Few Distractions

February 14, 2020 -- A light economic calendar this week gave investors few distractions from contemplating the effects of COVID-19, the World Health Organization's new official name for the Wuhan-originated coronavirus. For what it's worth, coronavirus at least sounds like the disease that it is, where COVID-19 sounds like a place where folks unlucky enough to have caught the germ are sent to for quarantine.

Regardless of the moniker, investors and central banks alike are trying to assess not only the near-term effects on both local and global economies, but also long these effects may linger, damping everything from travel to trade all the while.

Federal Reserve Chairman Jay Powell sat before Congress to talk about monetary policy, a semiannual happenstance that used to be called "Humphrey-Hawkins testimony" for the senator and representative that set the face-to-face discussion up way back in 1978. The U.S. economy remains in good shape and monetary policy is said to be in a fairly neutral position at the moment. Up until the outbreak it appears that last year's headwinds to stronger global growth were set to wane somewhat, but this outlook has been changed.

To what degree the disease will disturb things, though, is uncertain. Mr. Powell noted it as clearly as possible: "We'll begin to see it in economic data coming up fairly soon. It’s too uncertain to even speculate about what the level of that will be," The picture probably won't become much clearer until February data (and beyond) begin to show, and of course a lot depends on how soon (or whether) the spreading virus is contained.

With inventories of available homes tight and mortgage rates steady, low-to-moderate income homebuyers may need a little help. To lend a hand, HSH offers our popular "Homebuyer Assistance Programs By State" to help borrowers connect with the essential supports they need to become homeowners.

Until then, we can only peruse the data available to us and hope that forward momentum in the U.S. economy can be maintained and that our relatively strong position helps to lift other economies as well. For now at least, the U.S. has not been affected with a widespread outbreak and so there has been little immediate direct effect, such as widespread quarantines or shunning of public places.

Retail sales in January managed a solid enough gain, rising by 0.3% to start 2020. That was a bit slower than December's half-point gain, but the headline figure was trimmed a little by lower sales at gas stations (lower fuel prices) and those for electronics and clothing. Overall, though the indication was that consumer spending was still good and steady, and that trend is likely to continue provided job growth remains on trend and incomes continue to rise as we go and the consumer remains the bright spot as trade and manufacturing try to get back up to speed.

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On that note, industrial production failed to show any progress in January, declining by 0.3% from December's soft mark. The Institute for Supply Management's report suggested a pickup in activity last month, but that wasn't reflected here as manufacturing output eased by 0.1% for the period. Boeing's cessation of 737 Max production likely had an influence here across the supply chain and may have masked nascent improvement in manufacturing for the month. With petroleum exports gaining, mining output rose by 1.2%, a second month in a row of solid increase, while utility production slumped 4% after a 6.2% drop in December. Relatively warm weather during the month curtailed utility output, and the net effect of slower overall production across the three sectors means that there is plenty of available capacity, as production floors are only being used at an aggregate 76.8% pace at the moment, representing a full 1% decline in utilization since as recently as last August.

Looking backward to December, the collective levels of inventories at all three stages of production rose by 0.1%, continuing a mostly back-and-forth trend of increase then decrease in place since mid-2019. Manufacturers increased their stockpiles by 0.5%, a fourth consecutive increase in holdings; wholesalers trimmed inventory levels by 0.19% for the month, breaking a two-month string of increases, and retailers continued clearing goods off shelves and our of stockrooms with a 0.04% trim after a 0.87% emptying in November. To clear out stocks more quickly sales will need to increase, but those haven't materialized at a level needed to make that happen. As such, the ratio of goods on hand relative to sales remains elevated at 1.4 months, a level seen in 7 of the last 8 months.

Price pressures continue to be muted, if perhaps less so than at a range of times over the last year. For example, costs for imported goods in January were unchanged from December, but that was still sufficient to see the year-over-year increase in import prices rise to 0.3%. To be fair, 0.3% isn't much to be concerned about, but it is noteworthy as if is only the second positive reading for prices in the last eight months. Export costs rather a bit more, with a 0.7% increase for the month, but that lifted the annual price increase to 0.5%, the first such uptick in costs since last April. It's of course too soon to call it a trend, but it may be that the drag of both import and export prices on both domestic and global inflation is starting to wane a bit.

