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MarketTrends 05/17/2019: Fair Data, But Trade Trouble Dents Rates

Fair Data, But Trade Trouble Dents Rates

New Two-Month Rate Forecast at HSH.com

May 17, 2019 -- The cadence of mostly fair-to-solid U.S. economic news continues apace, but investors remain cautious and somewhat more positioned as though a softer climate may be just ahead. This change has infused the markets now for more than a week, after China purportedly backed out of a new agreement no trade and tariffs. In the aftermath, President Trump slapped new tariffs on some $200 billion of goods coming from there, and China retaliate by adding new levies to about $60 billion worth of goods they get from us. The pressure from both sides continues to build.

Odds favor that the cost increases will tend to trim economic growth a bit both here and there, and will also tend to increase consumer-level inflation here. Given that inflation has been running shy of the Federal Reserve's desired levels there is plenty of room available to accommodate firmer costs, and there is no current expectation any firmness in price pressures would tilt the central bank's thinking about raising rates in the near future.

For investors, though the questions are "how much slowing in growth can be expected?", and then, "what does this mean for profits and stock valuations?" At least part of the reason that interest rates have dipped of late is related to the large selloff in equities (since partially reversed) which pushed money into Treasury bonds and helped mortgage rates to ease a bit more of late.

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 has revised and updated our popular "Homebuyer Assistance Programs By State" to help borrowers connect with the essential supports they need to become homeowners.

For our part, the question is "when will these effects show?" After a solid 3.2% gain in the first quarter (driven by some short-term trends unlikely to be repeated) the economy was already expected to be slower in the second quarter and perhaps beyond, settling back to something in close to a 2% GDP rate than the 3% range we've been in. To be fair, the increases just kicked in; China and the U.S. remain committed to discussion (at least for now) and a new deal could be hammered out before much damage occurs... or not. Forecasts for second quarter GDP growth have already been ratcheted down in recent weeks, and the Atlanta Fed's GDPNow tracker reckons just a 1.2% run rate at the moment.

We'll get to the future when it comes, but for now, all we can do is review what's known and weigh it against what may come.

One item of concern that was in the news this week was the stall in retail sales in April. For the month, outlays by consumers retreated by 0.2%, arguably payback for a blowout increase of 1.7% in March. Overall, retail sales have been swinging back and forth for the last six months, buffeted by rough equity markets last year and early this year, government shutdown issues, delayed tax refunds and other distortions. Even with the monthly slide, year-over-year sales are still in a moderate range and handily better than they were to start the year.

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A bit of brightening for housing markets did greet investors this week, though. Housing starts in April rebounded from a soft March, rising 5.7% to an annualized rate of 1.235 million units started. Starts for single-family homes popped by 6.2% to 854,000 units, the fastest rate in about six months, while multifamily starts kicked 4.7% higher to 381,000 units, the best in five months' time. As well, permits for future building pushed higher a tad, with a 0.6% increase to an annualized 1.296 million expected units to be started, driven solely by the multifamily sector (single-family permits declined by 4.2%).

With a still-tight existing home market and with building activity increasing, home builders are increasingly sanguine. The National Association of Home Builders reported their Housing Market Index for May this week; the headline value rose three points to 66, a very solid level and the strongest since last October. Submeasures covering sales of single-family homes bounced three points higher to a robust 72, expectations for markets conditions over the next six months edged a point higher to 72 and the gauge of traffic at model homes and sales offices solidified to 49, good figure enough to be a 7-month high.

We'll learn how housing markets are faring next week when both existing an new home sales figures for April are released. Based upon current trends, limited inventory and firm prices will curtail increases in existing home sales, but we'll likely see another improvement in sales of new homes where there is greater elasticity in both components.

Industrial Production slumped in April, declining by 0.5% for the month. The components that go into the report revealed that manufacturing production declined by 0.5% after a flat March; mining output pushed 1.6% higher after a contraction the month prior and utility output cratered, falling 3.5% in April after a solid gain in March. The overall dip was enough to idle some formerly-used production floors, as the percentage of them in active use fell 0.6% to 77.9% and moving a little further away from levels that can contribute to inflationary pressure.

