March did not go quietly “out like a lamb” this year, with the impact of the COVID-19 pandemic evident in key labor sector reports. The Bureau of Labor Statistics reported 701,000 job losses in March, much worse than expectations, while the ADP report showed 27,000 job losses. Unfortunately, the latest Initial Jobless Claims filings broke another record, almost doubling the record figures from the previous week.
GDP is also feeling the impact. While the early estimates were for first quarter to be down by 6%, this has been revised to -9%. Meanwhile, second quarter GDP is expected to be down 34%. This is shocking and clearly spells a recession this year.
Also of note, the CARES Act is providing help for homeowners struggling with their mortgage payments. While this is great news, it’s important to understand key differences between mortgage forbearance and mortgage forgiveness, as explained below.
The Fed continues its asset purchase program, which includes purchases of Mortgage Backed Securities. Last week, the Fed bought enough MBS for market stability, but not too much, which is a positive development that can hopefully prevent problems for lenders, including margin calls.
Initial Jobless Claims Hits Record High … Again
The numbers are in … and, as anticipated, they aren’t pretty. Initial Jobless Claims showed that 6.6 million individuals filed for unemployment benefits for the first-time in the latest week. This was much higher than most estimates and almost double the previous report.
And these numbers will continue to climb, as New York only reported 366,000 claims and California only 878,000 in this report. These figures are obviously very low for those respective states and leads us to believe that many people have not filed yet in those areas but will.
Job Losses Roar On
The ADP Employment Report showed that there were 27,000 job losses in the month of March. Believe it or not, this was stronger than expectations, which were calling for 125,000 to 170,000 job losses. Unfortunately, this number will only get worse, as the figures were derived on the 12th of March or earlier, so the number does not fully take into account the effect of the pandemic.
Small businesses accounted for all of the reductions, slicing 90,000 from payrolls, with 66,000 of those reductions coming from companies that employ 25 people or less. Medium-sized businesses (with between 50 and 499 employees) added 7,000 jobs while big companies hired 56,000. Again, this has changed since March 12, and April’s report will more fully reflect this.
The Bureau of Labor Statistics (BLS) reported that there were 701,000 job losses in the month of March, which was much worse than expectations of approximately 150,000 losses. Let’s unpack what this means.
There are two reports within the Jobs Report: the Business Survey where the headline job number comes from and the Household Survey where the Unemployment Rate comes from. The Household Survey also has a job loss component.
There is a fundamental difference between these two surveys. The Business Survey is based predominately on modeling, while the Household Survey is done by actual phone calls to homes, meaning it may be reflective of actual job losses.
Why is this significant? While the headline number from the Business Survey showed 701,000 losses, that figure is likely very understated. Remember that there have been 10 million individuals who filed for unemployment benefits over the past 2 weeks – so the losses have to accelerate. Meanwhile, the Household Survey showed that there were almost 3 million job losses.
The Household Survey also reported that the Unemployment Rate increased from 3.5% to 4.4% but keep in mind that over 1.6 million people left the labor force. The Unemployment Rate would have been much higher if we didn’t have so many people leave the labor force.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, increased from 7% to 8.7%.
Rounding out the report, average hourly earnings increased from 3.0% to 3.1% on an annual basis, probably because lower-paid workers were cut first. Hours worked, however, fell by 0.2 hours. The more important weekly earnings figure, which takes this into account, was down from 3% to 2.2%.
The labor sector is certainly feeling the brunt of the pandemic, and upcoming reports will likely show this even more, once the data fully reflects the virus in full swing.
Take “CARE” Regarding Forbearance
The Government has created the CARES Act to assist homeowners whose income may have been adversely impacted by the COVID-19 virus. This includes the possibility of mortgage forbearance.
However, mortgage forbearance and mortgage forgiveness are not the same thing. Forbearance means that the payments will be suspended for a short period of time, initially up to six months, and then payments will need to be caught up when the forbearance period is over.
Think of it this way. When you buy something at a furniture store, for example, that offers “no payments” for three months, you still must pay for the furniture – the payments are just deferred.
Mortgage forbearance can have dangerous consequences if borrowers fail to catch up on their payments. Lenders can enforce their right to be paid, which ultimately could lead to foreclosure, and borrowers could lose all the equity in their home in the process. That’s why forbearance is designed to help those as a measure of last resort.
Housing Data to Note
Housing data that was reported last week still reflects a pre-virus environment. The Case-Shiller Home Price Index is considered the gold standard for home appreciation and features several important indexes, including the National Index which covers all nine U.S. Census divisions and reported a 3.9% annual gain in January. This was an increase from 3.7% in December. Meanwhile, the 20-city Index increased from 2.8% to 3.1% on an annual basis, with Phoenix (6.9%), Seattle (5.1%), and Tampa (5.1%) leading the gains. Due to the lag time of the report and the impact of the pandemic on the economy, this reading has much less significance than it typically does.
Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were up 2.4% in February. This reading was much higher than the -1.6% expected. Sales were also up 9.4% annually, which is the highest pace in 3 years. Unfortunately, many of these signed contracts may have to be cancelled, but it’s currently unclear the amount and details.
However, NAR’s chief economist, Lawrence Yun said, “Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals.”
Family Hack of the Week
Many people are missing social outings with friends and family, but thanks to the various social gathering platforms, a virtual dinner and a movie or game night together is still possible. Here are some simple tips for having a virtual night in with loved ones near and far.
Pick a social platform that works for everyone. Some easy-to-use options include Zoom, Skype, FaceTime or Google Hangouts. There are plenty of tutorials available for people new to the platforms.
Next, choose a menu that’s easy enough for everyone to make, and doesn’t require too much prep time. This will let you plan to connect on screen ahead of time with appetizers or for “happy hour.” Consider making it a theme or costume night, which can be fun for kids and adults alike. For example, have everyone dress in 80’s clothes or, if you’re planning to stream a movie together after dinner, the meal and attire can be tied into the movie.
Staying connected is so important right now, and these simple ideas for virtual hangouts can help.
What to Look for This Week
Most importantly, we will be looking for updates on some of the studies underway for drugs with a therapeutic response to COVID-19, like Azithromycin and Hydroxycloroquine. We stand hopeful and optimistic.
On the economic news front, Initial Jobless Claims will be the focal point again when it releases on Thursday. Unfortunately, it’s likely to be another whopping, record-setting number.
Inflation reports will also make headlines, as wholesale inflation for March will be reported via the Producer Price Index on Thursday, while the Consumer Price Index follows Friday. We should expect inflation numbers to move lower in these reports and moving forward. This would only make sense because starting in March, which these reports measure, and beyond there really has not been any pricing pressure that would lead to inflation. Inflation happens when you have too many dollars chasing too few goods, causing prices to rise. We are not seeing that, as demand has fallen due to the coronavirus. Expect inflation to turn negative month over month, if not in these reports, then soon.
In addition, there will be a 10-year Note and 30-year Bond Auction, which can influence the markets and tell us where traders believe yields will go. It’s also likely that the rampant volatility we have seen in the markets will continue, depending on the headlines regarding the pandemic.
Mortgage Bonds continue to trade in a wide range between support at the 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for Mortgage Backed Securities. Where MBS stand now, they are only about 80bp from this level. The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.
Help for many businesses and individuals is on the way as, after much negotiation, Congress passed and President Trump signed into law the massive $2 trillion dollar stimulus bill to stem the economic fallout from the Covid-19 pandemic. Among other things, the bill includes direct payments to individuals, expanded unemployment insurance and help for small businesses.
With weekly Initial Jobless Claims surging to a record high of 3.28 million individuals filing for unemployment benefits for the first time in the latest week, this relief will be a welcome glimmer of hope to many who have lost jobs and are fearful about paying their bills.
The Fed also said that it will continue its asset purchase program “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”
Economic data has taken a back seat to the current fallout from the pandemic, but of note, two important housing reports were released, New Home Sales and the Federal Housing Finance Agency Home Price Index. While data does not reflect the current environment, there is a key take away from both as explained below. Also, the Final reading of Q4 GDP, even though not important anymore, was reported at 2.1% as expected.
