Brexit & The U.S. Economy

<> on June 17, 2014 in Sao Paulo, Brazil. <> on June 17, 2014 in Sao Paulo, Brazil.

 

It happened.

The UK voted to leave the EU and thus started the process of what could be the formal disintegration the European Union. http://www.bbc.com/news/politics/eu_referendum/results

Spain, Portugal, Italy have started to discuss their own referendums to exit the EU increasing the uncertainty of what will happen next.

This uncertainty sent the world markets into a tizzy driving investors into a flight to quality, conservative investment meaning exiting stocks and buying back into the bond market.

As a consequence, the U.S. dollar got stronger and  oil prices fell.   But the Pound and European Stocks too the brunt of the damage.

A “must-follow” on twitter:

British Pound ETF: all-time low today on by far the highest volume day in its history (1.8 million shares).

British Pound 1

Black Friday across Europe: Euro Stoxx 50 Index suffers its worst decline in history, down 8.6% on the day.

EURO CRASH

What does all the economic drama abroad mean for the U.S. economy now?

Actually, not much!
As I mentioned, we did see the dollar  get stronger and oil prices fall. However, we are still well above the lows in oil prices. Unless the dollar really takes off, don’t expect to much action in oil and gas prices.

I also don’t expect much action in the bond market and mortgage rates.

As I have previously discussed,  the 10 year note, the major determiner of mortgage rates, hasn’t been able to really break under 1.60% area on a closing basis for years now.  In fact, the only previous world financial drama that caused a break in this line in the sand,  was the Spanish default fear trade of 2012.  Due to the BritExit action of last Friday, the 10-year closed at 1.57%.

Note the lowest closing yeilds for the 10-year note during some previous financial upheavals:
2015 – closing yield 1.64% = China Drama
2016- closing yield 1.64% = Oil Crash
2016- closing yield 1.56% = Bret exit fears
2016- closing yield 1.57% = Bret Exit aftermath

I’ll be keeping a close watch on the 10-year closes next week. If the bond market gets a close below 1.56% with follow through, then we can start talking about cycle low mortgage rates. However, until then expect more of the same.

(Chart below doesn’t include the closing level of Friday which was 1.57%)
10 year yield Logan

We have seen mortgage rates this low many times during this cycle. In fact, because of this,  many home owners have already refinanced to low rates.  Those who could refinance (had sufficient equity, etc)  have already done so.

From Calculated Risk
http://www.calculatedriskblog.com/2016/06/mba-mortgage-rates-drop-refi-apps-jump.html

MBARefiJune222016

Of course, there will  always be some refinance market for those home owners  that are looking for cash out loans, to remove PMI (mortgage insurance fees) and to combine first and second mortgages — but these are a smaller subset of the refinance market.   Big moves in the refinance markets will needs more downside in mortgage rates then we have seen so far. We would need to see another .50% – 0.75%  downward move in rates in order to get another big boom in refinances like we saw in 2012.
For the purchase market,  purchase application demand has been soft in this cycle, regardless of where rates have been. Purchase application seasonality has already kicked in for 2016. We are seeing 25% growth  in purchase applications this year compared to  last year during the key heat months.  The heat map shows most of this activity occurred from the 2nd week of January to the first week of May, so the major activity is over now for the year.  Nevertheless, we saw good growth, year over year, but some perspective is needed; this growth only brought us back to 1998 levels. Due to U.S. demographics, we shouldn’t expect major growth in  housing until years 2020-2024.

MBAJune222016

For the rest of the US economy, beware the doomsayers!

Remember all those Great Recession II advocates from January of this year? Granted, many of these people are vested in some trade and therefore say what ever is necessary to push it– but there are other economic ideologues who seem to love to portray America as a failed and desperate economy (you Gold Bugs & MMT crowd know who you are!)

On my facebook page where I post economic updated charts daily, I have had many battles over the years against the Perma Bear Crowd!

https://www.facebook.com/Logan.Mohtashami

In the last few years I have fought back against  these recession predictors and am sorry (not really!)  to say that their ability to forecast the economic status of the country is significantly  tainted by their own  political, economical, investment and ideology agenda.
The data, however, tells a different story:

1. LEI ( leading economic indicator)
She looks tired and has been hit by the strong dollar, but she isn’t recessionary at all.

From Doug Short:
http://www.advisorperspectives.com/dshort/updates/Conference-Board-Leading-Economic-Index

CB-LEI

2. Unemployment Claims

Unemployment Claims  are no where near the 4 week moving average of  323K print-  which is my first red flag for a recession call.  If we unpack this a bit we see that the world has been in a slow down since 2011. We have had a commodity and oil crash and we have had multiple world economic  crises  since 2011.  But none of this  has resulted in an increase in unemployment claims other than  the Sandy Flood. All the doom and gloom predictions  we have heard from the  financial websites, twitter,  MMT, Gold Bugs and the Anti Fed crew,came to nothing, even with the world economic slow down. The dollar never collapsed and interest rates never got higher that 3.04 on the 10-year. There was no mass collapse of the U.S. economy due to the oil crash.

From Doug Short:
http://www.advisorperspectives.com/dshort/updates/Weekly-Unemployment-Claims

weekly-unemployment-claims-since-2007 (1)

3. JOLTS  ( Job Openings & Labor Turnover Survey)

The JOLTS data shows that there are still almost 5.8 million job openings in many sectors of the U.S. economy.  When we look at the size of the prime age labor force,  we are missing roughly 2.8 million workers( Ages 25-54) compared to the size of the labor force during the peak of the housing bubble. The jobs are available,   but do we have the people with the right skills in right areas, to fill them?

From Doug Short:
http://www.advisorperspectives.com/dshort/updates/JOLTS-and-the-Business-Cycle

JOLTS-overview

While I don’t expect the economic drama in the rest of the world  to send the U.S. economy  into a recession, the challenges are real so I don’t expect a booming cycle for us  either.   In my 2016 housing & economic prediction article from January I reduced my low end GDP outlook to a 1.9% and reduced my jobs out look to 190K jobs a month to account for these challenges.
https://loganmohtashami.com/2015/12/28/2016-housing-economic-predictions/But, make no mistake: The U.S. economy is the best economy in the world.
We have:

– 154 Million working Americans

– 43 year low unemployment claims

– 5.8 million job openings

-An unemployment rate for college grads at a low 2.4%- The average combined income of full time working couples  is over 110K


http://www.bls.gov/news.release/wkyeng.t01.htm

To all those  Perma Bears friends on facebook: “You bet against the wrong country and wrong people! This is America!!!

Germany and Japan are old. France recently declared a economic state of emergency. China is dealing with the issues of their state capitalism model and with demographic issues. Brazil has major domestic political drama, inflation and other economic issues.Who has the most stable economy during  all this recent world drama? America does !

world-economy-gdp-voroni-a7d4

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987.