Complacency Heading into Spring

Last Week in Review: Complacency heading into spring

Volatility has disappeared in the financial markets and a sense of calm and complacency has emerged. Why?

Well thanks to the Fed, and inflation and higher rates not being a threat — both Stocks and Bond prices are moving higher.

For 2019, home loan rates have been stable at one-year lows (look at the chart below), and everyone’s stock portfolio is increasing in value. What’s not to like?

Complacency will change to volatility at some point, and what we are watching is rising wages and how that may increase inflation in months to come.

Should that happen, we could experience a real shock to the US Bond market and the present complacent interest rate market will be over — and in a hurry.

But for now, complacency is the theme as we head into the Spring housing market…meaning good times for us.

U.S. Economy showing solid growth

Last Week in Review: U.S. Economy showing solid growth.

This past week, the Bureau of Economic Analysis (BEA) reported the U.S. economy, as defined by Gross Domestic Product (GDP), grew at a 2.6% rate in the fourth quarter of 2018. Economists and the markets were expecting 2.0% to 2.3%, so this was a nice upside surprise.

This left GDP for all of 2018 at 2.9%. Consumer spending, which makes up nearly two thirds of GDP, expanded by a solid 2.8% in the fourth quarter – yet slower than the previous quarter.

Another solid number within the report was business investment which grew at a swift 6.2% pace.

This Q4 GDP reading was the first of three – so we will see some revisions in the months ahead.

Seeing the economy grow at such a nice clip despite high stock market volatility and the U.S. government shutdown is a good sign as we head into the spring housing market.

The increased wealth effect caused by the recent rally in Stocks along with one-year lows on home loan rates, rising wages and increased housing inventory sets the stage for an improved 2019 housing market.

No Rush to Hike Interest Rates

Last Week in Review: Minutes Revealed

The highlight of this past week was the Fed Minutes from the January Fed Meeting. The Minutes are a detailed record of the Fed’s monetary policy setting meeting, so the markets gain insight into the psyche of the Fed as it relates to interest rates, the economy and more.

What the markets heard loud and clear from the meeting Minutes was Patience — meaning, the Fed is in no rush to hike interest rates and they will watch the incoming economic data to determine when they might hike again. There is now a low probability for another hike in 2019.

What are the most important reports the Fed is watching which can influence rates?

  • Gross Domestic Product
  • Inflation (big report next week — more on that below)
  • Jobs Report
  • Consumer Confidence
  • Retail Sales

In response to the Minutes, mortgage bond prices and thus home loan rates are hovering near the best levels in a year.

Retail Sales hit a shocking 9-year low

Last Week in Review: Canary in the coalmine.

The financial markets are sensing a government shutdown and protracted trade war with China will be averted. This is good news and a reason why Stocks have continued to push higher and home loan rates have capped for the past few weeks.

But last Thursday, Retail Sales was reported at a shocking 9-year low. Combing through the report, a 3.9% decline in internet purchases was a huge negative surprise. With consumer spending making up nearly 70% of GDP, there is fear in the markets that this very poor Retail Sales number is an early warning sign that both consumer spending and thus economic growth are indeed slowing.

One thing we know for sure — Bonds love uncertainty and bad news. This Retail Sales report brought both and, as a result, pushed prices and home loan rates near the best levels in a year.

We will be watching future Retail Sales reports to see if this is just one bad report or the start of a negative trend.

In any case, reports like these support the Fed to not raise rates in 2019.

Why home loan rates will stay low

Last Week in Review: Why home loan rates will stay low

The Fed met this past week. As expected, they didn’t hike rates and the Fed Statement was very dovish, suggesting that rate hikes will be off the table for most, if not all, of 2019.

The Fed looked to muted inflation and slowing economies abroad as reasons to show patience in hiking rates further.

In response, home loan rates revisited the best levels of 2019 this past week.

This new position by the Fed is a complete departure from where they were just a few months ago, when Fed Chair Powell was forecasting 3 rate hikes this year.

People owning Stocks are feeling wealthier as shares hit a multi-month high this week after rallying 14% since Christmas. This is good for housing.

Job creations and wage growth are also fundamental to a healthy housing market and last week’s terrific Jobs Report showed steady growth in both.

More good news — the Mortgage Bankers Association just released a forecast suggesting that 30-year mortgage rates will remain below 5.00% through 2020!!!