Trials are taking place on a combination of drugs that are thought to help cure the virus within 3-7 days. We will continue to watch for results.
What’s in the Coronavirus Stimulus Bill?
Here is a recap of how the Coronavirus Stimulus Bill will help families:
Direct payments will be sent to individuals making $75,000 or less of up to $1,200 ($2,400 for couples making up to $150,000) with an extra $500 per child. Assistance will start to phase out for people earning more than these amounts.
Unemployment benefits will be expanded, increasing by $600 a week for up to four months. People could also get an additional 13 weeks of unemployment if they remain unemployed after state benefits end.
Homeowners with federally-backed mortgages will be protected from foreclosures for at least six months.
Students with federal loans can suspend payments until October.
Businesses will also get assistance, with small businesses gaining access to a nearly $350 billion loan program to cover things like payroll, rent and utilities. The loans will not have to be repaid if businesses keep their employees. The help will be retroactive to February 15, 2020, giving employers a chance to bring back employees.
An additional $500 billion will be available to businesses in hard-hit industries. Companies that receive assistance will not be allowed to increase executive pay or buy back stocks. In addition, businesses controlled by the president, vice president, members of Congress and heads of federal agencies do not qualify for loans.
In the coming days, we should learn more about the timing and methods for these cash payments. President Trump has said he wants them distributed quickly.
Also of note, Treasury Secretary Steven Mnuchin announced that he has formed a task force of U.S. financial regulators to deal with the liquidity shortfall that mortgage service firms may face as countless homeowners stop making their monthly payments. This is an important and positive development for the mortgage industry during this time.
Initial Jobless Claims Hits Record High
The latest Initial Jobless Claims showed that there were a whopping 3.28 million individuals who filed for unemployment benefits for the first time last week. This was much higher than the 1.5 million consensus and even higher than Goldman Sachs’ estimate of 2.2 million.
One thing this volume does show was that, despite concerns, the unemployment system was able to handle many more claims than thought. With that being said, the real number is probably much greater than 3.28 million, as it’s likely all the claims were not processed.
The silver lining, as noted above, is the Stimulus bill extends the term of benefits to 39 weeks, an increase from 26 weeks, if needed. Filers will also receive an additional $600 per week on top of the normal benefits they would receive.
The Key Take Away From Housing Data
February New Home Sales were down 4.4% on a monthly basis, but that is due in part to January’s already strong report, which was was revised even higher from 764k units to 800k units. Factoring in the revision, sales of new homes were actually a little higher than the originally reported number for January. February sales were up a strong 14.3% when compared to February of last year.
While this data is not reflective of the current environment, it’s important to note how strong housing has been. Housing has been solid, both on the new construction front and from what we saw in last week’s Existing Home Sales report as well. This is meaningful because as we head into an inevitable slowdown, and housing may see a temporary downturn, this housing market can sustain it.
This is not a scenario like the last recession where the Housing Bubble brought us into recession and junk loans were being done. After a short downturn, we expect housing to continue to show the strength it showed prior to the coronavirus, which could be a great opportunity for many people once this is all over.
Similarly, the FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While there can be a one-million-dollar home with a conforming loan amount, for the most part, this report specifically represents more of the lower-priced homes. So it should be no surprise that this report was even hotter than Case-Shiller, showing that home prices rose 0.3% in January and 5.2% on an annual basis. The year-over-year reading was unchanged from the previous report and remained at extremely strong levels.
Again, this is just another report showing that we headed into the Covid-19 pandemic with a solid housing market that should be resilient.
The Latest Inflation News
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.1% for the month of February and remained at 1.8% on an annual basis.
The Core rate, which strips out food and energy prices and is the most important reading that we focus on, was up 0.2% for the month. Year-over-year Core PCE increased from 1.7% to 1.8%.
Also of note, February Personal Income and Spending showed that incomes were up 0.6%, which was better than the 0.4% expected. Spending was up 0.2%, which was in-line with expectations.
Again, all of this data is for February, before the coronavirus effects really took place. Expect inflation numbers to go down as there is no pricing pressure out there. In fact, there are concerns we could see deflation occur, which is a decrease in the general price level of goods and service.
Remember that inflation news is always important to monitor because it reduces the value of fixed investments. This includes Mortgage Bonds, to which home loan rates are tied. And PCE will be a very important report to watch as things recover, as demand could come back ahead of supply.
Look at it this way: Once things start to turn around, consumers will start having stronger demand for products and services and the supply of those goods and services will likely lag behind. That’s why, once we see a recovery starting, we could see temporary periods of higher inflation.
Housing Hack of the Week
Spring is officially here, which means it’s important to schedule some seasonal maintenance on your home. Here are just a few items to tick off your list as the weather starts to warm.
Keep bugs away by making sure there aren’t any standing areas of water in your yard, which can be a breeding ground for mosquitoes and other pests. Also, if you notice any areas where water could pool, add soil to prevent both bugs and flooding.
Clear any debris from gutters and make sure none are loose or leaking. Also, double check that downspouts will drain away from your foundation, which is especially important if you’re in an area known for spring showers.
Make sure your screen doors and windows are free of any holes or tears. Also, check your outside faucets, hoses and sprinklers for frost damage to ensure they will work properly.
What to Look for This Week
The labor sector will be in the headlines again, as the ADP Jobs Report for March releases Wednesday followed by the Bureau of Labor Statistics Jobs report on Friday. Thursday will bring the latest weekly Initial Jobless Claims and all eyes will be watching to see if another record is set.
Also, look for housing news via Pending Home Sales on Monday and the Case-Shiller Home Price Index Tuesday. In manufacturing news, Chicago PMI releases Tuesday while the ISM Index will be reported on Wednesday.
Expect market volatility to continue, as additional cities across the country could become new hotspots for the virus. Stay safe, be well and remember to keep practicing social distancing!
Mortgage Bonds are quite literally in uncharted territory as they set new all-time highs yesterday in reaction to the Fed’s purchases of Mortgage Backed Securities. The chart below shows how new all-time highs were set on several days, as well as new all-time closing highs. Unfortunately, the lower rates that should be associated with this are not being passed to the consumer because lenders are having capacity issues. There is just too much volume trying to be pushed down the system…And lenders / servicers have their own set of difficulties and they are getting crushed by the government’s new mortgage payment forgiveness and have to front the money.
The charts will once again this week take a back seat to the news headlines and updates on the potential for an effective treatment. Last week testing began on a combination of Hydroxychloroquine and Azithromycin, which has shown promising results in the French study. We are expecting to see results here as early as Wednesday…Fingers crossed.
The start of spring ushered in continued market volatility, with Stocks and Bonds both experiencing wild swings throughout the week. Trading was halted for 15 minutes on Wednesday when the markets plunged 7%, triggering a circuit breaker for Stocks. Typically, when Stocks fall, Bonds improve, but these are not typical times as we explain in detail below.
The housing sector reported positive data in the form of Housing Starts, Building Permits and Existing Home Sales…13-year highs in fact. While this normally would have been cause for celebration, these figures were for February and reflect pre-virus behavior. Expect this data to be very different in future reports this spring due to the ongoing effects of the Covid-19 virus.
The manufacturing sector, which was already slowing, has shown additional signs of weakness due to the virus. Both the Empire State and Philadelphia Fed Indexes for March came in much lower than expectations and February’s readings. Same for Retail Sales in February, which were lower than the gains anticipated. And Initial Jobless Claims spiked to a 2.5 year high and will unfortunately take another huge leg higher in this week’s report.
Ongoing Market Swings
Last week saw periods where both Stocks and Bonds declined. Typically, when Stocks fall, the Bond market is a safe haven for traders. This means that investors normally would take their money out of riskier assets during times of uncertainty and put them into the Bond market, which is considered safer, brining Mortgage Backed Securities and Treasuries higher in price and lower in yield or interest rate. But this pattern has been broken of late. Let’s unpack why-
The Stock market’s dive lower has resulted in a lot of margin calls. Remember that investors can margin their Stocks up to 50%. For example, if an investor opens a $50,000 margin account, they can purchase up to $100,000 of a marginable security. Margin accounts also require an amount of available cash or equivalent value known as a maintenance margin. If your Stocks value goes down, you may get a margin call, where you have to come up with cash. And it’s these margin calls that are causing many to dump everything, including Bonds and Treasuries, to come up with the money.
