Market Update as of November 7, 2018

Impact of Mid-Term Elections So Far
The people have spoken and so far, the markets like (not love) the split Congress!  With the Dems seizing control of the House of Representatives, it’s going to be very difficult for the GOP to push through more of the big ticket fiscal changes on Trump’s agenda.  Further tax cuts weren’t a huge priority anyway, but the House victory does alleviate a lot of the risk as it pertains to federal fiscal policy changes.  The markets like a split Congress.  Equity futures point to a higher open today – the DOW is up 130 points, along with every other equity index around the globe.  Bonds like it too – mortgages are opening 6 tics higher (~ 20bps).

Interest Rates Highest Since 2011
Interest rates are facing upward pressure as bond markets brace for the government’s sale of $37 billion 3yr notes today, $1 billion more than last month.   Throw in a 25bps increase in rates by the Fed next month and interest rates are at the highest levels since early 2011.  In terms of supply, the outlook doesn’t get much better with additional Treasury auctions of 10yr and 30yr notes later this week; in all, the US Treasury will issue $83 billion worth of new supply this week.  As investors figure out how to absorb the glut of supply, purchases have been declining from overseas central banks. Economic data picks up later in the week, with the Fed Rate Decision on Thursday, followed by PPI, UMich Consumer Sentiment, and Wholesale Inventories on Friday. 

Employment Situation
Job growth blew past expectations in October and year-over-year wage gains jumped past 3 percent for the first time since the Great Recession, the Labor Department reported Friday. Nonfarm payrolls powered up by 250,000 for the month, well ahead of Refinitiv estimates of 190,000. The unemployment rate stayed at 3.7 percent, the lowest since December 1969. “The job market is doing remarkably well, particularly this late in the expansion,” said Jim Baird, partner and chief investment officer for Plante Moran Financial Advisors. “This report adds yet another data point to a narrative that has been positive for the labor market this year. Little seems to stand in the way of the economy finishing 2018 out on solid footing.”

Corporate Profit Might Peak Soon
Corporate earnings have been on a tear that soon will end, and history suggests a rough road ahead for the stock market. S&P 500 profits collectively are on pace to rise 25 percent for the third quarter, which would keep them in line with the results from the previous two reporting periods in 2018, according to CFRA and S&P Capital IQ. The fourth quarter is estimated to see a 17.5 percent increase. For the full year, that would mean earnings gains of some 17.5 percent for the large-cap index. However, that looks to be end of double-digit gains for the near future. 2019 is expected to yield a 9.3 percent gain that, while still substantial, indicates a considerable slowdown as well. "Not surprisingly, investors also wonder if EPS peaks have historically coincided with equity price sell-offs," Sam Stovall, chief investment strategist at CFRA, said in a note. "The unfortunate answer is yes."

Mortgage Apps Down
Mortgage lenders were less busy last week, even as interest rates held steady. Unlike rates, the stock market saw wide swings, mostly lower, and that may have spooked homebuyers. Total mortgage application volume fell 2.5 percent last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 16 percent lower than a year ago, when mortgage rates were nearly a full percentage point lower. Mortgage applications to purchase a home, which are less sensitive to weekly interest rate moves, fell 2 percent for the week and were 0.4 percent lower than the same week in 2017. That’s the first annual drop since August. “Purchase applications may have been adversely impacted by the recent uptick in rates and the significant stock market volatility we have seen the past couple of weeks,” said Joel Kan, an MBA economist.

Courtesy of Sotheby's International Realty's in-house Lender Simon Atik, 310.880.8414, Simon.Atik@grarate.com, Vice President of Mortgage Lending, Guaranteed Rate Affinity.

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