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The major stock market indexes moved lower during each treading day of the week with the Nasdaq Composite Index conspicuously recording its first weekly drop since late December. As a result, bond yields fell with the 10-year Treasury yield touching its lowest point since January 4th on Friday morning. Investor sentiment was negatively impacted by signs of slowing global growth and little progress on a trade deal between the U.S. and China.
Supporting the view of slowing global growth was a statement from The Organization for Economic Cooperation and Development (OECD) cutting its forecast for 2019 global economic growth to 3.3% from its November forecast of 3.5%. The OECD stated "Economic prospects are now weaker in nearly all G20 countries than previously anticipated. Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide.”
Furthermore, the European Central Bank (ECB) also cut its forecast for eurozone growth in 2019 to 1.1% from 1.7% as the U.S. - China trade dispute impacts economies across Europe. ECB President Mario Draghi stated “the economic outlook for the next 22 months has deteriorated after a series of shocks to the global economy, including a cut in China’s growth forecast and Brexit that are likely to persist throughout 2019.” In an effort to stimulate the slowing eurozone economy, the ECB launched a program called the Targeted Longer-Term Refinancing Operation (TLTRO III) consisting of two-year loans to help avoid a squeeze on credit that would lower economic growth.
U.S. - China trade deal surfaced when U.S. Ambassador to China, Terry Branstad, told The Wall Street Journal “a date has not been set for a summit because neither side feels an agreement is imminent.” Independently, President Trump said if a China trade deal is “not a great deal,” he will not make one, and “the U.S. will do well with or without a China trade deal.”
U.S. economic news during the week was mixed. Non- manufacturing activity (Services) in February exceeded consensus forecasts as did New Home Sales for December while the February Employment Situation Report at first glance was very disappointing.
The monthly payrolls report from the Department of Labor showed employers added only 20,000 jobs in February, well below expectations of 173,000 and the smallest number since September 2017. As bad as this number was, it may have been weather related and may be revised higher in coming months.
Average hourly earnings increased 0.4% with year-over-year average hourly earnings up 3.4%. This is great news as rising hourly earnings forms the basis for increased consumer spending.
The February unemployment rate was 3.8%. Persons unemployed for 27 weeks or more accounted for 20.4% of the unemployed versus 19.3% in January. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.3% versus 8.1% in January. The labor force participation rate held steady at 63.2% in February. There are a number of economists expecting payrolls will continue to grow by roughly 160,000 jobs per month, bringing the unemployment rate as low as 3.5% by the end of the year.
In housing news, the Commerce Department reported New Home Sales increased 3.7% month-over-month in December to a seasonally adjusted annual rate of 621,000, their highest pace in seven months. This was above the consensus forecast of 572,000. November's sales were revised down to 599,000 from an annual rate of 657,000.
The median sales price fell 7.2% year-over-year to $318,600 while the average sales price dropped 6.4% to $377,000. Regionally, New Home Sales were 44.8% higher in the Northeast; fell 15.3% in the Midwest; were 5.0% higher in the South; and were 1.4% higher in the West.
Homes priced at $399,999 and less accounted for 67% of total homes sold in December versus 72% in November.
The inventory of new homes for sale dropped slightly to a 6.6-month's supply at the December sales rate from 6.7 months in November.
The improvement in New Home Sales corresponded to a drop in both median and average selling prices.
The New Home Sales gains point to a potentially stronger 2019. The purchase of new homes not yet under construction surged 22.4% in December from the prior month. Average 30-year mortgage rates at 4.35%, down from nearly 5% in early November, have also eased some affordability pressures.
The Commerce Department also reported Housing Starts increased more than expected in January as construction of single-family housing rebounded after four straight monthly declines.
However, Building Permits fell to their lowest level since August 2017 suggesting weakness in single-family homebuilding in the months ahead. Housing Starts increased 18.6% month-over-month in January to a seasonally adjusted annual rate of 1.230 million units exceeding the consensus estimate of 1.180 million. Permits rose 1.4% month-over-month to 1.345 million.
Single-family starts increased 4.5% month-over-month to 926,000 while Single-family permits, which have leading indicator status, were down 2.1% month-over-month to 812,000. Regionally, Single-family starts in January were 66% higher in the Northeast; 18.5% higher in the Midwest; 15.5% higher in the South; and 44.9% higher in the West. Single-family permits in January were 1.8% lower in the Northeast; 1.8% higher in the Midwest; 1.3% lower in the South; and 5.8% lower in the West.
Elsewhere, mortgage data from the Mortgage Bankers Association (MBA) showed the number of mortgage applications decreased from the prior week. The MBA reported their overall seasonally adjusted Market Composite Index (application volume) decreased 2.5% for the week ended March 1, 2019. The seasonally adjusted Purchase Index decreased 3% from a week prior while the Refinance Index decreased 2%.
Overall, the refinance portion of mortgage activity decreased to 40.0% from 40.4% of total applications from the prior week. The adjustable-rate mortgage share of activity rose to 7.4% of total applications from 7.3%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.67% from 4.65% with points increasing to 0.44 from 0.42 for 80 percent loan-to-value ratio (LTV) loans.
For the week, the FNMA 4.0% coupon bond gained 43.7 basis points to close at $102.250 while the 10-year Treasury yield decreased 12.9 basis points to end at 2.630%. The Dow Jones Industrial Average lost 576.08 points to close at 25,450.24. The NASDAQ Composite Index dropped 187.21 points to close at 7,408.14. The S&P 500 Index fell 60.62 points to close at 2,743.07. Year to date (2019) on a total return basis, the Dow Jones Industrial Average has added 9.10%, the NASDAQ Composite Index has gained 11.65%, and the S&P 500 Index has advanced 9.42%.
This past week, the national average 30-year mortgage rate dropped to 4.45% from 4.57%; the 15-year mortgage rate decreased to 4.04% from 4.14%; the 5/1 ARM mortgage rate decreased to 4.34% from 4.44%; and the FHA 30-year rate decreased to 4.12% from 4.22%. Jumbo 30-year rates decreased to 4.25% from 4.37%.
Economic Calendar - for the Week of March 11, 2019
Economic reports having the greatest potential impact on the financial markets are highlighted in bold.