We'll see if manufacturing can pick up in the face of new tariff headwinds. For the moment, two regional reviews of manufacturing activity are all we have to go by, and both seemed fair enough. The Federal Reserve Banks of New York and Philadelphia both chimed in with their monthly releases this week, covering the month of May. New York reported an increase in activity, with their barometer rising 7.7 points to a solid 17.8 for the month. Sub-indexes covering orders improved (9.7 in May from 7.5 in April) but those tracking both employment and prices paid softened to modest levels. Philly's report was reasonably similar; the headline value rose by 8.1 points to 16.6; orders slipped back a little, sliding from 15.7 to 11.0 for the month, but employment strengthened and price pressures firmed just a whisker.

Prices of imported goods had little upward traction in April. Overall costs for imports rose by just 0.2%, the smallest increase in three months and one rather below analyst expectations. After only one month out of the last five in the black, import prices are again retreating on a year-over-year basis with a 0.2% decline in the last 12 months. In kind, prices of goods headed out of the U.S. to other parts carried an aggregate price tag that was also 0.2% higher in April than in March, but there have been three consecutive months of higher costs and that has kept export price increase modestly positive an annual 0.3% clip. As tariffs and levies are added to goods after they tallied here, it will be interesting to see if these measures move at all. In theory, they could even decline as production entities look to keep final prices level when they reach the consumer; this of course would tend to eat profits.

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.

The economy should continue forward at a moderate pace if the latest index of Leading Economic Indicators is any guide. The Conference Board reported that the LEI for April moved 0.2% higher, down a tick from March but a third positive reading in a row. The LEI is said to foretell the economy for a couple of months into the future, but probably simply better reflects activity in the month in which it's components are gathered. Even so, the three-month string suggests that at least a moderate trend of expansion is likely to continue for a bit.

Even as they are enjoying the present, consumers seem convinced there are much brighter days ahead. That's the message from the early May update of Consumer Sentiment from the University of Michigan. The headline sentiment figure of 102.4 was a 5.2-points increase and one that puts the mood gauge at its highest level in 15 years. The assessment of present conditions only edged higher, adding 0.1 point to last month's final tally, but the measure covering expectations for the future bounded 8.6 points higher to 96.0, the highest figure since 2004. It's yet to be seen if the latest trade impasse will diminish current or future assessment, but we'll not know that for at least another two weeks.

Claims for initial unemployment assistance had been rather elevated for a three-week stretch, but fell back to about the middle of a recent range in the week ending May 11. The 212,000 new applications for benefit was a 16,000 decline from the prior week, but we'll see if the recent bump in claims indicates a slowing in hiring for May, or if it was just a blip.

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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
 May 10Apr 12May 11
6-Mo. TCM2.46%2.47%2.05%
1-Yr. TCM2.37%2.43%2.27%
3-Yr. TCM2.24%2.31%2.67%
5-Yr. TCM2.27%2.32%2.82%
10-Yr. TCM2.47%2.52%2.97%
FHFA NMCR4.36%4.46%4.28%
FHLB 11th District COF0.958%1.166%0.816%
Freddie Mac 30-yr FRM4.10%4.17%4.61%
Historical ARM Index Data

Despite lower mortgage rates in the market of late, applications for mortgages have been rather lackluster. The Mortgage Bankers Association of America noted that new applications declined by 0.4% in the week ending May 10, with declines in applications for both purchase and refinance mortgages. Even so, apps remain well above where they began the year and are comparable to where they were at the start of 2018.

Lower mortgage rates should help the housing market to a degree this spring, and there is a good chance that we'll see another small decline in mortgage rates when Freddie Mac reports next week. It won't take much of a decline -- just two basis points, actually -- to re-trigger the "Lowest rates since January 2018" headlines -- not coincidentally the last time that applications for mortgages were at present levels.

Given the stance of markets and underlying influences for mortgages at the end of the week, there's a pretty good chance we'll be dusting off those headlines next week, as we expect a 3 basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday. Refi, anyone?

For an outlook for mortgage rates that carries just past America's 243rd birthday, check out our latest Two-Month Forecast.

You might also see our 2019 Outlook, where we provide observations and speculations for ten topics that are in and around the 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.

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