The word I would use to describe last week is disappointment. Both the Federal Reserve announcement and a lack of progress in the ongoing trade negotiations with China disappointed markets greatly.
Before we get there though, let’s take a look at some of the economic data that was released last week.
Personal Income and Outlays
Personal incomes were up 0.4% in June. Meanwhile, consumer spending rose 0.3%. Inflation remained soft, up only 0.1% overall and 0.2% in core categories. On the year, these inflation metrics are up 1.4 and 1.6%, respectively. It’s well below the Fed’s 2% target for annual inflation.
Analysts do point out that the core rate for inflation was up slightly above last month’s 1.5% pace. However, many numbers for core inflation, which takes out volatile food and energy prices, fell by 0.1%, so gains have been tenuous at best.
Wages and salaries were up 0.5% and consumers are saving more of the money, with the savings rate up 0.1% to 8.1% overall. It’s worth noting that wage and salary numbers had been low the prior 2 months, so that jump, while welcome, still might be about catch up as much as anything else.
S&P CoreLogic Case-Shiller HPI
There are signs that home prices might be starting to plateau a little bit. While the FHFA index released last week has been much higher than the S&P metric, the two are starting to converge.
On a seasonally-adjusted basis, prices were up 0.1% in the month of May, despite rising 0.6% overall. Prices have only gone up 2.4% on the year. This is the lowest rate of increase in 7 years.
Low mortgage rates and strong employment with increasing wages just hasn’t been enough to pick up home prices, and it’s something we’ll definitely be keeping an eye in the coming months.
While the previous two reports might point to the fact that the consumer isn’t spending as much, the American public is nonetheless feeling very confident about the future prospects as seen in July. Consumer confidence was up more than 11 points at 135.7.
Less people felt that jobs were hard to get, with this number down 3% to come in at 12.8%. Meanwhile, 46.2% of the public thinks that jobs are plentiful, a number which is up 2.2% on the month. Meanwhile, 4.2% more people see their income rising in the next 6 months, up to 24.7%.
Meanwhile, more people see the stock market on the rise with 41.6% of people seeing stocks going up in the next 6 months. Meanwhile, the percentage of people who see the stock market going down fell by an equal amount, seeing an 8% drop to only 22.4% of respondents.
Of interest to policymakers, consumers don’t expect inflation to go up very much, as the overall estimate was down 0.4% to 4.7%. Consumers were likely paying attention to the statements of Fed officials.
Pending Home Sales Index
The number of existing homes under contract for sale in June jumped 2.8% to come in at an index level of 108.3. This’ll bode well for future reports on sales of existing homes, which have been lackluster in recent months.
The number of pending home sales is only up 1.6% on the year, but it’s a start. It remains to be seen whether low mortgage rates and a strong labor market add to the momentum here.
MBA Mortgage Applications
Overall mortgage applications were down 1.4% last week. Refinance applications were up 0.1%, but applications to purchase fell 3% on the week. While purchase applications are still up 6% on the year, this now represents several big weekly declines.
The average rate on a 30-year conventional mortgage in this index was unchanged at 4.08%.
Initial claims were up 8,000 last week, but they’re still very low at only 215,000. The 4-week moving average was down 1,750 to come in at 211,500.
On the continuing claims side, these were up 22,000 to come in at 1.699 million. Meanwhile, the 4-week average was up 750 to come in at about 1.698 million.
ISM Manufacturing Index
Manufacturing growth slowed 0.5 points to come in at 51.2, which was 0.7 points below the expected level. This index has been trending lower since hitting a peak of 60.8 in August of last year.
New orders in this sector were up 0.8 points to show very slight growth at 50.8. However, production growth was down to 50.8, which represents a fall of 3.3 points on the month. Growth in hiring is also slowing as it fell 2.8 points to come in at 51.7. Meanwhile, the prices manufacturers are paying for materials and services is in deeper contraction, down 2.8 points at 45.1. This is the lowest that that metric has been in 3 ½ years and doesn’t bode well for the overall index.
U.S. nonfarm payrolls beat consensus expectations to come in up 164,000 in July. The unemployment rate was flat at 3.7%, which remains extremely low. On the downside, the number of jobs added to payrolls in June was revised down by 31,000 to 193,000.
