Friday Wrap: A Tale of Two Economies

Bullish Wall Street balanced by struggling economy

Two very different economic stories are being told in the United States as the pandemic continues. On one hand, Wall Street is back to the bullish strides it was hitting before March. Meanwhile, the American public continues to suffer rampant unemployment as the Federal Reserve acknowledges a bleak outlook for the U.S. economy.

This week the S&P 500 hit a record close, eclipsing the mark it hit just before the pandemic effect hit. The Nasdaq also hit record highs with thanks to another successful performance by FAANG stocks Facebook, Alphabet, Amazon, Netflix and Google. Apple went into the end of the week up nearly 3% and is now the first publicly traded company in the United States to reach a market valuation of $2 trillion. The Dow was somewhat muted, dragged down by The Home Depot and Walmart which underperformed compared to the stock’s exceptional earnings reports. At Thursday’s end, all the major indices traded higher on the day. In early Friday trading, equity futures were signaling a slightly negative open.

While tech is on a roll, the markets are being offset by a general malaise about the future of the economy. Thursday’s jobs report from the Labor Department showed more than one million Americans filed initial unemployment claims. That was higher than predicted and put us back over the 1 million claims per week mark. Continuing claims declined by more than 600,000 to bring the total below 15 million.

This was the fourth week without the extra $600 unemployment insurance payout. Eleven states have been approved to distribute an extra $300 per week under an executive order issued last week by President Trump. However, there is not much certainty about when that payout will happen.

The Fed Keeps its Options Open

The disappointment of investors was seen in the decrease of Treasury note yields. As investors put money back into the relative safety of bonds, the 10-year note yield dipped around 3 basis points to 0.644%.

Other big news about Treasurys this week came from the minutes of the latest Federal Reserve Open Market Committee meeting. As the Fed has done throughout the pandemic, it is keeping many options open, and chose to not enact yield curve control at this time. The Fed also dismissed the strategy of using negative interest rates as Japan and some countries in Europe have enacted.

The piece that remains unclear is just how long the Fed will continue its purchases and how long it will keep interest rates at 0%. It’s not expected that this policy will be solidified in time for next week’s meeting. However, the next meeting will have its own flair as it will be virtual and be the very first time the meeting will be broadcast to the public.

Besides the comments on Treasurys, the Fed minutes also revealed just how dire the economic situation is in committee members’ eyes. Referencing the pandemic, the minutes noted the coronavirus “would weigh heavily on economic activity, employment, and inflation in the near term.”

Delinquencies on the Rise, Rates Inch Upward

Mortgage rates, while remaining at historically low levels, inched up again this week. Freddie Mac’s 30-year fixed-rate mortgage average went up to 2.99%. That rise is due in part to the Federal Housing Finance Authority’s 50 basis point “adverse market” fee on refinance loans.

Low rates continue to drive purchase demand, however, inventory has continued to be a major problem for buyers. That inventory issue got a major positive boost this week with the Census Bureau’s release on new construction. July’s new construction numbers were up 22.6% monthly and 23.4% annually. That is incredibly good news moving forward.

However, as we continue to get deeper into the pandemic, the fear of delinquencies is creeping back in. The Mortgage Bankers Association this week released its Second Quarter National Delinquency Survey. The data shows “the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 8.22 percent of all loans outstanding.”

Most notably, the delinquency rate on FHA loans was a staggering 15.65%, the highest in the history of the survey dating back to 1979. The MBA notes that delinquency rate tracks closely with job loss, which would explain the spike in the current environment. Keep in mind that this rate does not include homes in the process of foreclosure.

That being said, there was a federally mandated moratorium on foreclosures through the end of July, as well as state-specific restrictions, under the CARES Act. The FHA recently decided to extend that moratorium through the end of the year. It covers an estimated 8.1 million homeowners who have FHA loans.

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized