile food and energy prices, remained stable at 2.3% on an annual basis. This is just shy of an 11-year high and marks the 23rd month in a row that Core CPI has been above 2%.
The report showed that rents rose by 0.4% for the month and are increasing at a rate of 3.8% on a yearly basis, which is unchanged from the previous month. Meanwhile, out of pocket medical care costs were up 0.2% for the month and are up 4.5% year over year.
Our good friend and MBS Highway contributor, Peter Boockvar, gives a great explanation for one of the reasons why the CPI is running almost 1% hotter than the Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE). “The PCE metric mostly measures what the Medicare and Medicaid bureaucracies will reimburse the healthcare system for these services, rather than measuring what people are paying out of pocket which is included here in CPI.”
Keep in mind that inflation news is always important to monitor because inflation is like the “arch-enemy” of the Bond market. Think of it this way. Bonds have a fixed coupon payment. And if inflation is on the rise, you can no longer buy the same amount of goods that you could previously. In other words, inflation erodes your buying power. So in a rising inflation environment, the end investor has to be compensated with a higher rate.
The bottom line is that when inflation rises, so too do interest rates, including mortgage rates. Thankfully, inflation has been relatively tame, but if we see a surprise move higher in CPI, it could pressure the Bond market and home loan rates.
Show Renters Some Love
A recent report from Freddie Mac showed that a whopping 84% of renters think it’s more affordable to rent than it is to buy, an all-time high for the survey.
The survey went on to note that affordability issues actually impact renters more than owners, with 42% of renters paying more than one third of their household income on rent compared to just 24% of owners on their mortgage.
What’s more, renters often think they need 20% down to purchase a home which is not true.
While the media sometimes downplays the benefits of homeownership, this data provides a tremendous opportunity to educate potential clients about how buying a home could benefit their financial situation. And our Buy vs. Rent tool makes it easy to do so!
Fed in the News
In his testimony in front of Congress, Fed Chair Jerome Powell noted that the Fed is closely monitoring the coronavirus and its effect on global economic growth.
He also said that Monetary policy will remain appropriate as long as information about the economy remains broadly consistent with the Fed’s outlook. Powell called the purchases of Treasury Bills a technical measure and not a change in monetary policy, despite the rally in risk assets that has come along with the balance sheet expansion.
The market is anticipating the Fed to cut its benchmark Fed Funds Rate one time before September. As the year progresses, we will get a better idea if this forecast will change … and when a cut may occur.
Home Hack of the Week
Snow recently fell in parts of the south that don’t usually see winter weather, which is a good reminder for all of us to double check our emergency kits in both our home and cars. Ready.gov provides this easy checklist.
For the basics, your kit should include batteries, flashlights, dust masks, whistle (to signal for help), moist towelettes, wrench or pliers, cell phone with chargers and a backup battery, first aid kit, one gallon of water per person per day for a minimum of three days, and a three-day supply of non-perishable food. Don’t forget a manual can opener!
Additional supplies that may be helpful include prescription medicines, glass and contact lens solution, infant formula, pet food and supplies, cash, important family documents (i.e. insurance and bank information), sleeping bags and blankets, extra clothes, fire extinguisher, matches, personal hygiene items, paper towels and plates, paper and pencil, and games and other activities for children.
Reminder to store your canned food in a cool, dry place and make a note to check your kit twice a year so you can replace expired items as needed.
What to Look for This Week
There will be a slew of economic data released this week, and we’ll see which news the markets love … or don’t.
Housing news will be in the forefront, as the National Association of Home Builder’s Home Price Index for February will be reported on Tuesday, January Housing Starts and Building Permits on Wednesday, and January Existing Home Sales on Friday.
There will also be news on February’s manufacturing numbers when the Empire State Index releases on Tuesday and the Philadelphia Fed Index on Thursday.
Wednesday also brings the Fed Minutes from the January 29th meeting and, as usual, the latest weekly Initial Jobless Claims numbers will be released on Thursday. All of this data certainly has the potential to move the markets so stay tuned!
Technical Analysis Breakdown
Mortgage Bonds continue to trade in the middle of a wide range between support at the 25-day Moving Average and overhead resistance at 102.25. Bonds have traded almost perfectly within this range since late January. Most of the news this week will be important but housing related and will not have an impact on the markets. The market will likely take a nod from headlines on the coronavirus epidemic and potentially the Fed minutes on Wednesday. Any stories on the coronavirus worsening will cause a flight to quality trade where Stocks will move lower and Bonds will move higher.
Parasite may have scored big at the Oscars, but “best picture” in the economic sector category for last week goes to labor, which showed that 2020 has started with blockbuster job creation numbers. Both the ADP and Bureau of Labor Statistics (BLS) reported job creations well above expectations. While the BLS Jobs Report showed that unemployment ticked up a notch, both average and weekly hourly earnings increased.
Not to be outdone, home appreciation figures were no joke, as CoreLogic showed home prices increased in December.
And while fears regarding the coronavirus continue, the markets did like some news from China. Both the Dow and S&P 500 set record highs late last week on news that China will half tariffs on roughly $75 Billion of US imports. This follows the US cutting tariffs in half on $120 Billion worth of Chinese products last month and was part of the agreement within the Phase 1 trade deal. Even though this was expected as per the agreement, Stocks didn’t mind the excuse to rally.
Blockbuster Jobs Data
Wednesday brought the first of the two Jobs Reports last week, and the ADP Employment report for January was no tear-jerker. A whopping 291,000 new jobs were created, which was much better than the 155,000 expected. ADP said the “mild winter weather provided a significant boost to the January employment gain,” which correlates to the sectors that benefitted the most. Construction added 47,000 jobs and leisure/hospitality added 96,000. ADP went on to note that real job gains are closer to 150,000, but all-in-all this was a very strong report.
