Friday Wrap: Analysis of News and Events for the Week

New Drug Give Stock Market Life Amid Dismal Data

We may have finally reached a turning point in the global pandemic and subsequent economic fallout. Late Thursday, a report from STAT news showed that a drug called Remdesivir showed effectiveness when treating patients suffering from the coronavirus COVID-19. This report causd Dow futures to skyrocket 700 points, starting trading Friday morning above 24,000 points.

This news was welcome relief a day after yet another dismal piece of data from the U.S government. The tally is now over 22 million as 5.2 million more Americans filed initial unemployment claims this week. The Labor Department’s 22 million figure wipes out pretty much all of the job gains since the Great Recession.

Part of the increase is due to the expanded allocation for unemployment. For example, independent contractors, once not allowed to apply for unemployment, are now able to under the current law. But even the four-week moving average, which can usually give some calm during volatility, was dismal. The average is now more than 6 million people over the last month claiming unemployment for the first time.

As staggering as the unemployment numbers are, the retail numbers are nearly as abysmal. Data released Wednesday by the Commerce Department showed March retail sales plummeted by 8.7%, the largest ever drop since 1992 when tracking of this data began. The chart below from CNBC highlights just how precipitous the drop is especially when compared to the Great Recession numbers.

In response to this data, the 10-year Treasury note yield continues to fall. Reaction to Wednesday’s retail sales data along with Thursday’s unemployment data pushed the yield to 0.61%.

The “worsts” keep piling up as the Empire State Manufacturing Index crumbled, hitting a reading of -72.8. To put that into perspective, economists had predicted a -32.5 reading and the previous worst was -34.3 during the financial crisis.

Right now, economists are predicting a 30% decrease in Gross Domestic Product (GDP) for the second quarter. Meanwhile economists from JP Morgan take that a step further, predicting a 40% decline with an extra 10% reduction added to the first quarter.

Reports Friday morning show that China says its own GDP shrank by 6.8% in the first quarter as it dealt with the COVID-19 crisis. This is the country’s first GDP decline since 1992, when records first started being kept.

As there is more uncertainty about when the economy will start to reopen, the question has changed from how deep the decline will be to how long it will last. Seven states have extended their shut-down policies to May 15 as President Trump continues to push for states to start reopening pieces of their economies. Thursday evening, the President laid out an 18-stage place nicknamed, “Open American Up Again” and identifies what would need to happen to start reopening the economy. According to CNBC, state governors would have the final call on whether or not shutdowns are lifted.

As all of this plays out, the resiliency of the stock market has found some stability this week. It’s been especially noticeable in the tech sector where companies like Netflix and Amazon each increased more than 18% on the week with both entities hitting record levels.

Rates Near Record Lows, Inventory Tightening

The silver lining in this economic downturn is still the historically low interest rates. The latest from Freddie Mac shows the average for a 30-year fixed-rate mortgage is 3.31%. That has helped keep the refinance pipelines full as folks look to save some money long-term on their mortgages.

According to the Mortgage Bankers Association, refinance activity is 192% higher year-over-year. However, the purchase index is down about 35% from one year ago. This would typically be an extremely busy spring buying season for people, but the pandemic has undoubtedly slowed that activity greatly.

The other problem that has reared its head is inventory. Already tight before the pandemic, the lack of inventory will get much worse as we continue through 2020. Housing starts in March are down 22.3% month-over-month, according to the Commerce Department. That is the worst monthly decline for housing starts since 1984.

When you dig into the data it gets bleaker. Homes under construction saw a 6.1% decline in completion. So homes are being left partially constructed right now. When you separate out the single-family home construction, that number jumps to 15% left unfinished. To add insult to unfinished injury, application for construction permits dropped by 6.8% last month as well.

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 contract.