Renewed China tariff woes push Stocks lower. Fed raises rates, consumers feel the pinch. Mortgage lenders profit margins decline.

Renewed tariff woes with China are helping the U.S. Bond markets today while pushing the Dow Jones Industrial Average, S&P 500 and the NASDAQ lower as the week comes to an end. President Trump has approved tariffs on $50 billion worth of Chinese goods imported into the U.S. An official announcement is expected later today. The closely watched Dow Jones Industrial Average was down nearly 300 points in early trading.

The Federal Reserve raised its benchmark short-term Fed Funds Rate this week, but what does that actually equate to for the U.S. consumer? The consumer will see a hike on rates for credit cards, home equity lines of credit, auto loans and other adjustable-rate instruments. In addition, student loan rates will creep higher while savings rates for banks will edge higher, but not by much.

Fannie Mae reported this week that mortgage lenders reported a net-negative profit margin outlook for the seventh consecutive quarter due in part to rising home prices and a tight supply of home for sale on the market. Tight supplies continue to put a squeeze on mortgage demand. “Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation, which have drastically reduced refinance activity and restrained home purchase affordability,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.

Housing sentiment continued to strengthen in May. Now is a good time to sell a home. Next week’s Fed meeting has capital markets at a standstill.

Housing sentiment continued to strengthen in May, but high home prices complicate consumer purchase confidence, reports Fannie Mae. Higher home prices are due in part to limited inventories of homes for sales on many markets across the nation. The Fannie Mae Home Purchase Sentiment Index (HPSI) rose 0.6 points in May to 92.3, reaching a new all-time survey high for the second consecutive month. The net share of respondents who reported that now is a good time to sell a home increased to 46% in May, and is now up 14 percentage points year over year. However, the net share of those surveyed said now is a good time to buy, decreased to 28%, showing little improvement in the past 12 months.

Not much action in the U.S. capital markets today as the investing world sits on their hands awaiting next week’s Fed decision and monetary policy statement. Currently, there is a 90% chance of a 0.25% hike to short-term Fed Funds Rate. The Federal Open Market Committee meeting begins Tuesday and ends Wednesday at 2:00 p.m. ET with the rate announcement and statement. The Fed will also release economic projections while Fed Chair Powell will hold a press conference at 2:30 p.m. ET.

Economic growth projected slightly lower than first reported. No bank failures so far in 2018. Fed meeting kicks off next week.

The National Association for Business Economics (NABE) feels the Tax Cut & Jobs Act will boost economic growth in 2018 and 2019, but the U.S. could fall into a new recession in 2020. NABE expects 2.8% Gross Domestic Product this year, slightly lower from its 2.9% reported in March. The slightly less optimistic view is due in part to the trade policies that could have a negative impact on the economy. The current economic expansion began in mid-2009 and is currently the second longest in U.S. history and will be the longest if it continues past June 2019.

There were no U.S. bank failures during the first five months of 2018, the first time this has occurred since 2006. Ultimately, there were no bank failures in 2006, the last calendar year when that happened. Since 2007, 531 banks have failed, an average of 48 per year over the last 11 years.

The two-day Federal Open Market Committee (FOMC) meeting will kick off its regularly scheduled meeting next week, June 12-13. It is expected that the meeting will end on Wednesday with a quarter-point hike in the short-term Fed Funds Rate (FFR). The Fed Funds Rate is the rate at which depository institutions lend reserves held at the Federal Reserve to other depository institutions overnight. The FFR influences everything from home and auto loans to credit cards along with lenders’ Prime Rates.

 

Fed could raise rates more aggressively if economy heats up. Current U.S. economic expansion is in a tie for the second longest since June 2009. Gas prices continue to push higher.

This morning, the Federal Reserve Bank’s Loretta Mester (voter, hawk) says the Fed could raise rates more rapidly if the U.S. economy grows faster than expected, though it could go slower if inflation weakens. Ms. Mester went on to say that she doesn’t see inflation picking up sharply this year. The Fed’s favorite inflation gauge, the annual Core PCE, is at 1.9%, not far off the Fed’s target of 2%. Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

The National Bureau of Economic Research (NBER) recently reported that the current economic expansion in the U.S. is in a tie for the second longest in history dating back to June 2009. In addition, the number of consecutive months of labor market gains is the longest ever as of April. The NBER went on to say that the 3.9% Unemployment Rate recorded in April was the lowest since late 2000. The NBER also reported that the number of job openings hit 6.6 million in March, the highest since the Labor Department started tracking the number in December 2000.