The BLS Jobs Report for January followed this trend, as it showed that 225,000 new jobs were created, much higher than the 160,000 expected. Adding to the win, the report also showed that November’s figure was revised higher by 5,000 jobs (from 256,000 to 261,000) while an additional 2,000 new jobs were reported for December (bringing the total from 145,000 to 147,000). As a result, the 3-month average now equals 211,000.
Average hourly earnings increased from 2.9% to 3.1% year over year, while the more important weekly earnings figure increased from 2.3% to 2.5% on an annual basis. This makes sense when you consider that ADP cited the mild January as a reason for its blockbuster job creation figure. A mild January likely means that workers were able to work more hours. And as a result of that, will probably have higher weekly earnings.
The Script on Unemployment
The BLS Jobs Report showed that the Unemployment Rate ticked up from 3.5% to 3.6%, but when we delve deeper into the numbers it’s easy to understand 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 89,000 jobs lost while the labor force increased by 50,000. It’s always interesting to see the disconnect between the Business and Household surveys. For January, this disconnect led to the uptick in the unemployment rate.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, increased from 6.7% (which is the lowest level on record) to 6.9%. The labor force participation rate remained increased from 63.2% to 63.4%.
The bottom line is that despite the small uptick in the unemployment rate for January, the labor sector is winning big so far in 2020.
Home Appreciation Also Stole the Show
In housing news, CoreLogic reported that home prices rose 0.3% in December and 4.0% on an annual basis. The annual reading increased from last month’s report, which showed a 3.7% gain. Idaho (9.9%), Maine (7.9%) and Wyoming (7.7%) showed the largest annual increases.
Frank Nothaft, the Chief Economist for CoreLogic said that, “moderately priced homes are in high demand and short supply is pushing up values and eroding affordability for first-time buyers. Homes that sold for 25% or more below the local median price experienced a 5.9% price gain in 2019, compared with a 3.7% gain for homes that sold for 25% or more above the median.”
CoreLogic forecasts that home prices will appreciate by 5.2% in the year going forward, which is a slightly lower pace from the 5.3% forecasted in the previous report, but still very strong. To run some quick numbers on this scenario: A 5.2% gain on a $300,000 home would translate to $15,600 in appreciation over the course of a year, which is certainly no tragedy for homeowners.
Home Hack of the Week
Winter can be the prime time for lighting candles around your home. If you notice any wax that’s dripped on your carpets, don’t panic. Try this easy fix-it trick from our friends at This Old House:
Rub a piece of ice over the spilled wax. Once the wax has hardened, break it into smaller pieces with a spoon, then vacuum before they re-soften. Blot the carpet with a towel to remove any remaining residue and rest assured, no one will ever know a spill occurred. Plus, this also works for gum!
And as a bonus tip, if your kids are enjoying art projects while they’re inside during the colder weather, there’s an easy solution if any glue spills on your carpet, too. Simply dampen a soft cloth or cotton ball with rubbing alcohol. Press on the glue until it is thoroughly moistened. Wipe gently and repeat as needed.
What to Look for This Week
The economic calendar picks up steam in the second half of the week, with inflation news teed up to take center stage when the Consumer Price Index for January is reported on Thursday.
Inflation news is always important to monitor because inflation and interest rates are tied very closely together. Inflation is the “arch-enemy” of the Bond market because Bonds have a fixed coupon payment. And if inflation is on the rise, you can no longer buy the same amount of goods that you could previously – Inflation erodes your buying power. Take a look at the graphic for to see how the same $20 can buy much less over time due to inflation.
In a rising inflation environment, the end investor has to be compensated with a higher rate to compensate them. It’s because of this that when inflation rises, so too do interest rates, including mortgage rates. Thankfully, inflation has been relatively tame.
December’s report showed that consumer inflation came in 0.1% weaker than expected on a month-over-month basis. But the headline reading was especially significant, increasing from 2.1% to 2.3% year over year – the hottest level in a year. The more important Core rate, which strips out volatile food and energy prices, remained stable at 2.3%, just shy of an 11-year high. We will be watching closely to see if January’s report adds to the drama. It is important to note, however, that 2% inflation is still very modest and is right at the Fed’s target. But not all inflation reports are created equal – The Fed, possible for their own agenda, follows the Personal Consumption Expenditures report much more closely, which runs about 0.5% lower than the Consumer Price Index.
The bottom line: Any jumps in inflation could pressure Mortgage Bonds and home loan rates later this week.
We’ll also find out if love was in the air for retailers when the latest Retail Sales figures for January are released on Friday.
Mortgage Bonds were volatile last week and tested both support and resistance within their trading range. On Friday Bonds managed to break the 102.25 resistance level, but were pushed back beneath it. A close above this level would be a significant sign, as the next ceiling of resistance can be found about 45bp higher at the top of the window formed on November 8th 2016. MBS Prices are near multi-year highs and if they can get past the inflation data next week, may have a chance to continue to climb. A lot will depend on the Stock market, which had a big week and set new record highs. Stay tuned.
The last week of January brought plenty of headlines, as housing data, inflation news and GDP were all released. On top of that there was a Fed meeting and growing fears regarding the coronavirus, which is spreading much more quickly than SARS did in the past. China has confirmed that the number of cases is now over 10,000 while the death toll has climbed above 200. The World Health Organization declared the virus a global health emergency and the U.S. has now seen the first case transmitted by one person to another. This news spooked global markets late last week.
