Fed Monitoring Virus as Treasury Yields, Inflation Stay Low
The spread of the coronavirus is still grabbing its share of the market this week as Treasury yields dipped Thursday in reaction to the latest news. More than 60 thousand cases have been confirmed with more than 1,300 deaths associated with the virus. There have been 15 confirmed cases in the United States.
The 10-year yield started this week at 1.54% and climbed above 1.6% before settling in at 1.61% to close trading on Thursday. Weak retail sales released on Friday morning have push yields lower and currently trading at 1.57%.
The most significant impact is being felt in China’s economy with at least one top economist predicting 0% gross domestic product growth in the first quarter. Evercore ISI Chairman Ed Hyman believes that the United States economy will not be affected greatly, but trade for China will be a major issue. “People are not going out,” says Hyman. “They are not shopping and that’s what’s hurting particularly China.”
On the state side, Federal Reserve Board Chair Jerome Powell spoke this week with a warning for U.S. lawmakers. Powell is concerned about the federal budget deficit, which is expected to go over $1 trillion this year. If there is a true downturn, Powell’s concern is that the Fed will have no room to cut. Right now the benchmark rate is at 1.75%. In year’s past, rates were hovering around 5% when a downturn hit, allowing wiggle room.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” said Powell during testimony on Tuesday to the House Financial Services Committee.
The latest budget proposal from President Trump would add another $5 trillion to the federal debt over the next 10 years. Trump’s presidency has already seen an increase of about $3 trillion. He is adamant that the Fed currently has interest rates set too high.
Powell’s response is that the U.S. economy is in a solid place and still seeing consistent growth and he expects that interest rates will remain at current levels. Powell did add the coronavirus is a “major unknown” for the economy at this point and the Fed will continue to monitor what happens there.
Consumers Still in the Driver’s Seat
The strong labor market continues to buoy the economy as consumers continue to spend money. The consumer price index also saw a jump, albeit a slight one, in January with the core CPI rising 0.2%. The report from the Bureau of Labor Statistics also shows that Americans are paying more for housing, airline travel and for clothing. The rise in those costs were offset by the drop in the cost of gasoline, which dropped off by 1.6% in January.
Retail sales numbers were soft for January, however, climbing by 0.3% in the first month of the year, according to the Commerce Department, and core retail sales were unchanged. People are spending more money dining out and also buying furniture for their homes. However, clothing stores saw a distinct drop with sales declining by the most since 2009 and December’s numbers were revised down to show a 0.2% rise in core retail sales as opposed to the previously reported 0.5% rise.
Consumers are seeing more buying power when it comes to home loans. People have jobs, are earning higher wages and are also seeing some of the lowest interest rates in seven years. That has helped contribute to a monster early buying season in 2020.
The latest report from the Mortgage Bankers Association shows that over the last 11 years, January 2020 has been the strongest for purchase mortgage applications. Not only that, the MBA’s Chief Economist Joel Kan says that refinances are also booming. So far in 2020, the Refinance Index has gone up by 5% to its highest level since June 2013. Year-over-year, that number is 207% higher.
Interest rate averages did tick slightly higher this week with Freddie Mac’s 30-year fixed-rate mortgage average showing 3.47% (blue line).
This early buying season for 2020 piggybacks off the incredible end to 2019. The Federal Reserve Bank of New York’s data shows that Q4 2019 was the biggest lending quarter in 14 years, to the tune of more than $750 billion in new mortgages originated in the last three months of 2019.
Overall estimates show that 2019 was worth $2.1 trillion in origination volume. That’s well above the MBAs original prediction of $2.07 trillion, which would have been a 12-year high on its own.
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.