Gas prices at the pumps continued to rise to start the week as the summer driving season gets set to kick off in a few weeks. In addition, the recent announcement from the White House to withdraw from Iranian nuclear deal had a hand in driving up oil prices. Motor Club AAA reports that the headlines from Washington along with the switchover to summer blend gasoline and growing global demand are also factors fueling the rise in gas prices. The national average price for a regular gallon of gasoline is at $2.87, up 6 cents in the latest week and up 53 cents from a year ago.

Consumer prices tame. Core inflation eases. Mortgage rates unchanged in the latest week.

Consumer prices cooled a bit in April after spiking early in the year, helping to ease rising inflation fears. The numbers revealed an uptick in energy and food prices which was offset by a decline in demand for used cars and trucks. The Bureau of Labor Statistics reports that the headline Consumer Price Index (CPI) rose 0.2% in April, just below the 0.3% expected and still down from the 2018 high of 0.5% recorded in January.

The so-called Core CPI, which strips out volatile food and energy, rose 0.1%, below the 0.2% expected. On a 12-month basis, CPI rose 2.5%, up from the 2.4% in March, while the Core rate increased 2.1%, unchanged from the March reading. The members of the Federal Reserve will be dissecting the data but it does regard the Core Personal Consumptions Expenditures (PCE) as its favorite inflation gauge. The annual Core PCE was last reported at 1.9%, right near the Fed’s 2% target.

Mortgage rates were steady in the latest week, and while they have risen in 2018, rates still remain historically attractive. Freddie Mac reports that the 30-year fixed-rate mortgage was unchanged this week at 4.55% with an average 0.5 point added on top. Freddie Mac says as we head into late spring, the demand for purchase credit remains rock solid, which should set us up for another robust summer home sales season. In addition, while this year’s higher rates, which are up 50 basis points from a year ago, have put pressure on the budgets of some home shoppers, weak inventory levels are what’s keeping the housing market from a stronger sales pace.

Survey shows no housing affordability crisis. U.S. Stocks fall. Mortgage rates slightly lower this week.

A recent survey by First American Financial Corp. reveals that there is no housing affordability crisis. One of the reasons given in the survey is that while home prices have been increasing, so have incomes. The report went on to show that most states have reached their peak home price at 2007 levels, while incomes are much higher than they were in last decade.

U.S. Stocks are lower today as investors remain on edge about the U.S.-China trade talks coupled with less than impressive corporate earnings released this morning. Treasury Secretary Mnuchin is in Beijing today spearheading two days of trade talks between the two countries. The closely watched S&P 500 has fallen below a key technical level, which is ushering in more selling.

Mortgage rates edged slightly lower this week after three straight weeks where borrowing costs have risen, after being in an upward pattern since the year began. Freddie Mac reports that the 30-year fixed-rate mortgage fell three basis points to 4.55% with an average 0.5 in points and fees. Despite the higher rates this year, Freddie Mac reports that its data through April shows that first-time home buyers represent 46% of purchase loans, up from 43% over the same period a year ago.

Consumer prices decline. U.S. Stocks decline on U.S.-Russia tensions. Mortgage rates edge lower.

The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) fell 0.1% in March, below the expected gain of 0.1%. Lower gas prices at the pumps are to blame for the first decline in 10 months. When stripping out volatile food and energy, the Core CPI was in line at 0.2%. On a year-over-year basis, CPI rose 2.4% while Core CPI rose 2.1%, both 12-month highs. The Consumer Price Index measures the average price level paid by urban consumers (80% of the population) for a fixed basket of goods and services.

Heightened tensions over Syria between Russia and the U.S. are giving Bond prices a modest boost so far this morning. President Trump tweeted that Russia should get ready for a missile strike on Syria after the chemical attack over the weekend. Several Russian officials have threatened to retaliate if the U.S. strikes. U.S. Stocks are lower on the headlines.

