Brexit & The U.S. Economy


It happened.

The UK voted to leave the EU and thus started the process of what could be the formal disintegration of the European Union.

Spain, Portugal, Italy have begun 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 to 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.


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 primary 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 Brexit action of last Friday, the 10-year closed at 1.57%.

Note the lowest closing yields 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 homeowners have already refinanced to low rates.  Those who could refinance (had sufficient equity, etc.)  have already done so.

From Calculated Risk


Of course, there will always be some refinance market for those homeowners 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 need more downside in mortgage rates then we have seen so far. We would need to see another .50% – 0.75%  downward move in rates 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 a 25% growth in purchase applications this year compared to last year during the critical 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 significant action 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 a significant increase in housing until the years 2020-2024.


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

Remember all those Great Recession II advocates from January of this year? Granted, many of these people are vested in some trade. They, therefore, say whatever is necessary to push it– but other economic ideologies 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!

In the last few years, I have fought back against these recession predictors. I am sorry (not really!)  to say that their ability to forecast the economic status of the country is significantly tainted by their own political, economic, 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:


2. Unemployment Claims

Unemployment Claims are nowhere near the 4 weeks moving an 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 slowdown. The dollar never collapsed, and interest rates never got higher than 3.04 on the 10-year. There was no mass collapse of the U.S. economy due to the oil crash.

From Doug Short:

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 the right areas, to fill them?

From Doug Short:


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 assume a booming cycle for us either.   In my 2016 housing & economic prediction article from January, I reduced my low-end GDP outlook to 1.9% and lowered my job outlook to 190K jobs a month to account for these challenges., make no mistake: The U.S. economy is the best 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

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 an economic state of emergency. China is dealing with the issues of their state capitalism model and with demographic problems. Brazil has major domestic political drama, inflation, and other economic problems. Who has the most stable economy during all this recent world drama? America does!


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