And that’s not the only important “panic” to mention. Recently we noted that the Panic/Euphoria Model from Citigroup, which is a gauge of investor sentiment, was very close to euphoric levels. Reminder that the model identifies ‘Panic’ and ‘Euphoria’ levels which are statistically driven buy and sell signals for the broader market.
Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later. A reading at or above .41 is euphoria and last week hit .45.
Bottom line: The index is now in full Euphoria territory, so this will be important to monitor in the months ahead.
And speaking of “euphoria” of a different type, congratulations to the Kansas City Chiefs on winning the 54th Super Bowl.
Fed Sings the Same Tune
The Fed’s first meeting of 2020 brought little surprises as the Statement that was released Wednesday was exactly as expected. In a unanimous decision, the Fed left rates unchanged. They noted that the labor market remains strong, economic activity is rising at a moderate pace, job gains are solid, and unemployment remains low.
If you’re feeling a sense of deja vu, there’s good reason. Last week’s Statement was almost exactly the same as the Fed’s Statement in December.
The most important part of the Statement we were looking for was comments on the Fed’s Balance Sheet. The Fed reiterated that they plan on purchasing T-bills “at least through April 2020 to ensure that the supply of reserves remains ample.” They then said that once they get to a point where reserves are sustainable, they will gradually reduce their purchases.
It seems like the Fed will be purchasing Treasury Bills for quite some time.
Digging Deeper on Inflation
In its Statement, the Fed also said that inflation remains muted but is turning towards their 2.0% target. That seemed to be confirmed with the subsequent release of the Personal Consumption Expenditures (PCE) Report, which is the Fed’s favored measure of inflation and which showed that headline inflation increased from 1.5% to 1.6% in December.
The more important Core rate, which strips out volatile food and energy prices, was reported at 1.6%. Both of these readings were in line with expectations and little changed from the previous report.
It’s also important to note that the Employment Cost Index, which measures compensation for workers, was in line with expectations and up 0.7% in the 4th quarter of 2019. On an annual basis, the index is up 2.7%, which was just below the 2.8% in the 3rd quarter of 2019. This report was former Fed Chair Greenspan’s favorite measure of inflation and this data is in line with what we saw in the last Jobs Report which showed average weekly earnings up 2.6%.
So what’s the bottom line? Inflation does remain muted in the reports the Fed follows closely, which is good news for fixed investments like Mortgage Bonds and the home loan rates tied to them. But we do think it’s important to keep a close eye on the Consumer Price Index (CPI). As we have mentioned several times, we think that CPI is a much better read of real inflation because it has a higher weighting towards the cost of putting a roof over your head and out of pocket medical expenses.
And the CPI is running much hotter at 2.3%.
CPI figures for January will be released February 13, and we’ll be watching closely to see if Mortgage Bonds and home loan rates love the data … or not.
Looking Beneath the Housing Headlines
The latest New and Pending Home Sales figures were released last week, and while the media latched onto negative headline numbers, important takeaway’s come from digging deeper here as well.
December New Home Sales were down 0.4% from November but are still up a very strong 23% year over year … something the media conveniently left out of many reports. The estimate of new houses for sale at the end of December was 327,000, which represents a healthy supply of 5.7 months at the current sales rate.
Meanwhile, Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were down 4.9% in December. While this reading was weaker than the expectations of a slight gain, Pending Home Sales are still up 4.6% on an annual basis. Of course, the media focused on the 4.9% drop and headlines calling for the end of strong housing market surfaced shortly thereafter. The National Association of Realtors, however, attributed the pullback to purely a lack of supply. They went on to say that demand remains very strong and if there were more homes for sale, there would be a greater amount of sales. While this can make finding a home more difficult, it’s a good dynamic for your customers’ investment in their home. Tight supply and strong demand, as the first law of economics states, means that prices should move higher.
How fast are homes appreciating in the US? The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices rose 3.5% November, which was a slight increase from 3.2% in October. The 20-city Index increased to 2.6% on a year over year basis from 2.2%. Phoenix (5.9%), Charlotte (5.2%), and Tampa (5.0%) led the gains, and the gains were broad based, with every city in the index seeing an increase.
Usually, the media cites the median home price when they claim housing is accelerating too quickly for incomes. Instead, appreciation is what we need to pay close attention to. And the 3.5% appreciation we are seeing nationally is still meaningful, but not too hot to outpace incomes and make homes unaffordable.
Hold That Housing Dial
Not to be outdone in an already full news week, Black Knight also shared some interesting stats on the health of the housing market:
Mortgage delinquencies fell by nearly 4% month-over-month to within 0.04% of the record low set in May 2019 and more than 12% below last year’s level
The national foreclosure rate fell again in December to reach a new 14-year low, and the lowest on record outside the final five months of 2005
2019 ended with just over two million borrowers past due on their mortgage (including active foreclosures) – down 236,000 from the same time last year and the lowest year-end volume since the turn of the century
All in all, despite what the media may focus on, the housing market is rolling along as we head into 2020.
What to Look for This Week
The labor market will be front and center, especially in the second half of the week. First up, the ADP report will be released on Wednesday, followed by weekly Initial Jobless Claims Thursday. But the week’s main attraction comes on Friday with the BLS (Bureau of Labor Statistics) Jobs Report for January.
December’s report showed 145,000 jobs created, which came in below expectations of 158,000 new jobs. The numbers for October and November were also revised lower by 14,000. We will be watching closely to see if January’s figures score big or fall flat. Also of importance will be the unemployment rate and average hourly and weekly earnings.
