Trillions in Aid Separate Democrats and The White House
The amount of federal stimulus is apparently one of the main sticking points for Congress as legislators work out a new coronavirus aid package. The two sides are split over how much extra to give unemployed Americans, with Democrats asking to continue the $600 payment while Republicans have upped their plan to $400 extra per week. The federal unemployment stipend lapsed on July 31.
The overall proposed spending cost is also vastly different, with Democrats pushing a $3 trillion bill and Republicans offering a $1 trillion spending package. Reportedly, the Democratic side has cut its request for United States Postal Service funding to $10 billion from $25 billion. Meanwhile, President Trump expressed a desire to give $25 billion in support for airlines. He also voiced his support for eliminating payroll tax.
Stocks opened lower on Thursday as investors reacted to unemployment data and some details that were leaked out about the next stimulus bill. Without a new aid package, it’s expected that consumer spending will plummet. That would be a huge blow to any economic progress made so far during this pandemic.
Jobs Picture is Slightly Brighter with Drop in Unemployment
For the week ending August 1, more than 1.1 million Americans filed initial unemployment claims, according to the Labor Department. That’s the fewest number of claims since the pandemic began, but it’s the 20th straight week of more than 1 million people filing claims. E800,000. However, that total number is still more than 16 million people.
There is another very important thing to note about unemployment data moving forward. The original CARES Act had a provision allowing workers like independent contractors to claim unemployment benefits. Previously, they were not covered. When the extra monetary assistance ended on July 31, the expanded unemployment coverage also ended. Unless they are also covered in a new stimulus bill, that will have an effect on unemployment numbers.
These concerns were slightly assuaged with a much better than expected jobs report. Friday’s report from the Bureau of Labor Statistics showed a 10.2% unemployment rate with 1.763 million nonfarm payroll jobs added. Economists had predicted a gain of 1.48 million jobs with a 10.6% unemployment rate.
Equity futures pared earlier losses Friday morning after the release of the jobs report. The 10-year Treasury note has flirted this week with the all-time low of .501% set in March of this year. Currently it is trading at a yield of .53%. Expect this yield to fall below .50 in the coming weeks.
Private payrolls saw a markedly different month. The report from ADP showed that private payrolls grew by just 167,000 jobs in July. Economists were expecting around 1 million jobs created in the private sector. This abysmally low number offsets the June data which was revised up to 4.3 million. When you break it down by company size, employers with 50-499 employees recorded a loss of 25,000 jobs. Large businesses increased by 129,000 jobs while those with fewer than 50 employees saw an increase of 63,000.
Consumer Debt Declines
It’s interesting to note a report from the New York Federal Reserve this week concerning household debt. Through the pandemic, analysts say household debt has declined by $34 billion in Q2 2020. That’s the first quarter-over-quarter decline in six years. Credit card debt saw the biggest decline with a drop of $76 billion in Q2. That’s the steepest drop in the history of the NY Fed’s data. A separate study by the Philadelphia Fed shows that, nationally, 45.5% of respondents said they used their stimulus checks to pay off debt.
While the NY Fed’s report does show a decrease in mortgage delinquencies, the group notes forbearance as the reason why we aren’t seeing higher delinquency rates. Also, the U.S. government’s foreclosure ban on government-backed mortgages expires at the end of this month. Barring any further government action, it’s likely we will see an increase in delinquencies and foreclosures should we continue down the current path.
Meanwhile, the Bank of England is facing its own dilemma as BOE Governor Andrew Bailey made statements this week regarding negative interest rates. Bailey says while negative interest rates are, at best, a “tool in the toolbox,” there are no plans to deploy them. England is in a similar, constrained situation with interest rates unchanged this week at 0.1%. The BOE projects the United Kingdom’s gross domestic product to show a 20% contraction for Q2, although many analysts say that prediction is far too optimistic.
Interest Rates Continue to Drop
Another historic week for interest rates as the Freddie Mac 30-year fixed-rate mortgage average dropped to 2.88%. That is the eighth time this year rates have hit an historic low. The 15-year fixed-rate average also hit a near 30-year low at 2.44%. The chart below from Freddie Mac shows the average rates over the last year. You can see how sharp the drop was even from last week to now.
The last week of July saw a slight slowdown in mortgage activity with a 5.1% decrease in applications, according to the Mortgage Bankers Associations. Furthermore, the MBA’s data shows refinances were down 7% weekly, but still up 84% year-over-year. Purchase activity declined week-over-week, but is still up by about 20% from this time last year. The MBA’s chief economist, Joel Kan, notes that purchase loan balances are rising, “which is perhaps a sign that the still-weak job market and tighter credit for government loans are constraining some first-time homebuyers.”
Also constraining the market is a lack of inventory, especially in the lower price ranges. Freddie Mac’s chief economist Sam Khater says the lack of inventory will continue to plague the market, especially for first time homebuyers. You can see in the chart below from CNBC the sharp recovery for home purchases. However, there is potential that could level off should inventory continue in its current state.
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