Rates Wandering Sideways

December 6, 2019 -- Of late, many of the factors that had been driving interest rates seems to have quieted themselves. Certainly, the issues of trade and tariff wars with China (and others) hasn't gone away, nor has the saber-rattling of North Korea, the complicated Brexit mess, the soft economic climate here and elsewhere. The presidential impeachment inquiry is still happening, too, of course, as are any number of other issues. Somehow, all the load banging and clanging of these things seems to have somehow become muted, as though being heard underwater, or perhaps the markets have simply become inured to them.

Whatever the reason, financial markets simply don't seem to be reacting with much fervor regardless of the news. Even a quip that suggested that the "Phase One" trade deal with China might wait until after the 2020 elections only created a short-term ripple in the market. Months ago, we would have seen a much less muted reaction.

Perhaps it is that the overall trend of economic diminishment across the globe has slowed or plateaued, or that central banks here and elsewhere have made their moves and are in more of a wait-and-see mode than not. Perhaps it is just that investors are quietly making moves as we close in on the end of the year. making only tweaks and minor adjustments to holdings even as major equity indexes hang near record highs, and that we'll see a new pattern or burst of activity after the calendar changes. Perhaps it is the realization that with Thanksgiving past, the rush of the short holiday season is already upon us, with plenty of distractions outside of market considerations.

Regardless, things seem a bit quiet. That's not necessarily a bad thing, especially with mortgage rates on pace to close the year much closer to 2019 lows than 2019 tops, keeping refinance activity ticking along and supporting both new and existing home sales even though this isn't the traditional time of year for shopping for houses. For the moment at least, the economic and inflation data doesn't seem as though it will push rates lower, but at the same time, there's little enough economic or inflation heat as to suggest that there's little danger that they will break out to the upside, either.

So here we find ourselves, drifting sideways on a nearly calm ocean of data, where things don't appear to be getting worse but aren't getting much better, either.

Have you seen HSH's new and expanded analysis of the salary it'll take to afford a median priced home? Our analysis now covers the 50 largest metropolitan areas, has maps for the most and least costly areas to live, as well as national data, too.

We have known for months and months that manufacturing has been taking it on the chin, given the trade-and-tariff wars. The Institute for Supply Management's activity tracker started the year at a very solid 56.6, but has generally trended down since. However, the decline has thankfully stalled in recent months, with the latest reading for November settling at 48.1, just a little below the breakeven level of 50 but in essence little changed over the last four months. In November, the submeasure that tracks new orders eased a little further from par, dropping 1.9 points to 47.1 for the month, while one covering employment metrics dropped 1.1 points to a soft 46.6 for the period. Neither suggest that an uptick in activity if to be expected anytime soon, but if the slightly-below-par trend continues the overall economic drag from a soft manufacturing sector should be muted.

Helping to prop up manufacturing, overall factory orders did manage a 0.3% increase in October, breaking a two-month slide. Orders for durable goods did all the heavy lifting, rising 0.5% for the month, while those for non-durable goods added exactly nothing to the tally (0.0%). However, the better news was that the proxy for business-related spending (nondefense capital goods orders exclusive of aircraft) managed a 1.1% increase, breaking a two-month decline with the strongest reading since January. Perhaps the news in October that a "phase one" trade deal was in the works cheered businesses enough as to make some new investments in equipment. If so, here's hoping that such enthusiasm continues as factories here could certainly use the support.

For the U.S., more important is how the non-manufacturing sector of the economy is performing. Like its manufacturing counterpart, the ISM's report covering service-related business has been in a overall downtrending pattern for since earlier this year but yet remains at a reassuring (if moderate) level. In November, the ISM services indicator posted a value of 53.9, down 0.8 as compared to October, but solid enough. Encouragingly, new orders popped higher, rising 1.5 points to 57.1 for the month, while the component that tracks labor activity strengthened by 1.8 points to a solid 55.5, it's highest level since July.

Taken together, the message is much the same as it has been for a while -- manufacturing is struggling but the more important service sector continues on a positive path.

Want to get MarketTrends as soon as it's published on Friday? Get it via email -- subscribe here!

With trade and tariffs nearly continuously in the headlines, the nation's imbalance of trade report suggests that we've seen some shrinkage in the difference between goods and services coming here and those going elsewhere. In October, that difference was just $47.2 billion, the smallest gap since June 2018. That said, the shrinking gap for the month reflects that exports declined by $0.5 billion to $207.1 billion but imports shrank by $4.4 billion, and in general, falling imports are usually reflective of slower economic growth here rather than a shift to domestic production and consumption. GDP growth did slow earlier this year to about 2.1% in the third quarter and the present run rate is reckoned to be just 1.5% Exports have largely been flat for months, reflective of slower growth among our trading partners, but the U.S. did manage to run a surplus for petroleum exports for a second consecutive month, the first time that's happened since at least the 1970s.

Construction spending hit a bit of a snag in October and posted a 0.8% decline. The drag came from all three facets that comprise the report: Outlays for residential projects declined by 0.9% (and that on the heels of a 1.1% drop in September), spending on commercial and industrial projects fell by 1.2% (-1.0% in September) and those for public-works projects eased by 0.2% (+1.9% in September, so just a little breather there). Housing starts were on the softer side in the first month of the quarter, but did kick a little higher in November, so odds favor that the November construction spending report will be a little better supported. With new home sales picking up a little steam of late, there's a good chance that residential spending may improve as we move into 2020, too.