Additionally, the at least $1T in stimulus that the Fed is planning on rolling out has to be paid for. The way the Treasury raises money is by selling Treasuries. If you have much more supply of Treasuries coming onto the market, it will drive prices down and yields higher. Think about it – There is likely some demand for Treasuries already, but there is not enough to sop up the massive additional supply. There is an “equilibrium price” where demand will meet supply eventually, but it’s a lower price. Remember that Bonds have an inverted relationship when it comes to price and yield – As price goes down, yield goes up, and vice versa. The move higher in Treasury yields has caused yield in the overall Bond market to rise, including home loan rates on mortgages.
Oftentimes, a country’s debt suppresses interest rates, so one may wonder why the stimulus plan is not having that effect in this scenario. This holds true when there are manageable levels of debt acceleration – This is a shock to the system, flooding the market with a lot of paper. And while there are buyers, if there is more supply than buyers, prices have to drop to get the demand to come in.
Treasury Secretary Steven Mnuchin, who meant well, said if we don’t take some of the measures we are now, unemployment could hit 20%. The market looked at that and said will mortgages be paid? Will we have delinquencies or foreclosures?
Due to the strong housing market we have seen, people do have a good cushion and a lot of equity, which will help. But this is a job security and potential repayment issue and there may be a period of time that housing suffers a bit. If you are a creditor, like the Bond market, you have to take that risk and calculate that into your price.
These two reasons are why home loan rates have taken a move higher, even in the face of Stocks declining.
The latest Initial Jobless Claims report showed that there were 281,000 individuals who filed for unemployment benefits for the first-time. This was the highest figure in 2.5 years and was 70,000 higher than the previous report. Unfortunately, this is just the beginning and we expect these numbers to rise.
In fact, on Friday, Goldman Sachs estimated that the next Initial Jobless Claims report, coming this Thursday, will surge 2.25 million…which is quite alarming. For comparison’s sake, during the peak of the financial crisis, the most claims for a week was about 600,000. This would be almost 4 times that. If unemployment does significantly rise, home loan rates may have to move higher because there is greater repayment risk.
The best sign of a recession to come is a spike in the unemployment rate – and the first sign of rising unemployment is a spike in people filing for it. This is likely the first sign we are seeing and will 100% lead to a recession, if we are not in one already.
Interestingly, we don’t know we’re in a recession until about 6 months afterwards, because it takes time to get data to show that we had 2 consecutive quarters of negative GDP.
February Housing Data In the Rear View Mirror
Housing Starts, which measures the start of construction on a home, were down 1.5% in February, while January Starts (which were already a really strong number) were revised even higher by 4% to a 13-year high. Factoring in the revision from January, February Starts were really up 2%. Starts were also up 40% when compared to February of last year. Starts for single-family homes, which are really the life blood of the housing market, were up nearly 7% in February.
Building Permits, which are a good forward-looking indicator of Starts, were down 5.5%. But this is coming off a 13-year high as well, so a slight pullback could be expected. Year-over-year, Building Permits were up 14%. Single Family Permits were up 2%, which is again the most important component.
Existing Home Sales increased by 6.5% in February, coming in at a 5.770 M unit annualized pace. Supply was down 9.8% from a year ago and the median existing home price was $270,100, up 8.0% from a year ago.
However, all of these reports reflect pre-virus behavior.
We should expect that they will be very different in the months ahead due to the continued economic fallout from the virus.
Important Take Away About Builder Confidence
The National Association of Home Builders Housing Market Index dropped 2 points to 72 in March, which is still a strong measure of builder confidence. Breaking down the components of the index, current sales expectations fell 2 points to 79, sales expectations for the next 6 months fell 4 points to 75, while buyer traffic fell 1 point to 56.
The decline in sales expectations for the next six months stems from the economic uncertainty due to the Covid-19 virus. It’s also important to note that half of the builder responses in the March report were collected prior to March 4, so the recent stock market declines and the rising economic impact of the virus will be reflected more in next month’s report.
Also of note, 21% of builders in the survey reported some disruption in supply due to virus concerns in other countries such as China. However, the incidence is 33% higher among builders who responded to the survey after March 6, indicating that this is an emerging issue.
Family Hack of the Week
Looking for interesting but educational ideas to keep kids entertained at home? Many museums around the world offer great ways to explore things online. Here are some more details on just two of them.
The Smithsonian features a world of options for kids to learn online. They can meet the animals at the National Zoo, learning both fun facts about them and conservation status. The Science Game Center provides both games and apps to help kids learn about science while the Learning Lab has more than a million resources for kids to discover and learn about a whole range of topics. Click here to learn more: https://www.si.edu/kids.
Meanwhile the Metropolitan Museum of Art created #MetKids, “made for, with, and by kids and The Met!” Kids can explore The Met using an interactive map, watch behind the scenes videos, try out creative projects and even travel through 5,000 years of art in a time machine. Learn more at https://www.metmuseum.org/art/online-features/metkids/about.
What to Look for This Week
We’ll get more housing news Tuesday when New Home Sales for February are released. On Wednesday, look for Durable Goods Orders while Thursday brings Gross Domestic product for 4Q 2019 and, more critically, weekly Initial Jobless Claims. And on Friday, the Fed’s favorite measure of inflation, Personal Consumption Expenditures, will be delivered along with Personal Income and Personal Spending. The Consumer Sentiment Index for March also will be reported on Friday.
All of this data, with the exception of Initial Jobless Claims, is for the month of February and is in the rear-view mirror before the effects of the coronavirus were more realized. Expect volatility to continue and the markets to react sharply to any new updates or headlines. The technical analysis, which is normally included, is also taking a backseat to the news every day and will be left out in this issue. Be safe out there and do your part to practice social distancing.
The economic calendar may have been quiet, but the news and markets were far from calm. Fears regarding the Covid-19 virus caused two halts in trading, on Monday and Thursday mornings, while closures, travel bans and cases of the virus all grew. The markets swung wildly throughout the week, with huge one-day drops on Monday and Thursday, followed by a rally on Friday. On Friday afternoon, President Trump also declared a national emergency due to the virus.
Then, in a historic move on Sunday, the Fed slashed its benchmark Fed Funds Rates 100 bp to 0% to 0.25% in an attempt to help the economic slowdown caused by the Covid-19 virus.
Consumer and wholesale inflation figures for February were released via the Consumer and Producer Price Indexes, respectively. While inflation always has the potential to move the markets, the reports took a back seat to the volatility and uncertainty surrounding the virus and its continued impact on world economies.
This year, March Madness applies more to the markets than basketball, unfortunately. Volatility was rampant throughout the week, and it started Monday just after the markets opened. Stock trading was halted for 15 minutes, as happens when the market falls 7%. This was sparked by a plunge in oil prices due to tensions between Saudi Arabia and Russia over oil production.
On Thursday, trading was also halted for 15 minutes soon after the markets opened, with the Dow ultimately tanking 2,300 points. This was due in part to several events that happened Wednesday night related to the Covid-19 virus. The NBA suspended their season, there is a travel ban from Europe to the US, and airlines are cancelling a massive amount of flights. And even more closure and cancellation announcements due to the virus have since followed both here and abroad, including schools, major sports and arts venues and even some countries’ borders.
Thursday also saw European stocks close 11% lower, their worst one-day drop due to fears about the virus.
However, Stocks here in the US did manage to rally on Friday. Yet, the overall decline in just 16 days from the peak of the market to now is 28%! Over 20% decline means we are now in a bear market … that ends the Bull market that began in 2009.
Fed’s Historic Move
After the volatile week in the markets, the Fed made a historic move on Sunday, announcing a 100bp cut to its benchmark Fed Fends Rate to zero. This is the rate banks use to lend money to each other overnight so it’s important to note that this action does not directly impact mortgage rates on the interest rate cut.