Mortgage rates declined slightly in the latest week after climbing since the beginning of 2018. The Mortgage Bankers Association reports that the 30-year fixed-rate mortgage with conforming loan balances ($453,100 or less) declined to 4.66% in the latest week from 4.69%. That rate carries at least an average 0.40 point added on top. Within the report it showed that both the refinance and purchase index fell 2%.

Consumer inflation tame in February. Small business optimism at record highs. Rex Tillerson out as Secretary of State.

The February Consumer Price Index (CPI) came in at 0.2% last month, in line with estimates and down from the 0.5% previously recorded in January. Lower energy prices were the catalysts for the lower readings. When stripping out volatile food and energy, the more closely watched Core CPI was also in line at 0.2%, leaving the year-over-year Core unchanged at 1.8%. If inflation numbers remain tame, the Fed will be hard pressed to raise the short-term Fed Funds Rate four times in 2018. This doesn’t change next week, as it appears a Fed Funds Rate hike is a lock at the FOMC meeting.

Small business optimism continued to run near record highs in February due in part to lower taxes and decreased regulations. The National Federation of Independent Business Small Business Optimism Index rose to 107.6 last month as owners showed unprecedented confidence in the economy. “When small business owners have confidence and certainty in the economy, they’re able to hire more workers and invest in their business,” said NFIB President and CEO Juanita Duggan.

The shakeups at the White House continued today as Secretary of State Rex Tillerson is out with current CIA Director Mike Pompeo taking his place. Last week President Trump’s Chief Economic Adviser, Gary Cohn resigned with the leading candidate being economist Larry Kudlow from CNBC. It’s been said that Mr. Tillerson due to the failure to wield any significant influence in internal administration over issues surrounding North Korea and Russia.

Small business optimism grows. Tomorrow’s CPI report to be closely watched. The Fed is upbeat on the economy, despite the recent plunge in the U.S. Stock market.

The National Federation of Independent Businesses (NFIB) reports that the underlying strength in the economy can be seen in the critical small business sector. The Small Business Optimism Index rose two points to 106.9 in January and set a record with the number of small business owners saying now is a good time to expand. “Main Street is roaring,” said NFIB President and CEO Juanita Duggan. “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.”

There are no economic reports due for release today. Tomorrow’s Consumer Price Index will be closely watched by the Fed for any signs of inflation due to the recent focus on rising prices and wages. The incoming economic reports are now very important to follow … especially inflation. In the latest Jobs Report, wages grew at the fastest pace since 2009, which could pressure inflation higher.

The recent plunge in the U.S. Stock markets doesn’t have members at the Federal Reserve scurrying to alleviate the situation. Cleveland Fed President Loretta Mester believes that the economy is safe and sound, and that it will work through recent fluctuations, which are far away from having an influence on the economic outlook. Ms. Mester went on to say that inflation should rise this year but not to a point that requires a quicker Fed reaction as it gradually begins to rise to the Fed’s target range.

Global Bond yields on the rise. Inflation remains low. Mortgage rates edge higher.

Global Bond yields continue to rise due to several factors as the U.S. 10-year yield at the highs seen in January 2014. The Bank of England said it sees interest rates rising sooner and higher as the U.K. is boosted by global growth. Dallas Fed President Kaplan said the central bank will likely continue removing policy accommodation gradually and could hike rates three times this year. In addition, with Friday’s uptick in wage growth, inflation talk is now picking up steam

At present, the annualized Core PCE, the Fed’s favorite inflation gauge, is still at a low 1.5%, below the central bank’s target range of 2%. Chicago Fed President Evans feels rate hikes should be put on hold until midyear with just a hint of inflation in the economy. Low inflation and waiting to see the tax reform impact could put a few rate hikes on hold.

Mortgage rates edged higher in the latest week though they still remain just above all-time lows. Freddie Mac reports that the 30-year fixed-rate mortgage jumped 10 basis points to 4.32% with an average 0.5 in points and fees, up 33 basis points since the start of the year. Mortgage rates are now at the highs seen in April 2014. Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage.