Mel's Blog

A Sobering Week on Wall Street

January 13th, 2015 9:41 AM by Mel Samick

It was quite a sobering start to last week on Wall Street as many traders and investors returned from their holiday hiatus. The Dow plunged over 250 points in mid-day trading last Monday as stock markets around the world fell sharply. The main culprits of market jitters were falling oil prices and the souring global economy. Crude oil now trades at about $50 and even dipped briefly below that level last Monday, another psychological threshold for the market. Experts now predict oil could go as low as $40 or even $30 a barrel. The dramatic fall in the price of oil which has tanked around 50 percent since mid June has been due to weak demand, a strong dollar and booming U.S. oil production, according to the International Energy Agency. While that's great for U.S. consumers, who are enjoying gas prices of $2 or less, there comes a point when sustained low prices begin to really hurt energy company stocks and jobs in the U.S. and other countries around the world.

With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact. The two primary factors that impact the price of oil are supply/demand and market sentiment. As demand increases (or supply decreases) the price should go up and vice versa. The price of oil as we know it is actually set in the oil futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of the transaction on the specified date. The following are two types of futures traders, hedgers and speculators. An example of a hedger would be an airline buying oil futures to guard against potential rising prices. An example of a speculator would be someone who is just guessing the price direction and has no intention of actually buying the product.

Private sector job creation popped in December, with companies adding a better than expected 241,000 workers. The count topped economist estimates of 226,000 and helped continue a trend of solid aggregate job numbers. Additionally the number of Americans filing new claims for unemployment benefits fell last week, adding to signs of a strengthening labor market. Nonfarm payrolls increased 252,000 last month after a revised 353,000 jump in November, the Labor Department said last Friday. The unemployment rate fell 0.2 percentage point to a 6-1/2 year low of 5.6 percent. But a five cent drop in average hourly earnings after rising six cents in November, took some shine off the report. Wage growth has been frustratingly tepid and economists believe the Federal Reserve will be hesitant to pull the trigger on raising interest rates without a significant increase in labor costs.

The whole world is suddenly in love with the 10-year Treasury note, and for U.S. consumers that means lower rates on mortgages and other loans. Since the turn of the year, the 10-year yield has taken a surprising ride below 2 percent, and looks set to break the 1.87 percent yield it briefly touched in a mid-October selloff, as investors flock to safety. Average U.S. mortgage rates started the year by dipping to new lows, with the benchmark 30-year rate marking its lowest level since May 2013. This week the nationwide average rate on the 30 year loan fell to 3.73 percent from 3.87 percent the previous week. The average for a 15 year mortgage slid to 3.05 percent from 3.15 percent the previous week. The ongoing decline in mortgage rates would appear to be a benefit for prospective homebuyers but it hasn't yet enticed a meaningful number of buyers into the market.

The holiday season is historically slow in the mortgage business, but this time around it was particularly quiet.  For the week ending January 2, 2015, total mortgage application volume was down 9.1 percent from two weeks earlier, on a seasonally adjusted basis. Applications to refinance existing mortgages decreased 12 percent from two weeks ago while mortgage applications to purchase a home fell 5 percent. December is the slowest month of the year in the housing market, but there is more weighing on sales than just a winter chill. With a move that could potentially open the housing sector to 250,000 new homebuyers, last Thursday, President Obama announced plans to shave insurance premiums on some federally issued mortgages. The Federal Housing Administration (FHA), the government insurer of home loans, will lower its annual insurance premiums from 1.35 percent to 0.85 percent. "It couldn't come at a better time," said David Stevens, CEO of the Mortgage Bankers Association. "For the typical FHA applicant, the reduction in premiums means a savings of about $80 on their monthly payment," according to CoreLogic's chief economist, Sam Khater.

Investors are hoping the lower gasoline prices is putting more money in consumers' wallets for spending on apparel and other retail goods. Retail Sales will be reported on Wednesday. Earnings will be back in play in the days ahead, with financials front and center midweek as JPMorgan Chase and Wells Fargo report on Wednesday, a day before chip maker and Dow component Intel releases its quarterly results. Also, the volatility that has roiled the market and had the Dow Jones industrial average making triple digit moves for the past five sessions is likely to continue. Weekly Jobless Claims will come out on Thursday and Consumer Sentiment on Friday will impact the markets. Luckily there is an important football game on tonight to keep us distracted from this volatile market.

 Mel

Information provided by NYCB Capital Markets

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Posted by Mel Samick on January 13th, 2015 9:41 AM

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