Investors in the week ahead will receive updated figures on the U.S. housing market, as interest rates continue to plunge amid global growth fears and a host of other headwinds.
While market participants had generally enjoyed a brief respite from recent trade-inspired risk aversion Tuesday, when U.S. President Donald Trump said he would delay imposing 10% tariffs on some Chinese imports to mid-December, more recent gloomy economic data out of China and Germany has reignited a bond rally.
The yield on the 10-year U.S. Treasury note was bid at around 1.589% intraday Wednesday, while the 2-year note yield was just a little more than 1bp shy of inversion with that level. Earlier Wednesday, the 2y/10y spread had inverted by at least a basis point – for the first time since June 2007 – which shot a warning signal throughout the financial markets of a potential near-term recession.
Briefing.com’s chief market analyst Patrick O’Hare noted that each of the five recession periods since 1980 were preceded by an inversion in the 2y/10y spread. He pointed out that “the time between the first inversion and the start of the eventual recession averaged just over 18 months, with a range that spanned from ten months to two years.”
O’Hare continued that this likely means the “strong response” in the equity market Wednesday “is perhaps a little premature as a full-fledged recession trade given the typical time lapse.” However, he added that because of the inversion headline, “there is likely an algorithmic trading influence that is weighing disproportionately on the futures market. Hence, there has been a quick retracement of yesterday’s tariff-relief rally.”
The S&P 500 was last down by more than 2.5% on the day Wednesday, led by a 3.7% drop in energy. The only sector to flash green was utilities, with a paltry gain of 0.15%.
Against this backdrop, investors will be closely watching economic developments for further signs of slowing growth and recession indications. Releases in the week ahead will include existing and new home sales, the Federal Reserve’s Open Market Committee meeting minutes and durable goods orders.
Wednesday, Aug 21 – Existing Home Sales (Jul)
The National Association of Realtors (NAR) is set to unveil July’s existing home sales numbers after purchases fell 1.7% in the prior month, and 2.2% year-over-year, to 5.27 million.
While two of the four major U.S. regions recorded minor sales jumps, the other two – the South and West – experienced greater declines.
Lawrence Yun, NAR’s chief economist, said home sales are “running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country.” He noted that the U.S. is facing a housing shortage and “much more inventory is needed.”
Total housing inventory at the end of June rose to 1.93 million, up from 1.91 million in May, but unchanged from a year ago. In July 2007, that figure had reached 4.04 million.
Yun continued that imbalance persists for mid-to-lower priced homes, with “solid demand and insufficient supply, which is consequently pushing up home prices.”
Friday, Aug 23 – New Home Sales (Jul)
Market participants will also receive new home sales data for July ahead of the weekend, following a 7% uptick in sales of new single-family houses in June to a seasonally adjusted annual rate of 646,000 – a rise of 4.5% from June 2018.
Indeed, the U.S. housing market generally continues to benefit from lower mortgage rates, while low inventory levels have been largely blamed for stunting sales growth.
Wednesday, Bankrate placed the average rate for a 30-year fixed mortgage at 3.74%, lower by 7bps from the prior week and 10bps lower year-on-year. Meanwhile, the average 15-year fixed-mortgage rate was 3.13%, up 4bps over the last seven days.
Mortgage rates have remained in a historically low range, amid the U.S. Federal Reserve’s variety of quantitative easing measures since the 2008 housing crash.
In Wells Fargo’s (NYSE: WFC) second quarter of 2019 earnings results, for example, CFO John Shrewsberry highlighted that mortgage originations at the bank increased by US$20bn over the previous quarter, due in large part to higher refi volumes from lower interest rates.
Applications in the second quarter increased US$26bn from the first quarter.
Shrewsbury said the bank ended the quarter with a US$44bn unclosed pipeline, the highest pipeline since Q3 2016, and expects originations to increase in Q3 2019.
Also, Bank of America (NYSE: BAC) noted that its average loans and leases grew US$5bn in Q2 2019, or 3%, driven by residential mortgages and custom lending.
Moreover, the Federal Reserve Bank of New York’s Center for Microeconomic Data also stated Tuesday in its Quarterly Report on Household Debt and Credit that mortgage originations, which include mortgage refinances, climbed by US$130bn in Q2 2019 to US$474bn, the highest volume seen since Q3 2017.
Overall, mortgage balances—the largest component of household debt—rose by US$162bn in Q2 2019 to US$9.4tn, surpassing the high of US$9.3tn in Q3 2008.
Also, total household debt increased by 1.4% to US$13.86tn in Q2 2019 – the 20th consecutive quarter with an increase, and US$1.2tn higher, in nominal terms, than the previous peak of US$12.68tn in Q3 2008.
Originations may rise further
According to Fannie Mae’s Economic and Strategic Research (ESR) Group, total origination volume is expected to improve 7% in 2019 on the back of a surge in refinances and moderate house price growth. In fact, refinance activity is expected to account for 32% of originations in 2019, up from 29% in the prior year.
Although the housing picture may appear upbeat, it seems the low supply levels and affordability problems are likely to persist.
Fannie Mae chief economist Doug Duncan recently said that while “home price appreciation has largely moderated – particularly compared to the recent past – and demand for modestly priced homes has proven strong and resilient, the lack of affordable inventory continues to cap sales and limit the potential pool of would-be homeowners.”
Sentiment Shaken – And Stirred
Against the landscape, the intensified and escalating trade dispute between the U.S. and China, coupled with the recent yield curve inversion, deteriorating manufacturing conditions in many nations, along with slowing global growth and geopolitical uncertainties, including Brexit and Hong Kong’s ongoing protests, may ultimately pose a threat to the confidence of the American consumer.
President Trump said that the delay in the tariffs on Chinese goods, for example, was intended to mitigate any potential impact on U.S. customers. He said that “just in case they might have an impact on people, what we’ve done is we’ve delayed it so that they won’t be relevant for the Christmas shopping season.”
Furthermore, some market participants fret that central banks may be out of ammunition when the next downturn in the economy hits.
Scott Mather, CIO of U.S. Core Strategies at PIMCO, said that “after years of low-rate policy intended to pull forward demand and provide stimulus to a lackluster growth and inflation environment, monetary policy may be both exhausted and less effective.”
He added that the Fed’s recent pivot to “insurance cuts” – while contributing to easier financial conditions – “may not be enough to prevent the Fed from revisiting zero interest rates again in the next downturn. Moreover, even rock-bottom interest rates may not be enough to lift the economy out of recession in the future.”
Still, while the housing market may seem rosy, the long list of global uncertainties has instilled a risk-off tone in housing-related stocks and exchange-traded funds (ETFs), such as Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), SPDR Homebuilders ETF (NYSEARCA: XHB) and the Vanguard Real Estate ETF, (NYSEARCA: VNQ).
Against this backdrop, investors will be closely watching economic developments for further signs of slowing growth and recession indications. Other releases in the week ahead will include a flash reading of the U.S. Markit Manufacturing PMI, as well as weekly updates on oil inventories.
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
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