To at least some degree, this is also reflected in the latest reading on consumer prices. The Consumer Price Index ticked just 0.1% higher in January, so there's little to get excited about in the monthly figure, but if you consider that the small bump contributed to the now 2.5% annual increase in the CPI -- the strongest annualized figure since October 2018 -- it's worth pondering if inflation is actually beginning to edge higher than has been the case. Certainly, headline CPI can be highly variable, reflective of unsteady price inputs for food and fuel, but leaving those out of the equation saw a 0.2% increase for the month and hold an annualized 2.3% rate, a level which has persisted for about the last six months after legging up a bit from around 2.1% in the six-month period prior to that. The Fed's preferred measure of core PCE is likely also steady, but at a level that remains on the other side of the 2% target the Fed hopes to achieve. Given the trend, perhaps inflation will be closer to that mark later in 2020.

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As measured by the University of Michigan, consumer moods are near highs for this cycle. It would appear that the solid performance by the economy trumps almost every other concern; even in the commentary snippet provided by Surveys of Consumers Chief Economist Richard Curtain it was noted that only 7% of respondents expressed concerns about the coronavirus and only 10% noted that the upcoming election could have some impact on their economic situation. For the early February survey, the Consumer Sentiment gauge rose by 1.1 points to 100.9 (second highest for this expansion cycle). The components revealed a mixed message, though, with the current conditions index easing by 0.6 points to 113.8 and the expectations index adding 2.1 points to land at 90.5 so far this month. Happier and unconcerned consumers are thought to be more likely to open their pocketbooks and wallets and continue to power the economy forward, and to the extent that this is the case we should expect continued growth.

Labor markets continue to do their part, too, with initial claims for unemployment assistance remaining at very low levels. Just 205,000 new applications were filed at state offices in the week ending February 8, and this figure remains at about 50 year lows and pretty close to the low water mark for this economic expansion, too.

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Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Feb 07Jan 10Feb 08
6-Mo. TCM1.57%1.56%2.49%
1-Yr. TCM1.49%1.54%2.56%
3-Yr. TCM1.40%1.58%2.48%
5-Yr. TCM1.42%1.64%2.49%
10-Yr. TCM1.61%1.84%2.68%
Federal Cost of Funds1.955%1.998%0.968%
FHLB 11th District COF1.036%1.035%0.639%
Freddie Mac 30-yr FRM3.45%3.65%4.37%
Historical ARM Index Data

As might be expected, the low levels of mortgage rates continue to attract folks, but the differing states of the mortgage market components are reflected in the weekly application survey from the Mortgage Bankers Association of America. Overall, applications in the week ending February 7 rose by 1.1%; refinancing led the increase with a 5% gain for the week and are still largely moving higher after the typical turn of the year surge last month. However, with both winter still upon us and a limited supply of homes available to buy, applications for purchase-money mortgages don't have the same traction, and the 5.8% decline in request for such funds last week was a third decline in the last four weeks. We are perhaps at the cusp of the start of the spring homebuying season, and unless we get a surge of listings coming into the market before then it will be hard to see applications for purchase mortgages (or sales of existing homes) increase much, if at all. We'll learn a little more about the current state of the housing market next week.

Bond markets start next week with a Monday holiday, but that break will give way to a more wide-ranging set of data next week to consider. Here's hoping that between now and then we start to see a little better news on the containment front for COVID-19, but we're more likely to still see difficult headlines in that regard for a time yet. At the moment, it looks to us as though most interest rates are pretty trendless, at best wobbling back and forth around present levels. Mortgage rates are in that vein as well, and as we write this, it looks like there will be no change to the average offered 30-year FRM that Freddie Mac reports on next Thursday morning. If there is any movement, it might be downward.

For an outlook for mortgage rates that carries through the end of the winter to the cusp of spring, check out our latest Two-Month Forecast.

See our brand-new 2020 Outlook , where we provide our thoughts and forecasts for mortgage rates, Fed policy, housing sales, home prices and more.

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

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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