After weeks of steady increases, U.S. mortgage rates are taking a breather this week, with the 30-year fixed-rate mortgage slipping 5 basis points.
30-year FRM averaged 4.85% for the week ending Oct. 18, 2018 vs. 4.90% the previous week; a year ago, the average was 3.88%.
"While the housing market has clearly softened in reaction to the rise in mortgage rates, the economy and consumer sentiment remain very robust and that will sustain purchase demand, particularly in affordable markets and neighborhoods," says Freddie Mac Chief Economist Sam Khater.
15-year FRM averaged 4.26% vs. 4.29% a week ago; year-ago rate was 3.19%
5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.10%, up from 4.07% a week ago; year ago the rate was 3.17%.
U.S. stock index futures are under pressure again, down 0.3%, as investors digest minutes from the Fed's most recent meeting that highlighted it was staying on course for rate hikes despite growing criticism from President Trump.
The yield on the benchmark 10-year Treasury note and 30-year Treasury bond were 3 bps higher at 3.21% and 3.38%, respectively.
On the data front, Philly Fed and U.S. jobless claims will be released at 8:30 a.m. ET.
Oil is down 0.7% at $69.28/bbl, gold is 0.1% lower at $1226/ounce.
A few FOMC members said they expected policy may need to become "modestly restrictive" for awhile and some "judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level" to reduce the risk of a sustained overshooting the committee's 2% inflation objective or "the risk posed by significant financial imbalances," according to the Federal Reserve minutes from their September meeting.
A couple participants, though, didn't favor a restrictive policy stance if there are clear signs of an overheating economy or rising inflation.
For the economy overall, participants said recent data suggested some acceleration in labor costs, but wage growth remained moderate due partly to tepid productivity growth.
Several participants commented that inflation may modestly exceed 2% for a period of time.
And, of course, trade issues came up: "Some participants commented that trade policy developments remained a source of uncertainty for the outlook for domestic growth and inflation."
Another downside risk: "The divergence between domestic and foreign economic growth prospects and monetary policies," which could further strengthen the dollar.
The S&P 500, down earlier, is close to break-even, -0.05%, the Dow -0.31%, and Nasdaq -0.17%.
Here's the reasoning behind the FOMC's decision to remove "the stance of monetary policy remains accommodative" from its statement last month:
The committee said it was "appropriate" to remove the description from its statement before the target range for the federal funds rate moved closer to neutral--the point at which interest rates neither boost nor hinder economic growth. "Earlier communications had helped prepare the public for this change, the minutes said.
Leveraged risk: Also mentioned in the minutes as a risk to the economy--leveraged loans.
"Some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial stability."
Still, they consider risks to the economy "roughly balanced."
10-year U.S. Treasury note yield little changed, up 1 basis point to 3.175%.
Even though government bond yields in Europe and Japan are lower than those in the U.S., hedging for currency can make them more profitable than U.S. Treasuries, Bloomberg reports.
For example, they can earn about 3.8% a year from very low yielding 10-year German bunds--more than half a percentage point more than Treasuries.
Jim Caron, a fund manager at Morgan Stanley Investment Management, uses the strategy to buy euro bonds and pointed to Spain, where he can get effective yields of almost 5% on 10-year notes.
Sachin Gupta at Pimco says the interest-rate spread between U.S. and other developed countries will eventually disappear.
“Other countries are still lagging behind in terms of economic strength and interest rate hikes,” he said. “So this differential is likely to become more attractive over the next year or two before it goes the other way.”
President Trump moves to pull the U.S. out of the Universal Postal Union, saying that the entity for setting international mailing rates unfairly gives China an edge and facilitates the shipment of counterfeit products and illicit drugs, the Financial Times reports, citing senior White House officials.
The UPU sets international shipping rates so that developing economies get lower rates and advanced economies get higher rates.
The process to withdraw from the union takes a year, and the White House officials say they'd be open to staying in the treaty if the system is overhauled.
Credit Suisse this morning downgraded Lennar (NYSE:LEN) and Meritage (NYSE:MTH) to Neutral from Outperform, and KB Home (NYSE:KBH) to Underperform from Neutral. While Q3 may produce earnings beats, says analyst Susan Maklari, slowing demand and worries over affordability will continue to weigh.
BTIG's Carl Reichardt says a monthly survey of builders showed decelerating housing demand last summer has continued into the fall. He trims EPS estimates, and cuts price targets for D.R. Horton (NYSE:DHI) and KB Home.
