Like a broken record, investors continue to focus on the impact of slower economic growth and falling equity markets in China as China’s Shanghai Index fell into bear-market territory with a 20% decline.
A slowing Chinese economy also results in less demand for oil, and lower consumption of crude oil in China coupled with the current global oversupply is a recipe for lower oil prices, a weaker stock market, and a more fragile junk bond market. Crude prices continued to fall with a decline below $30 to close at $29.70 per barrel on Friday and this is weighing on the debt of energy companies.
The Wall Street Journal is reporting that as many as one-third of all U.S. oil and gas producers could be in danger of declaring bankruptcy by the middle of 2017 if crude oil doesn’t soon rebound to at least $50 per barrel. A number of investment banks have said crude oil could continue lower to near $20 per barrel before eventually moving higher.
Should crude oil continue on its journey toward $20 per barrel, it would continue to put a huge strain on a junk bond market that holds a substantial amount of debt from independent oil and gas companies. The junk bond ETFs, the SPDR® Barclays High Yield Bond ETF and the iShares iBoxx High Yield Corporate Bond ETF, both traded to multi-year lows on Friday.
Historically, the junk bond market has acted like a canary in a coal mine as far as the stock market is concerned. Declines in the junk bond market often warn of an impending selloff in the stock market. Below is a November 2015 chart comparing junk bonds to the NASDAQ Composite (from Bloomberg). The divergence seen between junk bonds and stocks posed a somber warning to equity investors who took a look at this. As we now know, divergences such as these do not end well.
In a back-loaded week of economic news, the Producer Price Index, the N.Y. Empire State Manufacturing Index, Retails Sales, Industrial Production, and Consumer Sentiment were all reported on Friday.
The Producer Price Index (PPI), which measures inflation before it reaches consumers, fell 0.2% in December after a 0.3% increase in November. Over the past 12 months, the PPI has declined 1%. When excluding volatile food and energy costs, the so-called Core PPI crept 0.1% higher in December. Over the past 12 months, the Core PPI is up a miniscule 0.3%. This absence in inflationary pressures may delay future Fed rate hikes.
The Federal Reserve Bank of New York released a disaster of a manufacturing survey for the New York Region. The N.Y. Empire State Manufacturing Index plunged to -19.4 in January indicating manufacturing production in the region has contracted rather severely, and calls into question the health of the economy. The index has been below zero since July and this reading is the lowest since the last recession in March 2009.
Retail Sales fell a seasonally adjusted 0.1% during December to $448.1 billion after having grown by a solid 0.4% during November. The consensus forecast called for a +0.1% increase in sales. For the entire year, Retail Sales recorded a modest 2.1% gain, its lowest gain since 2009.
Industrial Production declined 0.4% in December compared to an expected reading of -0.2%. The decline was attributed to cutbacks in mining and utilities. For the fourth quarter, Industrial Production declined at a 3.4% annual rate. Meanwhile, Capacity Utilization for December was reported at 76.5% and was lower than the consensus forecast of 76.9%.fell more than expected, declining for the third month in a row in connection with the unusually warm temperatures and low commodity prices.
The University of Michigan’s Consumer Sentiment Index rose to a greater than expected reading of 93.3 in January from 92.6 in the preliminary January reading as lower inflation lifted consumer spending plans. The consensus had been for a reading of 92.6. The Current Conditions sub-index dropped 3 points possibly pressured by China’s gloomy outlook. The survey showed consumers expected the lowest wage gains in a year, but this was offset by expectations of a lower inflation rate.
Elsewhere, the Mortgage Bankers Association released their latest Mortgage Application Data for the two weeks ending January 1 showing the overall seasonally adjusted Market Composite Index increased 21.3%. On an unadjusted basis, the Composite Index increased by 76% week over week. The seasonally adjusted Purchase Index increased 18.0% from the prior reporting period while the Refinance Index increased 24.0%. Overall, the refinance portion of mortgage activity increased to 55.8% of total applications from 55.4%. The adjustable-rate mortgage segment of activity increased to 5.1% of total applications from 4.7%. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 4.20% to 4.12%.