Mortgage Bonds have been in a clearly defined upward trend since January 19th. Last week they tested an overhead ceiling of resistance at 102.25, but to confirm a break above it the last two attempts. Bonds are now in a wide range and could be susceptible to price swings. Bonds will likely take their cue from the Stock market. If Stocks sell off, Bonds will likely test overhead resistance again and potentially break above it. If Stocks regain some of Friday’s losses, it may apply pressure to the Bond market.
The big news of the week was again out of China…but this time not pertaining to trade relations. The new coronavirus that originated in Wuhan, China is something that not only individuals are fearful about, but also the markets.
Coronaviruses are a large family of viruses that usually infect animals but can sometimes mutate and spread to humans. Symptoms in humans include fever, coughing and shortness of breath, which can progress to pneumonia. This new virus is similar to the 2003 outbreak of SARS.
There are two confirmed cases in the US, one in Washington and the other in Illinois. Additionally, there are 63 cases being monitored as potential cases that stretch across 22 states. If the situation persists and worsens, it may cause fear in the Stock market. If a selloff were to occur, that money would likely find its way into the Bond market.
Another Contrarian Indicator
Citigroup released their panic/euphoria model, which is another great contrarian indicator, meaning it goes against the prevailing market trends – Selling when others are buying and buying when most investors are selling. Historically in this model, once the market reaches euphoria, there is an 80% chance that Stocks will be lower the following year. Currently the index is a .34, just below Euphoria, which is at .41. This is similar to the fear/greed index referenced a few weeks ago. This is something to keep an eye on for a reversal in the Stock market.
Paul Tudor Jones, the billionaire investor, made some interesting comments last week on how the current Stock market reminds him of the 1999 bull market that ended with the dot com bubble. Remember, the best indicator for recession is the unemployment rate. If it starts to move higher, breaking above 4%, that could be a sign that things are turning.
Strong Sales Despite Tight Inventory and Higher Prices
The Existing Home Sales report for December, which measures closings in that month and likely represents buyers shopping for homes in October and November, increased by 3.6%. This is the highest sales pace in 2 years. On a year over year basis, sales are up 10.8%.
There were only 1.4 M units for sale in December, the lowest reading on record. Imagine how many more sales there would have been if there were more homes for sale. At the current pace of sales, there is a 3-month supply.
The median home price was reported at $274,500, up 7.8% year over year, which is the largest jump since January 2016. We can’t stress enough how strong this housing report is – Sales are at a 2-year high, even with inventory levels at the lowest levels on record.
The media and Diana Olick did their best to shed some negative light on the report, as usual. Diana said that home prices were rising at double the pace of income – Incomes are rising at 3.1% year over year, while the Median home price is up 7.8%…but she doesn’t understand what the median home price is. The median home price means that half the homes sold above that number and half the homes sold below it. This does not necessarily show appreciation, it shows that more higher priced homes were sold. It is not a direct translation to appreciation, that is what reports like the FHFA House Price Index and Case Shiller Home Price Index are for.
Perhaps more importantly, Diana is incorrect in her statement that home prices were rising at double the pace of income because of the relationship between income and home payment. Incomes don’t have to keep pace with appreciation because a home buyer does not use 100% of their income to pay for their home. Look at this example, which is an oversimplification but expresses the point:
If a home buyer earns $5,000 per month, it would not be uncommon for them to purchase a home and have a monthly principal and interest payment of $1,000. Now if that person waited to purchase the home, and home prices went up 5%, their new monthly principal and interest payment would rise to $1,050. The home buyer’s income does not have to go up by 5% to make up the $50 increase, only 1%. Because of the typical relationship between home payment and income, incomes DO NOT have to keep pace.
And according to the FHFA House Price Index (Federal Housing Finance Agency), a report that measures appreciation, single family homes with conforming loan amounts rose 4.9% year over year, not the 7.8% that the median home price rose. This means that the pace of incomes rising could sustain a much greater level of appreciation than the current rates we are seeing.
What to Look for This Week
This week is action-packed with housing data, the Fed, and inflation. We will get New Home Sales, Pending Home Sales, The Case Shiller Home Price Index, GDP, a Fed Meeting, and the Fed’s favorite measure of inflation, Personal Consumption Expenditures. We expect the housing reports to continue to show strength and for sales to accelerate. The Fed meeting, PCE report, and GDP can all impact the markets and will need to be followed closely.
Technical Analysis Breakdown
Mortgage Bonds continue to contend with overhead resistance at 101.904, which has proven to be a tough ceiling. This level put a lid on Bonds last week and must be watched closely because if Bonds are pushed lower, there is a long way down until the next floor of support. If Bonds can make a convincing break above 101.904, it will be a significant move and positive sign for rates. A move higher in Bonds above this level will likely coincide with a move lower in Stocks.
The US and China Trade Deal was signed last week and marks a significant first step in trade negotiations. The US will still maintain 25% tariffs on approximately 250 Billion worth of Chinese goods and 7.5% on another $120 Billion, rolled back from 15%. These tariffs could be removed in a Phase 2 deal and are being kept in place to keep China honest. As a part of the Phase 1 agreement, China will have to buy at least $200 Billion more in US products and services than it did previously and will have to reduce barriers to US farm goods like beef, pork, poultry, and rice. Probably the biggest commitment from China is one to improve protection and enforcement of intellectual property rights, where China will increase criminal penalties for copyright theft as a deterrent.