Housing starts for September were released minutes ago, and showed a larger-than-expected decline from August. Also released this morning was the latest mortgage application data, and it too showed a slowdown in the face of surging interest rates.
Among premarket movers: Toll Brothers (NYSE:TOL) -2.4%
Just weeks after the retooling of NAFTA, the U.S. Trade Representative’s office has informed Congress it intends to open trade talks with the EU, U.K. and Japan, aiming to "address both tariff and non-tariff barriers and to achieve fairer, more balanced trade."
Under fast-track rules, the U.S. cannot start trade talks until 90 days after notifying Congress.
The U.S. is back as the most competitive country in the world, regaining the No. 1 spot for the first time since 2008 in an index produced by the World Economic Forum.
America's "vibrant" entrepreneurial culture, "strong" labor market and financial system "are among the several factors that contribute to making the U.S.' innovation ecosystem one of the best in the world," said the organization that produces the Davos conference.
President Donald Trump says the Federal Reserve is "my biggest threat" because it's raising rates too fast and it's "too independent," Fox Business Network reports.
So far, the Fed's policy-setting committee has raised short-term interest rates three times this year and appears ready to boost them again in December. The Fed forecasts three more rate increases next year.
Higher rates make it more expensive for consumers and businesses to borrow money, which they would then spend to feed economic growth.
It's Trump's latest salvo against the Fed and its chair, Jerome Powell, for its path of increasing interest rates.
The 10-year U.S. Treasury note yield is little changed at 3.156% in late trading ET.
Rising mortgage rates are pushing down Freddie Mac's (OTCQB:FMCC) Multifamily Apartment Investment Market Index across most markets in Q2 2018 and over the past year.
The analytical tool combines multifamily rental income growth, property price growth, and mortgage rates to provide a single index that measures multifamily market investment conditions.
At the national level the AIMI fell 2.6% in Q2; 12 out of 13 local markets tracked by the index also slipped, with the largest declines in Phoenix (-4.77%), Houston (-3.79%), and Atlanta (-3.36%). Only Boston(+0.39%) experienced an increase.
The biggest factor was a 29 basis point increase in mortgage rates during the quarter. Net operating income, though, grew in every market and the nation. Seattle saw the biggest quarterly increase, up 4.6%.
For the past 12 months, the national AIMI declined 7.1% with declines in every local market it tracks.
U.S. stock index futures are pointing to a firmer open ahead of fresh economic data that includes industrial production numbers, the Housing Market Index and JOLTS. Dow +0.5%; S&P 500 +0.4%; Nasdaq +0.6%.
Earnings season is also kicking into high gear as Netflix becomes the first large technology company to report results after today's close.
On the radar are also quarterly figures from BlackRock, Goldman Sachs, Morgan Stanley, Johnson & Johnson and IBM.
Oil is down 0.9% at $71.14/bbl, gold is 0.1% lower at $1232/ounce and the 10-year Treasury yield is up 1 bps to 3.17%.
Janet Yellen, who ran the Federal Reserve for four years, says that President Trump's critical remarks about Federal Reserve policy could be damaging to the central bank, Bloomberg reports.
“To politicize it and to undermine that is something that is essentially damaging to the Fed and to financial stability,” Yellen said in Washington at the Mortgage Bankers Association's annual convention.
"Presidents can speak out if they choose to and give their opinions about policy. There’s no law against that, but I don’t think it’s wise," she added.
Still, she doesn't think Trump's criticism of the Fed raising interest rates will change the Fed's actions and she defended her successor, Jerome Powell.
The Fed last increased its benchmark interest rate last month, raising it by 25 basis points to 2.0%-2.25%. It's widely expected to hike interest rates again in December.
The 10-year U.S. Treasury note yield is up 0.8 basis point to 3.16% in midday trading; Financial Select Sector SPDR ETF (NYSEARCA:XLF) -0.09%.
U.S. stock index futures are following Asia and Europe into the red as risk-off sentiment pervades amid increasing tensions between Riyadh and Washington. Dow -0.7%; S&P 500 -0.7%; Nasdaq -1.1%.
The Kingdom has vowed an economic response "with greater action," should the U.S. impose sanctions against Saudi Arabia over the Khashoggi case.
Crude warning? "If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure," Al Arabiya's Turki Aldakhil wrote in an op-ed.
Oil is up 0.4% at $71.64/bbl, gold is 0.9% higher at $1232/ounce and the 10-year Treasury yield is up 1 bps to 3.15%.
Cheaper valuations, a decent earnings seasons, and favorable seasonality may fuel a year-end stock rally, according to a note written by Morgan Stanley analysts led by Andrew Sheets.
