Equities took a nosedive earlier this week as the U.S. dollar strengthened to a 17-month high. A strong dollar is good for those importing foreign goods like cars or people looking for a strong exchange rate when traveling abroad. Conversely, a strong dollar weakens the value of domestic goods and is detrimental to profit for U.S.-based companies.
As the dollar rises, a shakeup in Brexit has caused the Sterling (pound) to plummet. The value of the Sterling dropped by 2 percent in the wake of key ministers, including U.K. Brexit Secretary Dominic Raab, leaving their positions during negotiations.
The dollar is also being affected by continued trade talks with China. Reuters reported earlier this week that China had sent a written response to U.S. demands on tariffs. President Trump is expected to meet with China’s President Xi Jinping at the G20 Summit at the end of this month.
Globally, a strong dollar is not ideal. About 40 percent of the S&P 500 profit is generated outside the United States, so when the dollar gets stronger the risk to those profits increases. Some analysts believe that the U.S. economy cannot withstand a global slow down in profits.
As the dollar rises in strength, U.S. Bond prices have also gone up, mostly impacted by equities weakening and a growing concern for a global slowdown. The yield on the 10-year Treasury note to went down to 3.08 percent at noon Friday, the lowest level this month.
The CPI, or consumer price index, recorded a nine-month high in October as consumer goods like rent and gasoline rose in price. The Labor Department statistics show that the CPI rose by 0.3 percent in October compared to a 0.1 percent rise in September.
A key indicator of inflation, the core CPI measures the consumer goods that are less volatile, so things like food and energy are not included in this statistic. October’s core CPI increased by 0.2 percent, fairly in line with expectation. The Federal Reserve uses this stat to help determine whether interest rates need to go up to cool off the economy, or sink to spur growth. October’s core CPI rise, along with the largest annual wage growth increase in nearly a decade, will likely cement the Fed’s belief in raising rates this year and next.
To that end, Fed Chair Jerome Powell reminded us this week that he will meet with the press after all eight committee meetings next year and it’s possible that they will make changes to interest rates “live” instead of waiting to make an announcement. He wants investors to realize that rates could change at any time in 2019 in order to control inflation.
Retail sales surged in October as September numbers were revised down for the month. The Commerce Department numbers show that retail sales jumped by 0.8 percent in October with people buying more electronics and appliances. Compared to last year, retail sales have spiked by 4.6 percent. The numbers show that the American economy is still going strong despite issues with trade and also a sluggish housing market.
Rates holding steady
Mortgage rates held steady this week, averaging around 4.94 percent for a 30-year fixed-rate loan. Data from Freddie Mac’s latest market survey showed just a slight increase. However, compared to last year’s rate of 3.95 percent at this time, we are considerably higher. Lower oil prices contributed in part to the steady rates according to Freddie Mac Chief Economist Sam Khater.
Many analysts believe the higher interest rates, paired with tax reform that reduced the value of home mortgage interest deduction, are the main driving forces behind the waning housing market. However, the Mortgage Bankers Association forecasts that while 2019 will be sluggish, the market will pick up in 2020 and beyond. The MBA also believes it will be the Millennial generation that picks up the slack to revive the housing market.
Looking back at Bank of America’s Homebuyer Insights Report from early October, Millennials still believe that you have to put 20 percent down for a home and pay private mortgage insurance if you don’t have that down payment. The survey also showed that many renters still believe you have to have a perfect credit score to be considered for a mortgage.
Oil still a volatile bear
In one of the biggest declines in crude since the collapse in 2014, earlier this week the U.S. West Texas Intermediate crude price dropped below $56 per barrel. The 7 percent drop in prices had oil hitting its lowest point in a year, which extended the streak to 12 straight losing sessions.
Midweek, those prices bounced back, with Brent crude climbing back above the $60 per barrel benchmark. The reason for the bounce-back is belief that OPEC and non-OPEC countries will decide at their meeting next month to cut back on output. As a side note, an intriguing report this week shows oil analysts believe President Trump tricked Saudi Arabia into flooding the oil market to lower prices and make energy cheaper for Americans.
*There will not be a Market Update next Friday, Nov. 23. The blog will return on Nov. 30.