The Fed also announced that it will do at least $700 billion in Quantitative Easing, purchasing at least $500 billion in Treasuries and $200 billion in Mortgage Backed Securities. Purchases begin Monday, March 16th with a $40 billion installment. The Fed will also stop the runoff of Mortgage Backed securities and Treasuries from its balance sheet…which no one is talking about. This is significant, and coupled with the purchases, will drastically reduce the supply.
The Fed also cut reserve requirements for thousands of banks to zero, and it cut the discount window from 1.25% to 0.25%. The Fed did this because of concerns about liquidity.
Note that the Fed was due to have its regularly-scheduled meeting Tuesday and Wednesday March 17-18, but the emergency meeting over the weekend replaces this.
On Monday, as a result, Stocks opened at “Limit Down”, meaning that they were stopped from opening any lower. The 10-year opened down 20bp to 0.77% and Mortgage Bonds rallied over 200 points.
February Inflation Not the Full Picture
February’s Consumer Price Index (CPI), which measures inflation on the consumer level, came in at 0.1% while the year-over-year reading decreased from 2.5% to 2.3%.
The more important Core rate, which strips out the volatile food and energy prices, was up 0.2% from January to February while it increased from 2.3% to 2.4% annually. This marks the 24th month in a row that Core CPI has been above 2%.
However, this report must be taken in content. Annual inflation will likely drop significantly due to oil prices dropping so precipitously. Also, the effects of the Covid-19 virus, which will likely lessen pricing pressures as businesses slow, will not be realized for a few months. Typically, when demand falls pricing falls, reducing inflation.
Meanwhile, the Producer Price Index (PPI), which measures inflation on the wholesale level, was weaker than expected in February. PPI was -0.6% from January to February, below the 0.0% that was estimated and decreased from 2.1% to 1.3% annually. The Core reading, which again strips out the volatile food and energy prices, was -0.3% for the month and year over year it ticked down to 1.4%.
Again, we will look to see the effects of the Covid-19 virus in future months as inflation will likely continue to drop.
There was some good news from the housing sector, as CoreLogic released their Loan Performance report for the month of December. Loans 30-days or more past due decreased from 3.9% to 3.7%, while seriously delinquent loans, which is defined as 90-days or more, dropped from 1.3% to 1.2%. Seriously delinquent homes in foreclosure were unchanged at 0.4%. Delinquencies remain near 20-year lows and we have seen even more of an improvement from great levels.
CoreLogic also released their equity report, showing that US homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $489 billion since the fourth quarter of 2018. This is an increase of 5.4% year over year. The average family with a mortgage had a $7,300 gain in home equity during the past year, and a total of $177,000 in home equity wealth.
Consumer Hack of the Week
The spread of the Covid-19 virus has, unfortunately, also brought a new wave of scams, ranging from products touted as miracle cures to fake charities set up to help those impacted by the disease.
Our friends at AARP shared these tips provide by the Federal Trade Commission and Securities and Exchange Commission to help you avoid any Covid-19 related scams.
First, be wary of anyone asking for money to help people diagnosed with the disease, especially if they want payment via prepaid credit cards. Also, it’s important to ignore any tips urging you to invest in hot new stocks related to vaccines for the virus and any product offers for cures. Vaccines take a long time to be thoroughly tested before coming to the market, and we will likely hear about them first from the CDC or World Health Organization.
Finally, browse carefully online as you search for the latest news and information. Scammers have already created fake Covid-19 hotspot maps that can download malware on your computer. Be sure to check any website URL and look for the secure symbol or padlock before browsing or downloading anything.
What to Look for This Week
We’ve got a busy week ahead with news from various sectors across the economy. First up are the latest manufacturing figures for March when the Empire State Index is reported Monday, followed by the Philadelphia Fed Index Thursday.
There will be news on housing Tuesday with the National Association of Home Builders Housing Market Index for March. On Wednesday, look for February Housing Starts and Building Permits, while Friday brings February Existing Home Sales.
February Retail Sales will also be reported Tuesday, while the latest Initial Jobless Claims releases Thursday, as usual.
All of these reports may take a back seat to the continued market volatility we’ve seen due to Covid-19 virus fears.
Technical Analysis Breakdown
Technical analysis will likely take a back seat due to the extreme moves in the market relating to the coronavirus, but they still have some importance. Towards the end of the day on Friday, Mortgage Bonds were able to climb above their 50-day Moving Average and Fibonacci level of 100.411. They are now in a new range with the next ceiling at 101.076, which is the 25-day Moving Average, with the aforementioned two levels now acting as support. The 10-year ended the day at 0.98%. Yields are in a massive range and have room to move higher until reaching the next ceiling at 1.087%. If they start moving lower, potentially fueled by a rate cut next week and some Bond friendly news, there is a significant amount of room to the downside technically speaking.
They say March comes in like a lion, and last week’s headlines certainly caused the markets to roar with volatility. Stocks saw wild swings and big losses, with the Dow opening almost 800 points lower on Friday alone. Meanwhile, Mortgage Bonds reached all time-highs last week, while the 10-year hit another all-time low of 0.70% Friday morning.
The ADP and Bureau of Labor Statistics (BLS) Jobs Reports were released for February. While both came in higher than expectations, the readings have to be taken with a grain of salt, given that the current fears about the virus weren’t as prevalent throughout last month.
The Fed took action, making an emergency cut to its benchmark Fed Fund Rate … and had the opposite effect than what was intended. More about that below.
February Job Growth Leads the Pack
The first of the week’s two job reports was released on Wednesday, and the ADP Employment Report showed that there were 183,000 new jobs created in February. This was stronger than the 170,000 to 175,000 job creations that were expected. However, January’s figures were revised lower by 82,000 to 209,000 jobs.
On Friday, the BLS reported that there were 273,000 jobs created in the month of February, which was much higher than the 177,000 expected. The figures for January and December were also revised higher by 85,000 new jobs: December saw an additional 37,000 jobs (from 147,000 to 184,000) while there were 48,000 more for January (from 225,000 to 273,000). This brings the 3-month average to 243,000.
Average hourly earnings decreased from 3.1% to 3.0% on an annual basis. The more important weekly earnings figure was also at 3%, up from 2.5%.
The Unemployment Rate moved lower from 3.6% to 3.5%. Remember there are two different surveys within the Jobs Report: The Business Survey, where the headline jobs figure is derived from, and the Household Survey, where the Unemployment Rate comes from. The Household Survey also has a job creation component, which said that there were just 45,000 new jobs created.
It’s always interesting to see the disconnect between the Business and Household Surveys. In addition to the small job creations in the Household Survey, the labor force decreased by 60,000. As a result, the unemployment rate dropped – but not exactly for the right reasons.
Additionally, notice the big disparity between the headline jobs figure and the figure in the Household Survey. The headline figure is done mostly by modeling, but the
household figure is derived from making phone calls to households. Because of this, it’s likely more indicative of where job growth really is – only at 45,000 versus the 273,000 in the headline.
The bottom line is that while these were strong reports for the labor sector, we don’t know the impact the coronavirus will have. The real question is how the coronavirus will impact future job growth, as we are not seeing its effects yet. There is a chance that we could actually shed jobs if companies slow enough. The next few months may be very different than the strong level of job creations we have been seeing.
Home Prices Roar Higher
Home prices rose 0.1% from December to January and 4.0% on an annual basis per CoreLogic. The year-over-year reading remained stable from last month’s report. Idaho (10.5%), South Dakota (9.3%) and Missouri (7.6%) saw the highest annual increases.
CoreLogic Chief Economist, Frank Nothaft, noted that, “January marked the third
consecutive month that annual home price growth accelerated in our national index, as low mortgage rates and rising income supported home sales. In February, mortgage rates fell to the lowest level in more than three years, which likely will spur additional home shopping activity and price appreciation.”
CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which is an acceleration from the 5.2% forecasted in the previous report. This also marks the third month in a row that appreciation forecasts have moved higher. For point of reference, a 5.4% gain on a $300,000 home would translate to $16,200 in appreciation over the course of a year.