“Earnings season may give some respite from the very ‘macro’ storylines of Fed policy, trade tensions and poor market liquidity,” they wrote.
Though the report considers the stock-rally scenario "plausible," growth shares are likely to continue their underperformance. And this year is on pace to record the highest frequency of unusually large moves since the financial crisis, the report says
In midday Friday trading, S&P 500 +0.1%, the Nasdaq +0.7%, and the Dow is off 0.1%.
"On the way to neutral, we've still got the punch bowl in play," says Chicago Fed President Charles Evans. Take from it what you will, but the once-dovish Evans sounds like he's saying current Fed policy remains stimulative.
The third quarter earnings season kicks off in earnest today on the heels of a backup in interest rates and a selloff on Wall Street.
JPMorgan, Wells Fargo, Citigroup and PNC Financial will all report before the bell, with U.S. futures getting a big bump overnight pending the results. Dow +0.6%; S&P 500 +0.7%; Nasdaq +1.2%.
Corporate tax cuts, strength in the U.S. economy, rising oil prices and share buybacks are expected to fuel double-digit earnings growth, but analysts will also be watching how often companies mention tariffs hurting their profits.
The White House is proceeding with plans for President Trump and Chinese leader Xi Jinping to meet at the G-20 summit in Buenos Aires at the end of November, in a step that could help ease trade tensions between the two nations, the Wall Street Journal reports, citing officials from both countries.
One of the people on the U.S. team that's planning the summit meeting is Christopher Nixon Cox, grandson of former President Richard Nixon, whose trip to China in 1972 eventually resulted in diplomatic relations between China and the U.S.
"It’s a correction that I think is caused by the Federal Reserve,” says the president, responding to a question about the stock market. "I think the Fed is far too stringent and they’re making a mistake."
Chairman Powell? "I'm not going to fire him," says Trump.
Stocks are near session lows, the S&P 500 down 0.7%.
The dollar (UUP, UDN) continues to hold modest losses.
With 10-year Treasury yields hitting seven-year highs, it's no surprise that mortgage rates are following suit.
30-year fixed-rate mortgage average of 4.90% for the week ending Oct. 11 2018 climbs 19 basis points from the prior week, according to Freddie Mac's (OTCQB:FMCC) Primary Mortgage Market Survey. Last year at this time, the rate was 3.91%
"Rising rates paired with high and escalating home prices is putting downward pressure on purchase demand," says Freddie Chief Economist Sam Khater. "While the monthly payment remains affordable due to the still low mortgage rate environment, the primary hurdle for many borrowers today is the down payment and that is the reason home sales have decreased in many high-priced markets."
15-year FRM averaged 4.29% this week vs. 4.15% a week earlier; year-ago rate was 3.21%
The "Fed has gone crazy crowd" will get a bit more ammo out of this morning's CPI report, with the core rate in September coming in at an unexpectedly soft 0.1%. On a year-over-year basis, core CPI was up 2.2% - flat from August, but shy of estimates for 2.3%.
The 10-year Treasury yield has ticked modestly lower on the number, now at 3.176%. TLT +0.45%, TBT -0.9% premarket.
U.S. stock index futures continue to gain ground, the S&P 500 now off just 0.3%.
via Bloomberg, traders reactions to Wednesday's selloff that saw the S&P 500 down more than 3% and Nasdaq drop over 4% were mixed. Some are buying the dip, others are still waiting for signs of strength. Overall, very little panic:
"It’s just people saying ‘Gosh, my neighbor is selling.’ There is no news today. That to me means you’re going to take this back. I don’t know if it takes a day or a week. I would absolutely be buying this.” - Josh Golub, chief equity strategist, Credit Suisse
"I don’t think anyone senses any panic at this point. Given the levels we are currently at, a lot of people think that something like this and even more downside are slightly overdue." - Larry Weiss, head of trading for Instinet LLC
“We’ve been used to one direction lately, and that’s up. Naturally there are ebbs and flows, and that’s what we’re seeing right now. While it may be tempting to make a move to mitigate portfolio risk based on today’s activity, timing the market rarely works to an investor’s benefit.” Mike Loewengart, VP of investment strategy, E*Trade
"Many are pointing to overall confusion, gross exposure reductions (selling longs/covering shorts), risk parity/factor related unwinds, etc., driving the overall selling. ETF options volumes have been relatively light since Friday’s initial breakdown and we would like to see that pick up and more activity in the puts before any true stabilization kicks in for a trade-able bottom." - Alon Rosin, head of institutional equity derivatives, Oppenheimer
“I do not think the cycle peak for stocks is in, if this is the start of a correction then so be it, but I think the bull market has gas left in its tank. Right now it’s dealing with a decline in certain sectors driven by late cycle factors and it’s coming to grips with it in an ugly way.” - Michael Antonelli, institutional equity sales trader, Baird
"The Fed has gone crazy," Pres. Trump says in reaction to today's stock market plunge. "It's a correction that we've been waiting for for a long time, but I really disagree with what the Fed is doing."