Potential Recession Indicator
The Cass Freight Index, which measures shipments in the US and is a good broad measure of economic health, was down significantly in December. Shipment volumes dropped 7.9% vs December 2018 levels, as the index posted its lowest reading since January 2018. It was also the steepest year over year decline since the Great Recession of 2008-2009.
This is an interesting index and is something that is not widely followed, but is very important. Think about it, every company must ship products, whether it’s by air, boat, train, etc., in order to deliver those products to stores and consumers. When this figure is negative, it speaks to businesses slowing down and can be an early warning sign that things are turning in the economy. Of course, there are other factors, but this is something that should be closely monitored.
Best New Construction Numbers in Nearly 20 Years
The strong housing data rolls on – Housing Starts were up 17% to a rate of 1.608M units for the month of December. Surprisingly, even Diana Olick from CNBC, who is typically very negative, was positive on housing after the report, citing some of the demographics that we have talked about for years. The level of starts is the highest number in almost 14 years. Last Month’s figure was revised higher from 1.365M units to 1.375M units and without the revision, Starts would have been even stronger and up 17.8%. Year over year Starts are up a whopping 40.8%. Single-family homes, which are really the life blood of the housing market, were up 11.2%.
Permits, which are a good forward-looking indicator of starts, were down 3.9%. Year over year permits are still up 5.8%. Single Family Permits were down 0.5%.
The NAHB (National Association of Home Builders) released their Housing Market Index, which gives a “finger on the pulse” look at Builder Confidence. The index decreased 1 point in January to 75…but this is still a very strong level and is only one point off a 20-year high.
What to Look for This Week
The focal point of this week will be more housing data. The FHFA (Federal Housing Finance Agency) will release their House Price Index, showing appreciation levels of single-family homes in the US with conforming loan limits. Typically, this report will show appreciation on homes that are closer to the median home price…and those homes are appreciating at a much faster clip than higher priced homes, as that’s where all the demand is. Look for this number to be north of 5%, which is extremely meaningful for wealth creation. After all, a 5% return on a $300,000 home would equate to a $15,000 appreciation gain in just 12 months.
Additionally, Existing Home Sales for December will be released. This is one of the most important housing reports, as existing sales account for nearly 90% of the housing market. Look for more strength in these numbers.
Technical Analysis Breakdown
Mortgage Backed Securities continue to trade in a very wide 137bp range between overhead resistance at 101.904 and support at 100.53. Support was tested last week, but as seen on the chart, it held and prices bounced higher. Because Bonds are in such a wide range, they are susceptible to big price swings and there may be volatility this week. Bonds are trying to remain in the uptrend that has been intact since December 19th. Last Friday Bonds began to break beneath this rising trend line, but there has not been a convincing break just yet. This is a level to watch closely, because if it’s broken, Bonds will likely move lower to test 101.53.
Last week was another volatile one, due to the US and Iran Conflict. Iran fired more than 20 ballistic missiles at two military bases in Iraq where US troops were stationed. Initially, the Stock market sold off significantly, down over 400 points. Once Stocks sold off, that money went into the Bond market, however once the Iranian Foreign minister made a statement regarding the attacks, everything changed. The Iranian Foreign Minister said that his country had “concluded” its attacks on American forces and did “not seek escalation or war”. This was followed by President Trumps press conference, where he said that no US citizens were injured and that he too did not want to use military action. The backing down from both sides was all the Stock market needed to hear to rally and set new all-time highs, with the Dow breaking above 29,000 at one point. Mortgage Bonds hung in there and after some turbulence, ended the week close to where they started.
The Fed Keeps Buying
The Feds balance sheet has a great correlation to the rise in the Stock Market. As covered in a previous issue, the Fed has been buying a significant amount of Treasury Bills each month to provide liquidity to the market and steepen the yield curve. Approximately $100 Billion per month in Treasury Bills is approximately how much. To give you an idea of how significant that is, during the height of the Fed’s Quantitative Easing purchasing program, the Fed was buying $85 Billion in Mortgage Backed Securities and Treasuries.
This is important because around September, when the Fed started purchasing, the correlation the Stock market has had was significant. As the Fed has continued to purchase and their balance sheet has risen, so too have Stocks. It’s unusual to see such an exact correlation. This is supposed to be a six-month operation which is setting up for turbulence down the road if they pull the plug and take away the punch bowl.
The One Piece of Jobs Data No One is Talking About
The Jobs Report is one of the most important economic reports released each month. There are many components within the report, but three of which are paramount: the overall level of job creations, the unemployment rate, and average hourly and weekly earnings.
Last week’s report was for December and it showed that there were 145,000 jobs created. This was lighter than the 158,000 expected. Additionally, there were 14,000 in negative revisions to the previous two months. While this was a slight miss, it was still a decent level of jobs.
The Unemployment Rate remained stable at 3.5%. 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 267,000 job creations. Additionally, there were 209,000 additional individuals that came into the labor force. Since the figures were close to one another, the unemployment rate remained unchanged.
Interestingly, the all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, moved lower from 6.9% to 6.7%….which is the lowest level on record.
But the one piece of data that seemed to fly under the radar was average weekly earnings. There are two measures of earnings in the Jobs Report, average hourly and average weekly earnings. Average hourly earnings decreased from 3.1% year over year to 2.9%. But the more important figure and the real story here is Average Weekly earnings, which decreased sharply from 3.1% to 2.3% year over year. We pay closer attention to weekly earnings because it shows what an employee is taking home each week. Think about it, you may make a certain amount per hour, if you are working less, you are earning less. While average weekly earnings are still going up 2.3% year over year, this was a significant drop. This is something to watch to see if it’s just a one off or a trend.