Fed Tries to Tame Volatility
On Tuesday, the Fed cut rates by 50bp in an emergency cut – and yet Stocks reacted negatively to this news. It’s important to take a step back and understand why.
Remember when the Fed cuts rates, they are not cutting mortgage rates like the media sometimes mistakenly reports. They are cutting the benchmark Fed Funds Rate, which is the very short-term rate that Federal Reserve Banks use to lend to each other. While cuts to the Fed Funds Rate can have an impact on the markets and home loan rates, it really depends if the cut is perceived as being inflationary or not.
If the cut is seen as inflationary, shorter-term rates can move lower, but longer-term rates like mortgage rates can actually move higher because inflation erodes the value of fixed investments like Bonds, especially long-term Bonds like Mortgage Bonds. And home loan rates are tied to Mortgage Bond performance.
What happened last week was different. The Fed cut rates in an attempt to help the economy and Stock market due to the coronavirus. But you can’t cure a virus with a rate cut…it’s not a vaccine.
The Fed’s action had an opposite affect than what the Fed wanted and Stocks moved lower because the cut shows the Fed has no clue what to do and they are in panic mode. The perception is that when the U.S. can more widely test for the virus, there will be an uptick in cases and there will be panic. People won’t go out to dinner, movies or other places and those businesses will feel it. This is why the Jobs Report for March may paint a very different picture than February’s when it’s released next month.
Travel Hack of the Week
The spread of the coronavirus has increased concerns about flying. If you have a trip coming up, the Chicago Tribune shares several steps you can take to disinfect your space on the plane.
Use disinfecting wipes to clean all the hard surfaces at your seat. This includes the seat belt buckle, TV screen (and remote if included), head and armrests, tray table, window screen, seat back pocket, and the air, light and flight attendant call buttons above your seat.
If your seat is leather or pleather, you can wipe that down as well. But it’s important to avoid using wipes on upholstered seats, as the dampness could spread germs instead of killing them.
Be sure to read the instructions on the packaging, which will note how long surfaces need to stay wet in order for the disinfectant to be effective. For extra protection, experts also recommend using a paper towel or tissue as a barrier between your hand and a touch-screen television if your seat features one.
What to Look for This Week
We’ll get a read on both consumer and wholesale inflation for February, beginning with Wednesday’s release of the Consumer Price Index (CPI) followed by the Producer Price Index on Thursday.
Inflation is always important to monitor because it reduces the value of fixed investments. This includes Mortgage Bonds, to which home loan rates are tied. Of note in January’s CPI reading, the Core rate, which strips out volatile food and energy prices, remained stable at 2.3% on an annual basis. This was just shy of an 11-year high and marks the 23rd month in a row that Core CPI has been above 2%.
Rounding out the week, Initial Jobless Claims will be reported Thursday, as usual, while the Consumer Sentiment Index will be released Friday. And the markets will certainly continue to react to the latest headlines regarding the coronavirus.
February may have ended with an extra day but that’s not the only “leap” in the news last week. Sales of new homes jumped 8% in January while Pending Home Sales reached their highest increase in two years. The FHFA and Case-Shiller indexes also showed home price appreciation was on the rise in December.
Inflation news was reported via Personal Consumption Expenditures, the Fed’s favorite measure, and it showed a slight uptick but no big leap in inflation. Meanwhile, the second look at Q4 GDP revealed that it remained stable at 2.1% and was in line with expectations.
The coronavirus continues to spread, with cases spiking in Italy, South Korea and Iran and the first case of unknown origin reported in Northern California, indicating a possible community spread of the disease. The CDC does not know how the patient contracted the virus. Stocks plummeted early in the week and by Thursday hit correction territory, which is defined as a move lower of at least 10%. Thursday also saw the Dow drop almost 1,200 points, marking the biggest one-day points decline in history. Mortgage Bonds have benefitted from this flight to quality trade, helping the home loan rates tied to them move lower.
New and Pending Home Sales Soar
Sales of new homes were up 8% from December to January, coming in much stronger than expectations. And that’s not even the whole story! December’s reading was revised higher by 2%, so when factoring in the revision, sales were really up 10%. Sales were also up 19% when compared to January of last year.
The median home price was reported at $348,200, which was up 14% on an annual basis. Remember – this is the median price not appreciation (more on that below). The estimate of new houses for sale at the end of January was 324,000, which represents a supply of 5.1 months at the current sales rate, just below the 6-month level seen as normal.
Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were up 5.2% in January. This reading was almost double expectations and the second highest figure in two years. Pending Home Sales were also up 5.7% annually.
Home Price Appreciation Also Elevates
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, was released for December. Of its various indexes, we pay most attention to the National Index and the 20-city Index.
The National Index, which covers all nine U.S. Census divisions, reported a 3.8% annual gain in December. This was a nice bump higher from the 3.5% gain reported in November. The 20-city Index increased from 2.5% to 2.9% on an annual basis. Phoenix (6.5%), Charlotte (5.3%), and Tampa (5.2%) led the gains, which were broad-based. Every city in the index saw gains for the second straight month.
It’s important to note that the Case-Shiller indexes take all homes into account. And while the levels of appreciation we are seeing are strong on all homes, they are even hotter for lower-priced homes because they are in the highest demand.
Meanwhile, the FHFA (Federal Housing Finance Agency) also released its House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While there can be a one-million-dollar home with a conforming loan amount, for the most part, this report specifically represents more of the lower priced homes. So it should be no surprise that the FHFA report was even hotter than Case-Shiller, showing that home prices rose 0.6% from November to December and 5.2% year over year. This was another big jump from the 4.9% annual reading reported the previous month.
Slight Uptick in Inflation
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), was released on Friday and showed that headline inflation increased 0.1% from December to January, and also ticked higher from 1.6% to 1.7% on an annual basis.
Core PCE, which strips out volatile food and energy prices and is the most important reading that we monitor, was also up 0.1% for the month. Year-over-year Core PCE also moved a notch higher, from 1.5% to 1.6%.
On the surface, the report gives the impression that inflation is still very tame. But a better gauge, as we have said before many times, is the Consumer Price Index, which is running much hotter at 2.5% on the headline and 2.3% on the core rate.
Inflation news is always important to monitor because inflation reduces the value of fixed investments, like Mortgage Bonds. And since home loan rates are inversely tied to Mortgage Bonds, this means that when Mortgage Bonds worsen, home loan rates increase.
Also of note, Personal Income and Spending figures for January showed that incomes were up 0.6%, which was double the 0.3% expected, while spending was up 0.2%, just below the 0.3% expected.
Health Hack of the Week
Washing your hands frequently is especially important during cold and flu season, and now more than ever given the news regarding the coronavirus.
But are you properly washing your hands?
The Centers for Disease Control share these five steps to follow. First, wet your hands with clean, running water (warm or cold). Second, apply soap and lather your hands by rubbing them together. Make sure you get the back of your hands, underneath your nails and between your fingers. Third, the step people often miss: be sure to scrub your hands for at least 20 seconds. Try humming the ‘Happy Birthday’ song twice if you need a timer. Fourth, rinse your hands under clean, running water. Finally, dry your hands using a clean towel or air dry.
Hand sanitizer with at least 60% alcohol can be an effective alternative if soap and water are not available. Check the label for the amount of sanitizer to use. Apply the product to one hand, rub your hands together making sure you cover all surfaces of your hands and fingers until they’re dry. This should also take about 20 seconds.
It’s also a good idea to avoid touching your hair or face frequently, and especially after touching surfaces in public.
What to Look for This Week
All eyes will be on the labor sector as the ADP report for February releases Wednesday, followed by the real headliner on Friday: the BLS (Bureau of Labor Statistics) Jobs Report.
January’s BLS report showed that 225,000 new jobs were created, much higher than the 160,000 expected. November’s figure was also revised higher by 5,000 jobs (from 256,000 to 261,000) and December’s by 2,000 jobs (from 145,000 to 147,000), bringing the 3-month average to 211,000 new jobs.
Continued market turbulence could also be a factor, based on the latest news regarding the coronavirus and especially if there is any increase in community spread.