Based on today's rout, which caps five straight declines on the S&P 500, investors appear to agree; the losing streak follows Fed Chair Powell's Oct. 3 comment that the central bank is "a long way" from getting rates to neutral.
"It's not an easy transition. It's going to be volatile but over the long term it's better for the health and robustness of markets," El-Erian says, adding that he expects the pullback to be temporary because of strong U.S. economic growth.
With Q3 earnings season ready to gear up, equities continue to stumble in the face of the fast rise in interest rates.
Tech again leads the slump, with the Nasdaq (NASDAQ:QQQ) dropping 2.1% vs. the S&P 500 (NYSEARCA:SPY) and DJIA (NYSEARCA:DIA) down just 1.5%.
What's working? Defensive plays like utilities (XLU +0.3%) and consumer staples (XLP +0.1%). The REITs (VNQ -0.2%), (IYR -0.2%) would also likely be in the green if it weren't for slumping retail landlords (as Sears preps for bankruptcy).
Not catching a bid is gold (NYSEARCA:GLD), currently flat at $1,192 per ounce.
Also not catching a safety bid are long-dated Treasurys - the 10-year yield is up one basis point to 3.22%. TLT -0.4%, TBT +0.8%
Intensifying into an extremely dangerous Category 4 hurricane, Michael is expected to strengthen further before making landfall in the Florida Panhandle or Big Bend area around noon today.
Oil producers - including Anadarko (NYSE:APC), BHP Billiton (NYSE:BHP), BP (NYSE:BP) and Chevron (NYSE:CVX) - have evacuated many personnel, with nearly 40% of daily crude oil production shut in the Gulf.
On watch are also insurers, power providers, hospitals, livestock and crop producers, generator manufacturers and building stocks.
Goldman Sachs Group (GS -0.6%) is said to be scaling back on its Marcus unit's loan-originations target for next year, taking a more cautious stance on the consumer debt market, Bloomberg reports, citing people familiar with the plans.
Marcus, Goldman's online consumer banking product, is a key part of new CEO David Solomon's plan to fuel revenue growth over the next several years. In less than two years, it's lending more than $4B.
The reduced 2019 plan, based on current market conditions for consumer lending, could still change, the people said. They didn't provide exact figures on the revised plan and a Goldman spokesman declined to comment to Bloomberg.
The Marcus portfolio loss rate stood at about 5%, according to CFO Marty Chavez on Goldman's July earnings call.
Treasury yields are rising, but faster at the long end, meaning a steepening yield curve. In mid-August, the 2/10 spread tapered to 23.4 basis points, the narrowest since August 2007, and had plenty of pundits worrying about imminent recession. It's since widened to 34 bps.
Alongside, the Cleveland Fed recession-probability indicator has fallen to 16.5% in September from 18.8% in August..
As interest rates climb, "bonds are looking as attractive versus U.S. equities as they have in ten years," Mark Kiesel, portfolio manager at Pacific Investment Management, told Bloomberg in an interview.
"Yields are finally competition for dividends," he said.
10-year U.S. Treasury note yield +5.4 basis points in midday trading ET to 3.24%. Meanwhile, S&P 500 -0.7%, DJIA -0.9%, and Nasdaq -1.4%.
Kiesel is also Pimco's chief investment officer for credit.
He sees pension funds and insurance companies as most likely to benefit from rising rates and recommends investors stick with shorter-term bonds because rates are likely to continue to rise on longer-term debt.
The headlines say big miss - with just 134K jobs added vs. 185K expected. Some economists, however, were predicting a messy/soft number thanks to the hurricane that hit the southeast. Also, there were revisions, with July's 147K gain revised higher by 18K jobs, and August's 201K gain revised higher by a full 69K.
Then there's the unemployment rate, which fell all the way to 3.7% from 3.9%, and against expectations for 3.8%. The labor force participation rate was steady at 62.7%.
Taking all this together, the report is looking closer to a beat than a miss.
Average hourly earnings were up $0.08 to $27.24, and higher by 2.8% Y/Y (inline with estimates). The average workweek was flat at 34.5 hours.