More Good Housing News
The housing market has been incredibly strong, and the good data keeps on rolling. CoreLogic reported that home prices rose 0.5% in November and 3.7% year over year. The year over year reading increased from last month’s report, which showed a 3.5% gain. It’s also the largest annual gain in almost a year. The states with the highest increases were Idaho (10.2%), Maine (8.6%), and West Virginia (6.9%).
CoreLogic forecasts that home prices will appreciate by 5.3% in the year going forward, which is a slightly lower pace from the 5.4% forecasted in the previous report, however still very strong.
A 5.3% gain on a $300,000 home would translate to $15,900 in appreciation over the course of a year.
What to Look for This Week
The focal point of this week will be inflation data. The Consumer and Producer Price Index reports will be released, showing inflation on both the consumer and producer levels. Inflation is an important metric to follow and can have a big impact on the Bond market. Below is an example of why Inflation is so important.
If you were to lend $100,000 of your own money to someone, for ease of use of numbers, you would expect a coupon or rate of return. For the purpose of this example let’s say it’s 4%. Each year you would receive a fixed payment of $4,000. However, if inflation starts to rise you would still receive the same fixed payment of $4,000, but it wouldn’t go as far. You would be able to purchase less, as the cost of goods has risen. This happens in the real world too in which the only way to be compensated in a rising inflation market, is with a higher rate. For that reason, interest rates are tied very closely to inflation and when inflation rises, so too do interest rates.
The Consumer Price Index will be an important report to follow – Any unexpected jumps in inflation could be negative for the Bond market and interest rates.
Technical Analysis Breakdown
Mortgage Backed Securities Continue to trade in a very wide 137bp range between overhead resistance at 101.904 and support at 100.53. Support was tested last week, but as seen on the chart, it held on two occasions. Because Bonds are trading in such a wide range, they can be susceptible to large price swings before reaching the aforementioned levels of support or resistance. This means that there could be more volatility this week.
If Bonds were to break beneath 100.503, there is a triple floor of support beneath that, formed by the 100, 25, and 50-day Moving Averages (the purple, brown, and black lines). The key things to look for this week are inflation and Stocks. If inflation data is tame, Bonds may have a chance to move higher. Perhaps more importantly, if Stocks take a breather, some of that money may come into Bonds. If Stocks continue to march higher, it may be difficult for Bonds.
Last week was not only the last week of the year, but also the last week of the decade. The Stock market posted impressive gains in 2019 with the major indices posting the following year over year gains:
S&P 500: 28.9%
With last week being a holiday shortened week, things were quiet, but Mortgage Bonds were able to edge higher and break above some important technical levels.
The US and Iran conflict has escalated after a series of events over the last two weeks. An American contractor was killed by an Iranian-backed rocket attack, which eventually led to the US drone strike and killing Iranian General Qasem Soleimani. As a result, Stocks did sell off at the end of the week and will likely continue to do so this week as the Stock market does not like uncertainty. Typically, when this occurs there is a “flight to quality” trade, where money flows into the Bond Market, and Mortgage Bonds are benefiting.
The question on many investor’s and individual’s minds will be “Can the Stock market continue to move higher in 2020?” Stocks are at pricey levels and a lot of the run up was due to euphoria over the US and China Phase 1 trade deal. As mentioned in last week’s issue, the Fear/Greed index is also at extreme levels of greed, which is a reliable contrarian indicator. If there is a pullback in Stocks, Bonds will likely be the beneficiary. Another question is “When will there be a recession?” The US is in the longest expansion on record and it’s not a matter of if, but when the next recession will come. Some are calling for a recession in 2020, while others think it will happen in 2021 or beyond. One thing we know for sure is that when the recession hits, Stocks will drop significantly and interest rates will fall.
One of the key early warning indicators we are watching is Initial Jobless Claims.
Claims Remain Steady but Could Play Important Role in 2020
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, showed that there were 222,000 Claims. The level of 222,000 was in line with expectations and 2,000 lower than the previous week, which was revised slightly higher from 222,000 to 224,000. Claims have been hanging around this level and have been steady…but this is an early indicator that we want to watch for a recession. If we start to see this report spike higher, it could be a warning sign. Why? When things do slow down, the first thing a business will do is stop hiring. Next, the business will let workers go.
Once businesses start to fire employees, those individuals will file for unemployment benefits and it will show up in Initial Jobless Claims. And eventually, the unemployment rate will move higher. With 100% accuracy, the unemployment rate has been a predictor of recessions. Interestingly, it’s not when the unemployment rate is at its highest point, but when it’s at its lowest point and then turns higher. The unemployment rate is currently at 3.5%, so if it moves slightly higher to 3.6% or 3.7%, it’s not something to worry about. But if it moves above 4%, it could be a sign of a recession to come in the next 6 months or so. Keep a close eye on a consistent spike in Initial Jobless Claims, as that will be the first sign.
Appreciation Remains Strong
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices across all nine U.S. Census divisions were up 3.3% October, which was a slight increase from 3.2% in September. The 20-city Index increased to 2.2% on a year over year basis from 2.1%. Phoenix, Tampa, and Charlotte led the metro areas that are covered. To see what 3.3% appreciation means to you, let’s examine an example:
Imagine you purchased a $300,000 home last January. If your home appreciated 3.3% over the course of the year, your home would be worth $9,900 more…which is very meaningful for wealth creation. And homes that are lower priced and trading near or below the median price in a given market are appreciating at a higher level closer to 5%.