Technical Analysis Breakdown
Mortgage Bonds reached all-time highs at 102.35. This is uncharted territory – Bonds have pulled back slightly to 102.33, but the 102.35 level will act as the nearest ceiling for now. The 10-year is trading at 1.085%, just above the all-time low set earlier of 1.064%. As the Coronavirus spreads, Bonds will continue to move higher and the 10-year will likely break beneath 1% this week! When there is fear and uncertainty, money typically comes out of riskier assets like Stocks and gets placed into the Bond market – This is called a “flight to quality” trade.
The markets may have been closed Monday for Presidents Day, but the rest of the week brought a bevy of economic data. Housing news was at the forefront, with reports on January Housing Starts, Building Permits and sales of existing homes. And despite a slight drop from January, builder confidence remained strong in February per the latest National Association of Home Builders (NAHB) Housing Market Index.
But the manufacturing sector wasn’t left out of the headlines, as the Philadelphia Fed Index had its best reading in two years, while the Empire State Index also came in strong.
The markets are still wary of the coronavirus. Both Apple and Walmart noted that it will impact corporate profits and the global economy. In addition, Cass Freight reported that their shipments index for January fell 9.4% on an annual basis, noting that the coronavirus is creating uncertainty around its eventual impact on global supply chains.
Any stories about the coronavirus worsening will cause a flight to quality trade where Stocks will move lower and Bonds will move higher. Continuing to monitor these developments remains important.
The “Start” of Something Wonderful?
Housing Starts, which measure the start of construction on a home, were down 3.6% to a rate of 1.567M units in January. But there is more than meets the eye to this decline.
December’s reading was a 14-year high, that was revised even higher from 1.608M units to 1.626M units. It’s natural to expect a pullback from such a huge number, which is why the market expectations were for the reading to come in down over 13%. But when you factor in the revision from last month, Starts actually dropped just 2.5%, so they really exceeded expectations.
Single-family homes, which are the real heart of the housing market, were down 5.9% from December but up 21.4% when compared to January 2019.
Building Permits, which are a good forward-looking indicator of Starts, were up 9.2% from December to an almost 13-year high and are 17.9% higher on an annual basis.
While this is a positive sign for future buyers, January’s Existing Home Sales report, which measures closings in January and likely represents buyers shopping for homes in November and December, showed that inventories remain tight. There were only 1.42M units for sale in January, down 10.7% on an annual basis. At the current pace of sales, this represents just a 3.1-month supply.
The headline figure showed that overall, sales of existing homes decreased by 1.3%, which is a minor pullback from the highest sales pace in 2 years. Additionally, sales are up 10.8% when compared to January of last year.
The median home price was reported at $266,300, up 6.8% year over year. It should be noted that even with inventory levels near the lowest on record and the median home price up 6.8% annually, sales are still very strong.
Last week also gave us a near real-time reading on builders’ confidence via the NAHB Housing Market Index. February’s reading decreased 1 point to 74 but is still at a very strong level and only 2 points off a 20-year high.
The report showed that current sales decreased 1 point to 80, sales expectations fell 1 point to 79, and buyer traffic was down 1 point to 57. Remember that a reading above 50 signals expansion so this was still a strong report.
“Curve” Ball Coming for the Economy?
The yield curve turned upside down last week, with 3-month yields moving higher than 10-year yields. This is unusual as typically you would expect to get a higher rate of return if you put your money away for 10 years when compared to just 3 months.
Why does this matter?
An upside-down yield curve has been an historically accurate recession indicator, as it is a symptom that the economy is slowing and something is wrong. It’s important to note that the yield curve was also inverted last year, though it was righted thanks in part to the Fed’s buying almost $100 Billion per month in Treasury Bills, which helped to steepen the yield curve. It will be important to keep an eye on this as the year progresses.
A “Minute” of Your Time
The Minutes from the Fed’s January 29th meeting showed that the current policy was likely to remain appropriate, which means that interest rates will remain unchanged for a while. But there are several factors that could change this, including inflation falling short of the Fed’s target or if the economy begins to slow more than the Fed expects. The Fed will also closely monitor the risk posed by the coronavirus.
So what is significant about this statement?
It’s in contrast to the market expectations, which are pricing in a 100% chance of a Fed rate cut by the summer. And on that note, Fed Vice Chair Richard Clarida suggests markets pricing in a rate cut are wrong. Clarida noted the majority of economists do not expect a rate cut soon from the Fed. But we should take this with a grain of salt, as the Fed has not been accurate on forecasting rates.
Travel Hack of the Week
Does winter weather have you dreaming of travel this spring? These easy hacks courtesy of BuzzFeed are great to remember any time of year!
If you forget your phone charger, and the hotel concierge doesn’t have a spare, check your hotel TV for a USB port.
If you’re traveling internationally, scan your passport and email it to yourself so you have a digital copy in the event anything happens to it.
Stop shampoo and other liquids from leaking by placing plastic wrap over them and sealing with the cap. As an extra precaution pack these in sealable plastic bags.
Contact lens cases are perfect for small amounts of lotions, while eye glass cases can keep all of your chargers in one place. Plus, wrapping headphones around a gift card can help keep them untangled.
What to Look for This Week
Tuesday brings news on home prices with the release of both the Case-Shiller and FHFA Home Price Indices. But it’s the second half of the week that will definitely garner attention. The second estimate for GDP for the 4th quarter of 2019 will be released Thursday followed on Friday by the Fed’s favorite measure of inflation, Personal Consumption Expenditures. Both of these reports have the potential to move the markets.
Technical Analysis Breakdown
Mortgage Bonds made a nice move higher last week within the range they have been trading in since mid-January. Bonds are now testing overhead resistance at 102.344, which is a very important level. If this ceiling holds and pushes Bonds lower, there is quite a bit of room till the next floor of support at the 25-day Moving Average. But if Bonds can break through this ceiling, the next resistance level is all the way up at 102.703.
Valentine’s Day may have come and gone but that wasn’t the only love in the air last week. The Mortgage Bankers Association latest figures showed that last month was the strongest January for purchase applications in 11 years. Meanwhile optimism was also on the rise among small businesses last month, per the National Federation of Independent Businesses Optimism Index for January. Key inflation was reported via the latest Consumer Price Index figures, plus Fed Chair Jerome Powell testified in front of Congress.
One thing Stocks didn’t love late last week was the news that confirmed coronavirus cases spiked to over 60,000, with the death toll around 1,367 as of last Thursday. Some of this spike was due to a new diagnosis methodology that has been put in place.
The news did spook Stocks when it was initially reported Thursday, though they did move higher early on Friday. Mortgage Bonds and the home loan rates tied to them sometimes benefit from global uncertainty if investors make “safe haven” trades and move their money into fixed investments like Bonds, which are considered safer than Stocks. We will be closely watching this situation and how the markets continue to react to it.
What’s at the Heart of Consumer Inflation?
The Consumer Price Index (CPI), which measures inflation on the consumer level, came in just below expectations at 0.1% in the month of January, while the year-over-year reading increased from 2.3% to 2.5%.
More importantly, the Core rate, which strips out volatile food and energy prices, remained stable at 2.3% on an annual basis. This is just shy of an 11-year high and marks the 23rd month in a row that Core CPI has been above 2%.
The report showed that rents rose by 0.4% for the month and are increasing at a rate of 3.8% on a yearly basis, which is unchanged from the previous month. Meanwhile, out of pocket medical care costs were up 0.2% for the month and are up 4.5% year over year.
Our good friend and MBS Highway contributor, Peter Boockvar, gives a great explanation for one of the reasons why the CPI is running almost 1% hotter than the Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE). “The PCE metric mostly measures what the Medicare and Medicaid bureaucracies will reimburse the healthcare system for these services, rather than measuring what people are paying out of pocket which is included here in CPI.”
Keep in mind that inflation news is always important to monitor because inflation is like the “arch-enemy” of the Bond market. Think of it this way. Bonds have a fixed coupon payment. And if inflation is on the rise, you can no longer buy the same amount of goods that you could previously. In other words, inflation erodes your buying power. So in a rising inflation environment, the end investor has to be compensated with a higher rate.
