Uncertainty continues to creep into the economic picture as investors try to balance fear with optimism. While there are signs that the economy is still strong and growing, there are also plenty of warning signs and economic pressure within the stock market about a potential recession.
The latest development to rock equities was President Trump’s tweet threatening hit Mexico with 5% tariffs on all imports starting June 10. That tariff would then increase to 25% in October unless Mexico stops “illegal migrants” from coming into the United States.
Yield Curve Inversion
This week we saw another yield curve inversion with the 3-month note yield rising above the 10-year Treasury note rate. This time, the separation was the largest since the financial crisis.
Typically, investors and analysts look at yield curve inversions as a predictor of a recession. The one that they believe is the key indicator is the difference between the 10- and 2-year notes. That inversion has continued to stay positive albeit flatter than investors would like. Right now there is a 16 basis point difference between the two yields.
The trade war with China has continued to bring volatility to equities with the S&P 500 seeing the hardest hits. This month alone, the S&P has lost 4%.
A Volatile Stock Market
Once again we are seeing the silver lining of a volatile stock market in the form of interest rates moving lower. The 10-year Treasury note yield continues to drop, closing at 2.168% in early Friday trading. That puts it down another .15% for the week. It started the month with a yield of 2.50%.
Mortgage Rates Going Down
Mortgage rates are being pushed down because of it. This week’s Freddie Mac average on a 30-year fixed rate mortgage was 3.99%. That’s the first time rates have dropped below 4% since January of 2018. The chart below from Freddie Mac shows the path of interest rates on 30-year, 15-year and 5/1-year ARM.
Credit Suisse equity strategist Patrick Palfrey sees this as a sign that the economic outlook isn’t positive. “Interest rates are a barometer of what future expectations are,” said Palfrey. “It’s a good gauge of what investors are focused on. If interest rates are falling, it’s likely the outlook is less bright.”
This ongoing trade war has also put more pressure on the Federal Reserve’s patient stance on rates. Many bond investors are taking the position that further signs of economic weakness or downturn will force the Fed to lower rates.
Adding to the equation was first quarter real GDP growth being revised down by one-tenth to 3.1%. This development was in line with expectations. But when you exclude trade, inventories and government spending, the economy grew at a rate of 1.3%. The economy is expected to mark 10 years of expansion in July which would be the longest streak on record.
The Fed is basically working a balancing act right now between a preemptive move or a too little too late attack. “There’s a cost to the Fed moving rates around a lot,” said Minneapolis Fed President Neel Kashkari. “We can add our own uncertainty and volatility to the markets and the economy.”
Mortgage Rates Keep Falling – Click Here for Part 2
ABOUT THE AUTHOR: MOVEMENT STAFF
The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement’s staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.
For more useful tips and mortgage information, contact Pam at Movement Mortgage today by visiting her website. You can also visit her at 7773 S. Suncoast Blvd., in Homosassa, Florida. Call her directly at (352) 634-0716.
Courtesy of Pam Cleary, Branch Manager, Movement Mortgage.
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