Rates touch 2019 highs this week

Last Week in Review: Rates touch 2019 highs this week

Despite bond friendly news with the unresolved US/China trade relations and the ongoing government shutdown, rates actually touched 2019 highs midweek…this as stocks continue to move higher.

Home loan rates have been on the rise ever since the last Jobs Report and Fed Speech back on Friday Jan 4th — next week we are seeing another Jobs Report and Fed Meeting…more on those big events below.

The Housing market showed a surprising decline in Existing Home Sales in December. Despite the poor reading to finish the year, 2019 is setting up to be a good year. Historically low home rates, a slowing rate of home price increases along with the highest wage gains in a decade will see to that.

Stocks continue their winning ways

Last Week in Review:
Stocks continue their winning ways.

Home loan rates finished this week near unchanged and remain near 9-month lows — so we have that going for us.

Most of the week’s news was pretty bond friendly, including Brexit uncertainty, ongoing Government shutdown, ongoing US/China trade dispute, low inflation and more.

So why haven’t rates improved further with these bond-friendly tailwinds?

The first Friday of 2019 was the day things changed for the Bond Market when a blockbuster Jobs Report and overly dovish Fed Chair Powell speech were delivered, which has helped Stocks move steadily higher at the expense of Bonds.

Here’s an important word to consider as we head into the Spring home buying season and that’s disinflation, which means a slowing growth rate of inflation. We are seeing signs of this today and if the trend continues, home loan rates will benefit as 2019 progresses.

Inflation is not a threat

Last Week in Review: No rate hikes in 2019. Who wins?

Stocks continued to react positively to Fed Chair Powell’s Jan 4th speech, where he essentially said, “we have your back”…meaning that the Fed will be flexible and may not raise rates at all in 2019. 

There is an old saying in the financial markets – “don’t fight the Fed.” This means that if the Fed is saying or doing something (hinting no rate hikes) that helps Stocks, that theme will continue until the story changes. 

Typically, when stocks move higher, so do long-term rates, like home loans. And this past week, we saw the recent nice trend of lower rates get disrupted. 

Even though the recent trend of lower rates, the lowest since the Spring, is very much at risk – we should not expect long-term rates to move too high. Why? Inflation is not a threat. 

Fed President Bullard, also said he expects inflation to be near current levels for the next FIVE years. If that is the case, home loan rates will remain relatively attractive for longer than most expect. 

Apple helps home loan rates

Last Week in Review:
Apple, Congress negate solid jobs numbers

I-Phone maker, Apple, was a downer this week as the company announced a surprise weak sales and earnings forecast for the first quarter of 2019. 

Stocks and interest rates fell on the bad news, concerned that Apple, the first big tech firm to report weak growth in 2019, is the canary in the coalmine and that more companies will report weaker sales and earnings. 

Regardless of Apple’s current woes, the U.S. economy is still humming along as was evident in Friday’s Jobs Report which showed an eye-popping 312,000 jobs created in December. 

Adding to the good news in the Jobs Report was a 3.2% hike in wage gains year over year – the highest level in a decade. 

Remember, jobs buy houses, not rates, so the positive jobs numbers and wage growth are great for housing. 

But while we are on the subject of rates, the bad Apple news helped rates improve again this week to the lowest levels in nearly a year. 

Rates have been steadily improving since early November. What happened in early November? Congress became divided. Bonds and home loan rates love uncertainty, chaos, stalemates and bad news – Congress can provide plenty of it from time to time. 

Stocks Rally

Last Week in Review:
Headline Risk Highlights Christmas Week.

The financial markets had plenty to cheer about this week. On Wednesday, Stocks rallied a stunning 1,000+ points, enjoying their best one-day gain in history and then rallied over 800 points higher intraday on Thursday, erasing a huge midday loss. All in all, a great and welcome week in what was otherwise a miserable December for Stocks. 

Typically, higher stock prices mean higher home loan rates but that wasn’t the case this holiday week. Yes, Bonds moved slightly lower and home loan rates slightly higher in response to the swift Stock rally, but rates ended the week and head into 2019 near the best levels since spring. 

The high volatility in the markets is likely to continue well into 2019 as Stocks and Bonds continue to bounce around in response to the U.S. government shutdown, U.S./China tariffs, China slowdown, European issues and uncertainty around the Fed. 

Is this good news for home loan rates and housing? Inflation is in line with the Fed’s expectations and bond yields in other parts of the world remain low due to slower economic growth which means that home loan rates should remain relatively low for the foreseeable future.

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