Wall Street looks past abysmal jobs report
Not since World War II has the United States seen an unemployment rate this high. Two months ago, the unemployment rate was 3.5%, which was the lowest level since 1969. According to the latest jobs report from the Bureau of Labor Statistics, the current unemployment rate in the United States is 14.7% with 20.5 million jobs lost in April. The last time we had double-digit unemployment was 1982 at 10%. The “real” unemployment rate, which includes workers not looking for jobs and the underemployed, surged to 22.8%.
This chart from CNBC really gives you better look at just how drastic the drop was for April’s report.
Despite the staggering report, Dow futures were up 300 points Friday morning as investors were betting that we are over the worst of the economic downturn. Economists had expected the jobs report to be worse than it was, so there was a slim positive for investors to look toward.
The private payroll report from ADP was equally as disheartening. The ADP records started in 2002 and this was the single worst report in its history. It shows more than 20 million jobs were lost in the private sector in April. That’s better than the 22 million economists were expecting, but still exponentially worse than the previous low of 834,665 jobs lost in 2009. Keep in mind, the sample week used by ADP to pull its data was the week of April 12. In the subsequent weeks millions more Americans filed initial unemployment claims.
The service industry took the brunt of the hit as 8.6 million furloughs were reported for service and hospitality positions. Trade, transportation and utilities lost 3.44 million jobs with construction seeing a 2.48 million job loss. It is interesting to note that private payrolls for healthcare lost nearly one million jobs in April.
Initial unemployment claims for the last week totaled more than three million, bringing the seven-week total to more than 33 million Americans filing for unemployment. The small positive in that data from the Labor Department is that each week we are seeing this number decrease. Three million people filing for unemployment is still a staggering number, however it is a number that is decreasing, suggesting we already hit the peak of jobs lost.
On the more concerning side, the continuing claims went up to more than 22 million people. That data point shows us how many people have filed within the last two weeks and are still on the claim rolls. It is important to note that the current requirements for qualifying for unemployment also include furloughed workers, independent contractors and others who previously were not eligible to file.
In spite of all this, equities continue their march upward with expectations for a quick rebound to the economy as states start the process to move away from stay-at-home or shelter-in-place orders. Earlier in the week, the Nasdaq turned positive for the first time this year. Climbing by 1% to dig out of negative territory, the market was buoyed by positive tech stocks like Facebook, Apple, Amazon, Netflix and Alphabet (FAANG). That also caused the Dow to jump 400 points. The chart below from CNBC takes a look at the recovery from the early April nadir of the three major market indices.
Treasury Selling Long-Term Debt
The United States Treasury continues the process of raising cash to foot the bill for the coronavirus stimulus plans. For the first time, the Treasury will sell 20-year bond notes. Starting May 20, the Treasury will auction off $20 billion of 20-year bonds, then reopen the 20-year bond in June and July at $17 billion each. This is part of an overall strategy to raise the size of all debt auctions.
It is forecast that the United States federal deficit will reach $3.7 trillion for fiscal year 2020 as the government tries to protect the economy from collapse during the COVID-19 crisis. The Federal Reserve helped by buying up $1.3 trillion in Treasurys over the last couple of months, but it is difficult to put a dent in the already devastating deficit.
In response to this move, the 10-year Treasury note yield rose to 0.713% with the 30-year bond yield rocketing to 1.394%. That rise was quickly reversed for both notes as the markets absorbed Thursday’s news of the latest jobless claims. The 10-year yield settled in Friday morning post-jobs report at 0.67%.
Forbearances, Purchases Both Rise
An interesting phenomenon is happening in the housing industry as the number of loans in forbearance keeps going up, but home purchases are also on the rise.
The latest numbers from the Mortgage Bankers Association’s Forbearance and Call Volume Survey show that 7.54% of loans are in forbearance. That equals about 3.8 million homeowners. When you look at loans backed by Ginnie Mae (USDA, FHA, VA), that number is even higher. The MBA’s data shows 10.45% of Ginnie Mae loans are in forbearance. Mike Fratantoni, the MBA Senior Vice President and Chief Economist, only expects these numbers to increase.
“The share of loans in forbearance increased once again in the last full week of April, but the pace of new requests slowed,” said Fratantoni. “With millions more Americans filing for unemployment over the week, the level of job market distress continues to worsen. That is why we expect that the share of loans in forbearance will continue to grow, particularly as new mortgage payments come due in May.”
On the flipside, home purchases went up again this past week according to the MBA. Total mortgage application volume was only up 0.1%, due in large part to refinances slowing because of some lenders charging different rates for rates for refis. “Despite lower rates, refinance applications dropped, as many lenders are offering higher rates for refinances than for purchase loans, and others are suspending the availability of cash-out refinance loans because of their inability to sell them to Fannie Mae and Freddie Mac,” says Fratantoni.
Purchase volume, however, went up 7% week-over-week. Rates are historically low and as some states begin to reopen, and mortgage companies become more digitally focused with their offerings, people are taking advantage.
Meanwhile, mortgage rates continue to stay at historic lows. This week’s Freddie Mac average for a 30-year fixed-rate mortgage was sitting at 3.26%.
Contributed by Greg Richardson, MAXEX Managing Director
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 contract.