November 29, 2018

The major stock market indices opened lower this morning following yesterday’s relief rally. At the moment, the Dow is down 62 points, and the SPX is down .2%. Energy, healthcare and materials are up about .5%, but most other sectors are falling back, led by the cyclicals (tech, financials, consumer discretionary). WTI crude oil is bouncing a bit; now trading up around $52/barrel. Gold is up slightly today, but most other commodities are trading lower. Treasury bonds are trading up as yields tick lower. But corporates are falling, perhaps due to the Federal Reserve’s financial stability report (see yesterday’s market update). Remember how spiking rates and the threat of inflation was the talk of the town in August and September? Well, since then inflation has moderated and rates have fallen. The five-year Treasury note yield is all the way back down to 2.83%, and the 10-year Treasury yield collapsed back to 3.02%.

Investors were cheered yesterday by the Fed’s acknowledgement that the economy faces some significant risks in the near term, and therefore it may have to be a little more patient when it comes to interest rate hikes in 2019. This morning, everyone even remotely connected with Wall Street is parsing and debating every word of Federal Reserve Chair Powell’s speech. CNBC ran an article laying out the viewpoint that the market may have overestimated the Fed’s dovish message yesterday. Tom Porcelli of RBC Capital says, “If there has been one certainty of late it is the market’s ability to misinterpret Fed chairman Powell.” In his view, “Powell is not to suggesting that since they are just below the range it may stop soon.” This opinion is clearly an outlier. Most investors and economists believe either that 1) Powell made an error back on October 3rd when he claimed current interest rates are “a long way” from neutral, or that 2) he is now revising his messaging due to some less optimistic global economic data.

The annual rate of growth in home prices is slowing down—and it needs to. The median home price for all types of housing (except for new homes) was about $255,400 in October, or roughly 3.8% higher than year-ago levels. That’s the slowest rate of home price growth since 2014. For much of the last couple of years, home prices have been rising at a 5-7% clip. That’s too fast, and we’ve seen affordability levels drop as a result. At the same time, mortgage rates have risen this year. Freddie Mac says the average 30-year mortgage rate is about 4.83%, compared with the 2017 average of 3.99%. Higher prices & rates are causing some potential home buyers to balk. The annualized volume of existing homes sale transactions is down 5% from year-ago levels and the volume of new home sales is down about 12% from year-ago levels. This is not the precursor to a crash, but don’t expect reacceleration in the next 6 months either.

US consumer incomes and spending accelerated in October beyond levels expected by economists. Personal spending rose 5.0% from year-ago levels. Income growth picked up a bit, rising 4.3% from year-ago levels. It is true to consumers have been spending a little more than they’ve been earning, and as a result savings rates are coming down. But savings (at about 6% of discretionary income) is right around the long-term average. The report also revealed that inflation on items purchased by consumers is not rising. The so-called “PCE Deflator” shows prices are up 2.0% from year-ago levels. That’s right where the Federal Reserve says it should be.

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