Applications for mortgages dropped off in the week of November 29, but as this was the week of Thanksgiving this year, that's nothing of concern. The Mortgage Bankers Association of America reported a 9.2% decline in overall applications, with purchase-money mortgages holding up well with a 0.9% increase, while those for refinancing slumped by 15.6% for the week. Given the flat pattern for rates, it's likely that few homeowners feel much urgency to run to a lender and grab a new loan, especially as there's a reasonable chance that today's great rates will be available tomorrow as well.

Sales of new vehicles had stalled in October but picked up again in November, where an annualized 17.1 million new cars and light trucks took place, a 0.5 million improvement from October. Consumers seem willing to continue to replace old clunkers with new stock and car sales have generally held up better than expected this year despite somewhat tighter financing conditions for borrowers with more marginal credit and ever-escalating prices of new cars and trucks. Depending on what happens this month, it may be that overall vehicle sales are only about on par with last year, but given that the aging expansion is now the longest on record and the cyclical nature of auto sales, it's not all that surprising that a flat-to-declining trend for auto sales might be seen.

Despite an overall slower economic patch, the labor market continues to outperform. As tracked by the outplacement firm of Challenger, Gray and Christmas, announced layoffs totaled just 44,569 in November, down by 11.3% from October's tally and 16% below November 2018 levels. As well, initial claims for new unemployment benefits slumped to only 203,000 in the week ending November 30, down 10,000 from a week prior and the lowest figure since April. However, the drop may have more to do with holiday seasonal adjustments (a "late" Thanksgiving this year) than any strong shift in the trend, but claims remain low, regardless.

If HSH's weekly MarketTrends newsletter is the only way you know HSH, you need to come back and check out HSH.com from time to time. You'll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.

On Wednesday, the payroll company ADP reported that private payrolls expanded by just 67,000 in November, about half the expected total and down sharply from October. Although it doesn't always correlate well with the monthly employment report, enough investors give it credence and so there were some concerns that Friday's November employment situation report would come in on the weak side, not that October's 128,000 new hires was much to get all that excited about.

Those concerns were laid to rest come Friday morning, when the Bureau of Labor Statistics reported that a whopping 266,000 new hires took place in November, well above forecasts of 182,000 jobs created. In addition, there were upward revisions to both October (+28,000) and September (+13,000) employment reports, so the hiring trend has been more solid over the past few months than was previously thought. With the lift in hiring, the nation's official unemployment figure slipped back to 3.5%, matching a 50-year low, while the labor force participation rate stepped down a tenth of a percentage point to 63.2, a level just below the expansion's high-water mark. Wages rose 0.2% in November and are running at a 3.1% annual clip, slightly cooler than earlier this year. With the Consumer Price Index running at about a 1.8% clip, this means that consumers are seeing real wage gains and not just keeping up with inflation, and that suggests more spendable (and savable) funds to power the economy forward.

With jobs solid and incomes firm, consumes are pretty happy. The initial December reading of Consumer Sentiment from the University of Michigan rose by 2.4 points to 99.2 to start the month. A plummet in sentiment back in August has now been worn away by optimism, and the present overall level is very close to 2019 highs. Assessments of current conditions were rated more favorably, with a 3.6-point rise bring this subindex to 115.2, good enough for a 2019 high, while those for the future improved by 1.6 points to 88.9, eradicating a summer plunge. Happier consumers are believed to be more likely to open their wallets and purses and power the economy, so there is a greater likelihood that the already record-long economic expansion can run a bit longer.

See fresh mortgage rates every day at HSH.com Follow us on Twitter for even more need-to-know news!
Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Nov 29Nov 01Nov 30
6-Mo. TCM1.62%1.61%2.53%
1-Yr. TCM1.59%1.57%2.70%
3-Yr. TCM1.60%1.59%2.84%
5-Yr. TCM1.61%1.60%2.87%
10-Yr. TCM1.76%1.78%3.05%
Federal Cost of Funds2.068%2.150%0.951%
FHLB 11th District COF1.100%1.127%0.659%
Freddie Mac 30-yr FRM3.66%3.78%4.81%
Historical ARM Index Data

Happier consumers are likely to borrow more, too. Consumer credit balances expanded by $18.9 billion in October, as a surge in the use of revolving credit (typically credit cards) drove the total sharply higher. After posting a decline of $0.9 billion in August and just a meager expansion of $0.2 billion in September consumers stepped up their spending on plastic in a vigorous way. Installment borrowing remained in a more muted pattern, with borrowing for things like autos and education rising by $11 billion, a little lift from September but well below levels of early- and mid-summer.

Even with some bright spots, the overall news about the economy remains mixed, and plenty of headwinds to faster growth remain in place. Even with Friday's spate of solid fresh data, interest rates only edged higher a little and remain well-tethered from both low inflation and a Fed that will be in no hurry to raise rates anytime soon. At the moment, there seems as though there might be a slight upward bias to mortgage rates next week, so we might see an increase of perhaps a couple of basis points in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday.

For an outlook for mortgage rates that carries through the holiday season and until mid-January, check out our latest Two-Month Forecast.

See our mid-year review of our 2019 Outlook , where we provide updates to our speculations for ten topics that are in and around housing and mortgage markets.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

Still underwater in your mortgage despite rising home prices? Want to know when that will come to an end? Check out our KnowEquity Underwater Mortgage Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.

Have you seen HSH in the news lately?

Want to comment on this Market Trends? -- send your feedback, argue with us, or just tell us what you think.

See what's happening at HSH.com -- get the latest news, advice and more! Follow us on Twitter.

For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President

Copyright 2019, HSH® Associates, Financial Publishers. All rights reserved.