The FHFA (Federal Housing Finance Agency) supports this – Their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts, represents lower priced homes. While there could be a million-dollar home with a conforming loan, for the most part, the index represents homes under $500,000. The FHFA showed that homes rose 5.0% year over year and this number has been accelerating. It was 4.6% just two months ago.
With inventory levels at record lows and demand remaining very strong, we expect appreciation to continue to be solid in 2020 and even accelerate.
What to Look for This Week
This week is Jobs week, with the ADP and BLS (Bureau of Labor Statistics) Jobs Report released on Wednesday and Friday respectively. The market is expecting between 150,000 and 170,000 job creations in each report. The ADP can give us some clues on Friday’s BLS Jobs report, but often times they do not track closely month to month. Just look at last month – The ADP report showed that there were only 67,000 job creations, while the BLS report showed that there was 266,000…quite the disconnect.
These two reports do correlate closely over time, however. And if they were to come closer to one another, it could happen one of two ways. There could be significant revisions or there could be a “catch up” or “give back” the following month. After the BLS Report surprised sharply to the upside, it would not be surprising if there was a negative revision or weaker figure in Friday’s report. A strong jobs report would coincide with higher Stocks and lower Bonds, while a weak jobs report would send Stocks lower and Bonds higher.
There are a few other factors – The unemployment rate is always an important indicator to watch. The last reading was at 3.5%, but it is expected to rise to 3.6%. Another important and potentially market moving component for the Bond market is average hourly and weekly earnings, which can show if there is wage pressured inflation.
Technical Analysis Breakdown
Mortgage Bonds have made a nice move higher and are now in the middle of a range between support at 101.53 and overhead resistance at the 101.904 Fibonacci level. While the move higher in Bonds is a good thing, they are now in a wide range with roughly 20bp of room to improve and move higher until reaching resistance and 20bp of room to worsen and move lower until reaching support. If the Iran conflict continues to be at the forefront of investors minds, Stocks will likely continue to selloff and Bonds may benefit.
The Stock market must have been on Santa’s nice list this year, as it moved higher Christmas week and has posted gains of almost 30% over the course of the year so far. Mortgage Bonds continued to trade in a sideways pattern, with interest rates still at very attractive levels.
With Stocks seeming to set all-time highs every day now, it makes sense that investors are feeling very optimistic. Investor sentiment is and has always been a very important indicator. Some of the greatest investors of all time were contrarians, meaning they try to do the opposite of the crowd. A contrarian investor believes the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. When people predict a downturn, they have already sold out, so there is plenty of money on the sidelines to push the market higher.
Here are a few of the greatest contrarian investors of all time…you should recognize a few listed below:
Warren Buffet – “Be fearful when others are greedy. Be greedy when others are fearful”
Baron Rothschild – “Buy when there’s blood in the streets”
Sir John Templeton – “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
CNN has a very reliable contrarian indicator called the Fear & Greed Index. Just a year ago, the index showed a reading of 5, which is in the Extreme Fear range. According to the contrarian mindset, this would have been a strong buy signal. And sure enough, Stocks have gone up nearly 30% so far this year. Just this past week, the index rose to 92, which is a reading of extreme greed. Stocks may very well continue to move higher, but this is something we should keep an eye on, as it would point to a pullback in Stocks. If that were to occur, Bonds would likely be the beneficiary and rates would move lower.
Stealth QE (Quantitative Easing)
Stocks have gone up for a few reasons, one being the Phase 1 trade deal with China, and another being the Fed. The Fed has been performing what we call “Stealth QE”, meaning that they are quietly adding stimulus into the market. The Fed has been buying, on average, just over $100B per month of Treasury Bills in order to inject liquidity into the market, which is how they have been quietly adding stimulus into the market. Because the Fed has been buying a significant amount of Treasury Bills, short term rates have been kept extremely low. Just how much is $100B per month? At the height of the Fed’s stimulus run they were investing $85 Billion in MBS and Treasuries…so this is even greater than that.
As a result of the buying and short-term rates falling, the yield curve has righted itself, with shorter term maturities yielding less than longer term maturities. Remember not long ago the yield curve was inverted, where shorter term maturities were yielding higher than longer term, which is also a recession indicator. Because short term rates have been financially engineered lower, its very hard to get a return anywhere except the Stock market. For this reason, investors have been forced to buy more Stocks, which has pushed them even higher.
The Housing Scoop
New Home Sales, which measures signed contracts on new homes, were up 1.3% in November at a 719,000 annualized pace. It’s always important to look deeper than just the headline which is something the media rarely does. In this case, the 1.3% gain looks strong, but doesn’t tell the whole story. The previous report, which was for October, was revised lower from 733,000 to 710,000. When factoring in the negative revision, sales actually dropped about 2% month to month. The current level of New Home Sales is still very strong, but we bring this up to show how the media and many others get it wrong and don’t fully understand how to interpret the data. Looking at the bigger picture, New Home Sales are up a very strong 17% year over year.
The Median Home Price was reported at $330,800, up 7.2% year over year. This is another metric that causes confusion. The Median Home Price means that half the homes sold above that number and half beneath it. While home prices are going up due to appreciation, this metric can be skewed if more higher priced homes sold Vs. lower priced homes or vice versa. The media explained that it was a bad thing that prices were up 7.2%, however if you were to tell any homeowner their home rose 7.2% in price, they would likely be thrilled. Often the media looks at home sales and homeownership as a driver of the economic activity and not as an investment for the consumer.
Inventory levels remain very tight, with only 323,000 new homes for sale at the end of November. With higher prices and lower levels of inventory, one could argue that the current level of sales show just how strong the housing market is.