For the week, the FNMA 3.5% coupon bond gained 7.8 basis points to end at $104.00 while the 10-year Treasury yield decreased 7.8 basis points to end at 2.037%. Stocks ended the week with the Dow Jones Industrial Average falling 358.37 points to end at 15,988.08. The NASDAQ Composite Index dropped 155.22 points to close at 4,488.42, and the S&P 500 Index lost 41.70 points to close at 1,880.33.
Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 8.99%, the NASDAQ Composite Index has lost 11.56%, and the S&P 500 Index has lost 8.70%. This past week, the national average 30-year mortgage rate decreased to 3.84% from 3.94% while the 15-year mortgage rate fell to 3.12% from 3.19%. The 5/1 ARM mortgage rate decreased to 3.05% from 3.07%. FHA 30-year rates fell to 3.50% from 3.63% while Jumbo 30-year rates decreased to 3.68% from 3.75%.
Mortgage Rate Forecast with Chart
For the week, the FNMA 30-year 3.5% coupon bond ($104.00, +7.8 bp) traded within a 77 basis point range between a weekly intraday high of 104.19 and a weekly intraday low of $103.42 before closing at $104.00 on Friday.
After a monthly coupon re-pricing on Monday, the bond stepped its way higher throughout the rest of the week culminating in an upward gap or “rising window” opening on Friday as panic selling gripped the stock market. The bond then traded above resistance at the 23.6% Fibonacci retracement level located at $104.15 before pulling back. The pull-back from Friday’s intraday high price created a “shooting star” candlestick, a potential reversal signal indicating lower prices in the near future. Support is now located at the 200-day moving average at $103.75.
The slow stochastic oscillator is showing the bond is “overbought” and susceptible to a turn lower in price. Unless the stock market continues to sell-off this coming week, we could see bonds pull back toward support as traders lock in some profits. Should this happen, we could see mortgage rates edge slightly lower.
Chart: FNMA 30-Year 3.5% Coupon Bond
Economic Calendar – for the Week of January 18, 2016
The economic calendar provides us the latest insight into the housing sector with the release of the NAHB Housing Market Index on Tuesday; the MBA Mortgage Index, Housing Starts, and Building Permits on Wednesday; and Existing Home Sales on Friday. Of particular interest to the markets will be the Consumer Price Index and Crude Oil Inventories reports on Wednesday and the Philadelphia Fed Manufacturing Index on Thursday. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.
Road Signs – We Can Have Anything We Want!
By Daniel Blanchard
We can have anything we want, if we want it bad enough, and are willing to pay the price. That’s great news, isn’t it? So the world is our oyster after all, right? This is awesome! So let’s go get what we want!
Wait. Hold on a minute. This sounds too good to be true, doesn’t it? If we can have anything we want, then why don’t more of us already have what we want? Well, after some pondering I think the real issue here is that most of us haven’t really figured out what we truly want.
You see the challenge here is that we all have been programmed to think and live our lives in a certain way by others from the moment we are born until the moment we die. Please think about this for a moment. We’re brought into this world and if we aren’t crying loud enough then someone slaps our little behinds to make us cry out louder. As we grow up our parents tell us what to do and what we should want followed by our siblings telling us. Next, our teachers, coaches, friends, and eventually our spouses and then the needs of our own children vastly influence what we should think and want.
In retrospect, combine the above influences with the bombardment of messages we get from Hollywood and Wall Street and sadly, most of us haven’t really been given a chance yet to discover who we truly are and what we truly want.
We all need to reprogram ourselves more to our own liking. We need to find out what we truly want. After we have figured out for ourselves what we want, then we should WANT to do almost anything to get to that special place.
Now tweens, teens and parents, go learn, lead, and lay the way to a better world for all of us. Remember, we can have anything we want, if we want it bad enough, and are willing to pay the price. And once again, thanks in advance for all that you do, and all that you will do…
Award-winning author, speaker and author Dan Blanchard wants to you to get what you really want. For more secrets to success be sure to visit Dan’s website at: http://www.GranddaddysSecrets.com.