The bottom line is that when inflation rises, so too do interest rates, including mortgage rates. Thankfully, inflation has been relatively tame, but if we see a surprise move higher in CPI, it could pressure the Bond market and home loan rates.
Show Renters Some Love
A recent report from Freddie Mac showed that a whopping 84% of renters think it’s more affordable to rent than it is to buy, an all-time high for the survey.
The survey went on to note that affordability issues actually impact renters more than owners, with 42% of renters paying more than one third of their household income on rent compared to just 24% of owners on their mortgage.
What’s more, renters often think they need 20% down to purchase a home which is not true.
While the media sometimes downplays the benefits of homeownership, this data provides a tremendous opportunity to educate potential clients about how buying a home could benefit their financial situation. And our Buy vs. Rent tool makes it easy to do so!
Fed in the News
In his testimony in front of Congress, Fed Chair Jerome Powell noted that the Fed is closely monitoring the coronavirus and its effect on global economic growth.
He also said that Monetary policy will remain appropriate as long as information about the economy remains broadly consistent with the Fed’s outlook. Powell called the purchases of Treasury Bills a technical measure and not a change in monetary policy, despite the rally in risk assets that has come along with the balance sheet expansion.
The market is anticipating the Fed to cut its benchmark Fed Funds Rate one time before September. As the year progresses, we will get a better idea if this forecast will change … and when a cut may occur.
Home Hack of the Week
Snow recently fell in parts of the south that don’t usually see winter weather, which is a good reminder for all of us to double check our emergency kits in both our home and cars. Ready.gov provides this easy checklist.
For the basics, your kit should include batteries, flashlights, dust masks, whistle (to signal for help), moist towelettes, wrench or pliers, cell phone with chargers and a backup battery, first aid kit, one gallon of water per person per day for a minimum of three days, and a three-day supply of non-perishable food. Don’t forget a manual can opener!
Additional supplies that may be helpful include prescription medicines, glass and contact lens solution, infant formula, pet food and supplies, cash, important family documents (i.e. insurance and bank information), sleeping bags and blankets, extra clothes, fire extinguisher, matches, personal hygiene items, paper towels and plates, paper and pencil, and games and other activities for children.
Reminder to store your canned food in a cool, dry place and make a note to check your kit twice a year so you can replace expired items as needed.
What to Look for This Week
There will be a slew of economic data released this week, and we’ll see which news the markets love … or don’t.
Housing news will be in the forefront, as the National Association of Home Builder’s Home Price Index for February will be reported on Tuesday, January Housing Starts and Building Permits on Wednesday, and January Existing Home Sales on Friday.
There will also be news on February’s manufacturing numbers when the Empire State Index releases on Tuesday and the Philadelphia Fed Index on Thursday.
Wednesday also brings the Fed Minutes from the January 29th meeting and, as usual, the latest weekly Initial Jobless Claims numbers will be released on Thursday. All of this data certainly has the potential to move the markets so stay tuned!
Technical Analysis Breakdown
Mortgage Bonds continue to trade in the middle of a wide range between support at the 25-day Moving Average and overhead resistance at 102.25. Bonds have traded almost perfectly within this range since late January. Most of the news this week will be important but housing related and will not have an impact on the markets. The market will likely take a nod from headlines on the coronavirus epidemic and potentially the Fed minutes on Wednesday. Any stories on the coronavirus worsening will cause a flight to quality trade where Stocks will move lower and Bonds will move higher.
Parasite may have scored big at the Oscars, but “best picture” in the economic sector category for last week goes to labor, which showed that 2020 has started with blockbuster job creation numbers. Both the ADP and Bureau of Labor Statistics (BLS) reported job creations well above expectations. While the BLS Jobs Report showed that unemployment ticked up a notch, both average and weekly hourly earnings increased.
Not to be outdone, home appreciation figures were no joke, as CoreLogic showed home prices increased in December.
And while fears regarding the coronavirus continue, the markets did like some news from China. Both the Dow and S&P 500 set record highs late last week on news that China will half tariffs on roughly $75 Billion of US imports. This follows the US cutting tariffs in half on $120 Billion worth of Chinese products last month and was part of the agreement within the Phase 1 trade deal. Even though this was expected as per the agreement, Stocks didn’t mind the excuse to rally.
Blockbuster Jobs Data
Wednesday brought the first of the two Jobs Reports last week, and the ADP Employment report for January was no tear-jerker. A whopping 291,000 new jobs were created, which was much better than the 155,000 expected. ADP said the “mild winter weather provided a significant boost to the January employment gain,” which correlates to the sectors that benefitted the most. Construction added 47,000 jobs and leisure/hospitality added 96,000. ADP went on to note that real job gains are closer to 150,000, but all-in-all this was a very strong report.
The BLS Jobs Report for January followed this trend, as it showed that 225,000 new jobs were created, much higher than the 160,000 expected. Adding to the win, the report also showed that November’s figure was revised higher by 5,000 jobs (from 256,000 to 261,000) while an additional 2,000 new jobs were reported for December (bringing the total from 145,000 to 147,000). As a result, the 3-month average now equals 211,000.
Average hourly earnings increased from 2.9% to 3.1% year over year, while the more important weekly earnings figure increased from 2.3% to 2.5% on an annual basis. This makes sense when you consider that ADP cited the mild January as a reason for its blockbuster job creation figure. A mild January likely means that workers were able to work more hours. And as a result of that, will probably have higher weekly earnings.
The Script on Unemployment
The BLS Jobs Report showed that the Unemployment Rate ticked up from 3.5% to 3.6%, but when we delve deeper into the numbers it’s easy to understand why. There are two different surveys within the Jobs Report – the Business Survey, where the headline jobs figure is derived from, and the Household Survey, where the Unemployment Rate comes from.
The Household Survey also has a job creation component, which said that there were 89,000 jobs lost while the labor force increased by 50,000. It’s always interesting to see the disconnect between the Business and Household surveys. For January, this disconnect led to the uptick in the unemployment rate.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, increased from 6.7% (which is the lowest level on record) to 6.9%. The labor force participation rate remained increased from 63.2% to 63.4%.
The bottom line is that despite the small uptick in the unemployment rate for January, the labor sector is winning big so far in 2020.
Home Appreciation Also Stole the Show
In housing news, CoreLogic reported that home prices rose 0.3% in December and 4.0% on an annual basis. The annual reading increased from last month’s report, which showed a 3.7% gain. Idaho (9.9%), Maine (7.9%) and Wyoming (7.7%) showed the largest annual increases.
Frank Nothaft, the Chief Economist for CoreLogic said that, “moderately priced homes are in high demand and short supply is pushing up values and eroding affordability for first-time buyers. Homes that sold for 25% or more below the local median price experienced a 5.9% price gain in 2019, compared with a 3.7% gain for homes that sold for 25% or more above the median.”
CoreLogic forecasts that home prices will appreciate by 5.2% in the year going forward, which is a slightly lower pace from the 5.3% forecasted in the previous report, but still very strong. To run some quick numbers on this scenario: A 5.2% gain on a $300,000 home would translate to $15,600 in appreciation over the course of a year, which is certainly no tragedy for homeowners.
Home Hack of the Week
Winter can be the prime time for lighting candles around your home. If you notice any wax that’s dripped on your carpets, don’t panic. Try this easy fix-it trick from our friends at This Old House:
Rub a piece of ice over the spilled wax. Once the wax has hardened, break it into smaller pieces with a spoon, then vacuum before they re-soften. Blot the carpet with a towel to remove any remaining residue and rest assured, no one will ever know a spill occurred. Plus, this also works for gum!
And as a bonus tip, if your kids are enjoying art projects while they’re inside during the colder weather, there’s an easy solution if any glue spills on your carpet, too. Simply dampen a soft cloth or cotton ball with rubbing alcohol. Press on the glue until it is thoroughly moistened. Wipe gently and repeat as needed.
What to Look for This Week
The economic calendar picks up steam in the second half of the week, with inflation news teed up to take center stage when the Consumer Price Index for January is reported on Thursday.