There were 148,000 jobs added to private payrolls and a sizable 16,000 jobs added in the government sector. The labor force participation rate also went up 0.1% to 63%. Meanwhile, average hourly wages were up 0.3% and have risen 3.2% on the year. In the last headline number, the length of the average workweek decreased by 6 minutes to 34 hours, 18 minutes.
There were 16,000 jobs added in manufacturing, which is always very closely watched. However, the hours worked in the manufacturing sector are down. There was a 38,000-job uptick in business services including 18,000 jobs added in the financial sector. Retail jobs continue to decline, falling 4,000 in July and continuing a long run of declines.
The U.S. deficit in international trade did decrease by $100 million in June to come in at $55.2 billion. However, rather than being due to an increase in exports, it had more to do with the fact that imports fell quite a bit.
Imports were down 1.7%. Imports of services were up 0.2% at $49.2 billion, but goods imports were down 2.2% to $212.3 billion. Oil prices were down, which meant the U.S. spent less money on energy imports and it led to a $3.2 billion decline in industrial supplies. Imports of consumer goods were also down $900 million, but came in at $54.7 billion.
Exports were down 2.1%. While exports of agricultural products were up slightly coming in at $4.1 billion and $600 million added to civilian aircraft exports. Still, capital goods exports were down $1.2 billion to $44.9 billion and there was a $1.9 billion decrease in consumer goods exports to $16.2 billion.
Consumer sentiment was flat in the final reading in July to come in at 98.4. Looking at trends, this is up 0.2 points from the reading at the end of June.
Expectations for the future were down 1.2 points to come in at 90.5. Consumers appear to be concerned over ongoing trade issues. Meanwhile, on the current conditions end, these have been pretty rock solid at 110.7.
In terms of inflation, over the next year, consumers expected to rise 0.2% to 2.5%, but the 5-year outlook was down 0.1% to come in at 2.6%.
The Federal Reserve chose to lower short-term interest rates by 0.25% during its meeting last week. This didn’t move mortgage rates very much in itself because the market had pretty much priced in the rate move. What traders paid attention to was the language in the statement, but also the press conference given by Fed Chairman Jerome H. Powell in which he said that the market shouldn’t expect a cycle of rate cuts. Rather, he characterized this as a midcycle adjustment in order to maintain the current economic momentum.
Mortgage rates were pretty flat last week, but in this case, flat is a good thing because rates are really good right now. If you’re in the market to purchase or refinance, it’s a good time to lock your rate.
The average rate on a 30-year fixed mortgage with 0.6 points paid in fees was flat on the week at 3.75%. This is down from 4.6% a year ago.
Looking at shorter terms, the average rate on a 15-year fixed-rate mortgage was up a couple basis points to 3.2% with 0.5 points paid. This is down from 4.08% last year.
Finally, the average rate on a 5-year treasury-indexed adjustable rate mortgage (ARM) with 0.4 points paid in fees was down a single basis point to 3.46%. This has fallen from 3.93% at the same time last year.
The market didn’t react positively to Powell’s statement that market participants shouldn’t anticipate a sustained campaign of rate cuts, but rather one here and there. The trade war also dominated the end of the week and this morning China has pledged to retaliate after President Trump said he would impose more tariffs. None of this is stemming market losses. Don’t look at your retirement funds today.
The Dow Jones Industrial Average was down 2.6% last week to close at 26,485.01. This was down 98.41 points on the day. Meanwhile, the S&P 500 fell 21.51 points on the day and 3.1% on the week to finish at 2,932.05. Finally, the Nasdaq closed at 8,004.07, down 107.05 points on the day and 3.92% on the week.
The Week Ahead
Wednesday, August 7
MBA Mortgage Applications (7:00 a.m. ET) – The mortgage applications index measures applications to mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
Thursday, August 8
Jobless Claims (8:30 a.m. ET) – New unemployment claims are compiled weekly to show the number of individuals filing for unemployment insurance for the first time. An increasing trend suggests a deteriorating labor market. The 4-week moving average of new claims smooths out weekly volatility.
Friday, August 9
Producer Price Index (PPI) (8:30 a.m. ET) – The Producer Price Index measures the average change over time in prices received by domestic producers for the sale of goods and services.
In contrast to last week, there aren’t nearly as many reports coming out this week, so look for the stock market to drive things. We’ll have it all covered in next week’s Market Update!
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