What To Look For This Week
This week is another Holiday shortened week. Stocks will have a regular trading day on Tuesday, but the Bond Market will be closing early at 2:00 pm ET. Wednesday both the Stock and Bond Market will be closed for the New Year’s Day holiday.
There will be a few housing reports scheduled for release, including Pending Home Sales, The Case Shiller Home Price Index, and The FHFA House Price Index. Pending Home Sales will give a reading on signed contracts on Existing Homes, while the Case Shiller and FHFA reports will show home price appreciation. Although these are important housing reports, they will not move the markets. This means that technical analysis will continue to play an even more important role this next week.
After trading in a sideways pattern for quite some time, Bonds have broken above their 50, 25, and 100-day Moving Averages. If Bonds can hold onto these gains and remain above these levels, there is significant upside potential until the next ceiling at 101.904. If Bonds move lower, the aforementioned moving averages should provide some support. The Stock market will also have an impact on Bond trading. If Stocks have another blockbuster week, it may be hard for Bonds to gain ground. In short if they sell off, Bonds will likely be the beneficiary.
After all of the posturing, back and forth, tweets, and rumors, a phase one trade deal was finally struck with China last week. The key words here are phase one…and the deal, while a good sign that the two sides were able to put something together, was not very substantial. China will buy products like soy beans from the US, the US will lower tariffs and not implement the new ones that were set to go into effect on 12/15. As a result of the trade news, Stocks set new all-time highs, while Bonds were relatively unchanged in aggregate after a volatile week.
The Fed left rates unchanged, and the decision was unanimous. The Fed felt the current level of the Fed Funds Rate was appropriate after cutting rates three times this year. There were no changes to the Fed’s view on the economy, as it’s exactly the same as it was last meeting. As expected, the statement had no surprises and was a nonevent. The Fed’s dot chart showed that the Fed was relatively unified in letting rates stay right where they are through all of 2020. During his press conference, Powell indicated that he would need a significant and sustained move up in inflation before he would raise rates.
An Update on Inflation
The Consumer Price Index (CPI), which measures inflation on the consumer level, came in hotter than expectations. The headline reading increased from 1.8% to 2.1% year over year, which is the hottest level in a year.
But the more important Core rate, which strips out food and energy prices, remained stable at 2.3%. This marks the 21st month in a row with a core CPI rate that has a 2 handle.
These levels should be even higher, but there are hedonic adjustments that keep inflation artificially low. Let’s use a car as an example: the price of a new car is at a record high, but because of hedonic adjustments, CPI says that prices are flat over the past 5 years. The reason being, even though the price of a car has gone up, there are newer features that account for the rise in cost. However, the car is still more expensive, and some buyers may not want the additional features, but have them forced upon them. The price of the car is still higher and is felt by consumers, which is why we believe the rationale of these reports are flawed.
Looking deeper into the report, rents rose by 0.3% for the month and are increasing at a rate of 3.7% on a yearly basis, which is unchanged from last month. Medical care costs were up 0.3% for the month and are up 4.2% year over year.
Making matters worse, the Fed focuses on the Personal Consumption Expenditures (PCE) report, which is running 0.7% lower on the core rate. And PCE doesn’t really account for the cost to put a roof over your head and out of pocket medical expenses. The Fed’s PCE gauge says there is little healthcare inflation because Medicare and Medicaid reimbursement rates are price fixing things lower. This allows the Fed to cite little or no inflation, meanwhile the average consumer is feeling the rise in prices.
The Producer Price Index (PPI), which measures inflation on the wholesale level, was a bit tamer than expected. Headline PPI held steady at 1.1%, but the Core Reading, which strips out the volatile food and energy prices, dropped significantly from 1.6% to 1.3%.
A Return to Normalcy…Or Not
The Mortgage Bankers Association reported that Mortgage Application volume was up 3.8% last week. As we said would happen, applications rebounded and normalized this week after the holiday skewed previous two weeks. Applications to purchase a home were down 0.4% but are now up 5% year over year. Refinances were up 9.0% and are now up 146% year over year.
The average 30-year mortgage rate ticked up from 3.97% to 3.98% week over week, bringing rates 110 basis points (bp) or about 1 1/8% lower than this time last year. The Refinance share of mortgage activity increased from 59.0% to 62.4%. ARM’s made up 5.0% of all applications, up from 4.8% last week. The FHA share of mortgage activity rose to 13.9% from last week’s 12.7%
The other report that has been skewed due to the holidays is Initial Jobless Claims. And while Mortgage Apps have smoothed out and are finally showing more reliable figures, Initial Jobless Claims is still all over the place. The latest report showed that there were 252,000 individuals that filed for unemployment benefits for the first-time last week. This was 49,000 higher than the previous week, which was unrevised at 203,000 and 39,000 higher than estimates of 213,000. Last week we told you this number could be higher because some people were not going to file during Thanksgiving week. And those individuals naturally filed the following week, making this figure higher than it should be. In this regard, there may be some weakness that could be concerning. The next report will be important to follow and will likely show some clarity on which way is right and which way is wrong.
Technical Analysis Breakdown
Mortgage Bonds are being squeezed between a reliable floor of support that has held the last several times tested, and a familiar triple ceiling. The aforementioned floor of support is at 101.094 and has held the last 5 or so times it was hit, limiting the decline in Bonds. The triple ceiling, created by the 25, 50, and 100-day Moving Averages, will make gains this week a bit challenging. And the optimism surrounding the US and China trade deal should be a good thing for Stocks and potentially negative for Bonds. Because of this, we must be careful and watch Bonds closely, because if support is broken, there is a lot of downside potential.
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.