Inflation news is always important to monitor because inflation and interest rates are tied very closely together. Inflation is the “arch-enemy” of the Bond market because Bonds have a fixed coupon payment. And if inflation is on the rise, you can no longer buy the same amount of goods that you could previously – Inflation erodes your buying power. Take a look at the graphic for to see how the same $20 can buy much less over time due to inflation.
In a rising inflation environment, the end investor has to be compensated with a higher rate to compensate them. It’s because of this that when inflation rises, so too do interest rates, including mortgage rates. Thankfully, inflation has been relatively tame.
December’s report showed that consumer inflation came in 0.1% weaker than expected on a month-over-month basis. But the headline reading was especially significant, increasing from 2.1% to 2.3% year over year – the hottest level in a year. The more important Core rate, which strips out volatile food and energy prices, remained stable at 2.3%, just shy of an 11-year high. We will be watching closely to see if January’s report adds to the drama. It is important to note, however, that 2% inflation is still very modest and is right at the Fed’s target. But not all inflation reports are created equal – The Fed, possible for their own agenda, follows the Personal Consumption Expenditures report much more closely, which runs about 0.5% lower than the Consumer Price Index.
The bottom line: Any jumps in inflation could pressure Mortgage Bonds and home loan rates later this week.
We’ll also find out if love was in the air for retailers when the latest Retail Sales figures for January are released on Friday.
Mortgage Bonds were volatile last week and tested both support and resistance within their trading range. On Friday Bonds managed to break the 102.25 resistance level, but were pushed back beneath it. A close above this level would be a significant sign, as the next ceiling of resistance can be found about 45bp higher at the top of the window formed on November 8th 2016. MBS Prices are near multi-year highs and if they can get past the inflation data next week, may have a chance to continue to climb. A lot will depend on the Stock market, which had a big week and set new record highs. Stay tuned.
The last week of January brought plenty of headlines, as housing data, inflation news and GDP were all released. On top of that there was a Fed meeting and growing fears regarding the coronavirus, which is spreading much more quickly than SARS did in the past. China has confirmed that the number of cases is now over 10,000 while the death toll has climbed above 200. The World Health Organization declared the virus a global health emergency and the U.S. has now seen the first case transmitted by one person to another. This news spooked global markets late last week.
And that’s not the only important “panic” to mention. Recently we noted that the Panic/Euphoria Model from Citigroup, which is a gauge of investor sentiment, was very close to euphoric levels. Reminder that the model identifies ‘Panic’ and ‘Euphoria’ levels which are statistically driven buy and sell signals for the broader market.
Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later. A reading at or above .41 is euphoria and last week hit .45.
Bottom line: The index is now in full Euphoria territory, so this will be important to monitor in the months ahead.
And speaking of “euphoria” of a different type, congratulations to the Kansas City Chiefs on winning the 54th Super Bowl.
Fed Sings the Same Tune
The Fed’s first meeting of 2020 brought little surprises as the Statement that was released Wednesday was exactly as expected. In a unanimous decision, the Fed left rates unchanged. They noted that the labor market remains strong, economic activity is rising at a moderate pace, job gains are solid, and unemployment remains low.
If you’re feeling a sense of deja vu, there’s good reason. Last week’s Statement was almost exactly the same as the Fed’s Statement in December.
The most important part of the Statement we were looking for was comments on the Fed’s Balance Sheet. The Fed reiterated that they plan on purchasing T-bills “at least through April 2020 to ensure that the supply of reserves remains ample.” They then said that once they get to a point where reserves are sustainable, they will gradually reduce their purchases.
It seems like the Fed will be purchasing Treasury Bills for quite some time.
Digging Deeper on Inflation
In its Statement, the Fed also said that inflation remains muted but is turning towards their 2.0% target. That seemed to be confirmed with the subsequent release of the Personal Consumption Expenditures (PCE) Report, which is the Fed’s favored measure of inflation and which showed that headline inflation increased from 1.5% to 1.6% in December.
The more important Core rate, which strips out volatile food and energy prices, was reported at 1.6%. Both of these readings were in line with expectations and little changed from the previous report.
It’s also important to note that the Employment Cost Index, which measures compensation for workers, was in line with expectations and up 0.7% in the 4th quarter of 2019. On an annual basis, the index is up 2.7%, which was just below the 2.8% in the 3rd quarter of 2019. This report was former Fed Chair Greenspan’s favorite measure of inflation and this data is in line with what we saw in the last Jobs Report which showed average weekly earnings up 2.6%.
So what’s the bottom line? Inflation does remain muted in the reports the Fed follows closely, which is good news for fixed investments like Mortgage Bonds and the home loan rates tied to them. But we do think it’s important to keep a close eye on the Consumer Price Index (CPI). As we have mentioned several times, we think that CPI is a much better read of real inflation because it has a higher weighting towards the cost of putting a roof over your head and out of pocket medical expenses.
And the CPI is running much hotter at 2.3%.
CPI figures for January will be released February 13, and we’ll be watching closely to see if Mortgage Bonds and home loan rates love the data … or not.
Looking Beneath the Housing Headlines
The latest New and Pending Home Sales figures were released last week, and while the media latched onto negative headline numbers, important takeaway’s come from digging deeper here as well.
December New Home Sales were down 0.4% from November but are still up a very strong 23% year over year … something the media conveniently left out of many reports. The estimate of new houses for sale at the end of December was 327,000, which represents a healthy supply of 5.7 months at the current sales rate.
Meanwhile, Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were down 4.9% in December. While this reading was weaker than the expectations of a slight gain, Pending Home Sales are still up 4.6% on an annual basis. Of course, the media focused on the 4.9% drop and headlines calling for the end of strong housing market surfaced shortly thereafter. The National Association of Realtors, however, attributed the pullback to purely a lack of supply. They went on to say that demand remains very strong and if there were more homes for sale, there would be a greater amount of sales. While this can make finding a home more difficult, it’s a good dynamic for your customers’ investment in their home. Tight supply and strong demand, as the first law of economics states, means that prices should move higher.
How fast are homes appreciating in the US? The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices rose 3.5% November, which was a slight increase from 3.2% in October. The 20-city Index increased to 2.6% on a year over year basis from 2.2%. Phoenix (5.9%), Charlotte (5.2%), and Tampa (5.0%) led the gains, and the gains were broad based, with every city in the index seeing an increase.
Usually, the media cites the median home price when they claim housing is accelerating too quickly for incomes. Instead, appreciation is what we need to pay close attention to. And the 3.5% appreciation we are seeing nationally is still meaningful, but not too hot to outpace incomes and make homes unaffordable.
Hold That Housing Dial
Not to be outdone in an already full news week, Black Knight also shared some interesting stats on the health of the housing market:
Mortgage delinquencies fell by nearly 4% month-over-month to within 0.04% of the record low set in May 2019 and more than 12% below last year’s level
The national foreclosure rate fell again in December to reach a new 14-year low, and the lowest on record outside the final five months of 2005
2019 ended with just over two million borrowers past due on their mortgage (including active foreclosures) – down 236,000 from the same time last year and the lowest year-end volume since the turn of the century
All in all, despite what the media may focus on, the housing market is rolling along as we head into 2020.
What to Look for This Week
The labor market will be front and center, especially in the second half of the week. First up, the ADP report will be released on Wednesday, followed by weekly Initial Jobless Claims Thursday. But the week’s main attraction comes on Friday with the BLS (Bureau of Labor Statistics) Jobs Report for January.
December’s report showed 145,000 jobs created, which came in below expectations of 158,000 new jobs. The numbers for October and November were also revised lower by 14,000. We will be watching closely to see if January’s figures score big or fall flat. Also of importance will be the unemployment rate and average hourly and weekly earnings.
Mortgage Bonds have been in a clearly defined upward trend since January 19th. Last week they tested an overhead ceiling of resistance at 102.25, but to confirm a break above it the last two attempts. Bonds are now in a wide range and could be susceptible to price swings. Bonds will likely take their cue from the Stock market. If Stocks sell off, Bonds will likely test overhead resistance again and potentially break above it. If Stocks regain some of Friday’s losses, it may apply pressure to the Bond market.