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The yield curve is now normal again across all maturities. If it wasn’t for the way the curve inverted, this would be a recessionary warning. There was a major selloff in the long bond on Thursday as there was positive news on phase one of the trade deal. It could be signed in early December. We wouldn’t be discussing this action if it was just in one day though. The long bond has been selling off for a few weeks now as the 10 year yield bottomed at 1.46% in early September and recently hit 1.96%. The short end of the curve hasn’t increased as much because the Fed stated it would need to see a big spike in inflation to hike rates. That implies no rate hikes in 2020. The Fed has changed course before, but that’s what is limiting the short end of the curve now. As you can see from the chart below, the difference between the 10 year yield and the 3 month yield has increased from about -50 basis points to 34 basis points.
The big question is what the rise in the 10 year yield means. Traditionally, it predicts higher nominal GDP growth. There has been a rise in both the breakeven inflation rate and the TIPS rate, implying inflation and growth expectations have increased since September. This could be because investors see global growth improving or because of the potential trade deal. Global stock markets have been outperforming the US stock market recently, so there is definitely increased optimism on global growth. Keep in mind, the S&P 500 is at a record high, so outperforming that is significant.
The 10 year breakeven inflation rate bottomed at 1.48% in October and was at 1.69% as of November 7th. The TIPS rate bottomed at -9 basis points in late August and was at 23 basis points as of the 7th. On Thursday, the nominal 10 year yield rose 11 basis points to 1.92% (biggest increase since Trump’s election). The real yield (TIPS) rose 8 basis points to 23 basis points and the breakeven rate rose 3 basis points to 1.69%. The majority of the rise in the 10 year yield on Thursday was caused by increased real growth expectations. This is a big positive assuming you don’t think the market is wrong. The expectations for rate cuts in 2020 have been declining in the past few weeks as optimism has taken hold. There is only a 49.7% chance of any cuts in 2020.
Housing Market Looks Good For Now…
In the week of November 1st, the MBA applications report showed yearly purchase applications growth was 7%. In the week of October 31st, which is the week of this report, the average 30 year fixed rate increased 3 basis points to 3.78%. The recent trough was 3.49% in September. In the week of November 7th, the rate fell 9 basis points to 3.69%. That decline won’t continue though as long rates have recently increased as we just discussed.
On the one hand, the chart below shows the comps are easy and will stay easy for the next few weeks. On the other hand, it’s good to see growth in the face of rising rates.
With the big spike in long rates on Thursday, demand for housing could come under pressure. Rates are still much lower than they were last year and all housing stats will face easy comps this fall, but on a sequential basis we could see weakening demand. Higher rates are especially problematic at a time when consumers view housing as unaffordable.
Only A Net 21% Say Now Is A Good Time To Buy A House
The Fannie Mae Home Purchase Sentiment index fell 2.7 points in October to 88.8. It’s up 3.1 points from last year. The net percentage of Americans who think now is a good time to buy a house fell 7 points to 21%. That’s despite low rates as housing is viewed as unaffordable. The net percentage who say now is a good time to sell a house fell 3 points to 41%. 20% more say now is a good time to sell than buy. The net percentage of Americans saying home prices will increase fell 2 points to 27%. It has been falling since June. Home price growth has been weak, but still positive. Growth can easily plummet further if the increase in long rates continues considering that people feel prices are unaffordable.
The net percentage of Americans who think mortgage rates will rise in the next year fell 2 points to -25%. The net percentage of Americans who aren’t concerned about losing their job increased 3 points to 72%. This goes against the negativity on future expectations of the labor market in the October consumer confidence Conference Board report. Finally, the net percentage of Americans who say their household income is significantly higher than it was 1 year ago fell 5 points to 16%.
Jobless Claims Are In A Historically Tight Range
Jobless claims have been in a tight range since this spring. The 12 week range of the 4 week moving average is only 5,000 as you can see from the chart below. Since the 1960s, the range has only been tighter in 1973 and 2017. Volatility in claims spikes in recessions. Not only are claims low, they aren’t moving. This is the opposite of a recession. Jobless claims in the week of November 12th fell from 219,000 to 211,000. That was 4,000 below the consensus. The 4 week average rose just 250 to 215,250. Continuing claims rose 2,000 to 1.692 million and the 4 week average was unchanged at 1.687 million.
Conclusion
The 10 year yield has been increasing which has been steepening the curve. The increase is due to higher real growth estimates and higher inflation estimates. In other words, nominal GDP growth is expected to rebound in 2020. There is very little evidence real growth will be strong in Q4 2019. The MBA purchase applications index improved, but demand might wane because of the rise in rates. Americans view housing as unaffordable which is why 20% more see it as a good time to sell than a good time to buy. Not only are jobless claims low, they haven’t been moving much at all. This is very far from recessionary as claims usually spike and are volatile in recessions.
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