Great Week for Equities Stifled by Dismal Data
Equities continued its bullish run this week closing out the month with the largest monthly surge in over 30 years as states begin to reopen their economies. Helping push the rally are signs of some peaking of hospitalizations for COVID-19 as well as further studies concerning a treatment for the disease. However, the positive sentiment is offset by fear, uncertainty and the reality that it will likely take years to repair the damage done to the United States’ economy.
The rally was stopped short Friday morning as tech stocks Apple and Amazon released their respective earnings reports. Apple’s quarterly earnings were high, but the company’s revenue was flat. Meanwhile Amazon shares took a 6% dive after the company announced it would spend all Q2 profits on its coronavirus relief response. That spurred Dow futures to take a sharp dive of more than 400 points to start trading Friday. The 10-year Treasury note yield was also trading down early Friday, sitting 0.613%.
Upwards of three million more Americans filed initial unemployment claims this week, putting the total well over 30 million over the last six weeks, according to the Labor Department. Continuing claims also went up and now sit just under 18 million–which is 2.2 million higher week-over-week. That report caused stocks to drop slightly Thursday. Although, the S&P 500 finished up 10% for April, its best month since 1987.
On the flipside of that, we got a look at the gross domestic product reading for the first quarter. Although not as bad as the worst contraction during the financial crisis, it’s also not good. The Bureau of Economic Analysis reported that the economy contracted by 4.8%. That number is expected to be revised down as more data comes in.
Consumers are responsible for nearly 70% of the economy and in Q1 consumer spending dropped more than 7%, according to the BEA’s report. Pretty much every category in the report saw a drastic drop with durable goods spending down 16.1%, expenditures on services were down 10.2%, exports dropped 8.7% and imports fell 15.3%, including a 30% drop in services.
As states do begin phases of reopening, both Congress and the Federal Reserve are doubling down on their support of businesses and the economy as a whole. This week the Fed announced it would expand its Main Street lending program to businesses with up to 15,000 employees and up to $5 billion in revenue. The Fed has also changed the types of loans it is allowing. There are now three categories of loans entitled New, Priority and now, Expanded. The Expanded loans start at $10 million. CNBC does an excellent job breaking down all the details of the loan requirements themselves.
The Fed also said it would continue to support the mortgage industry through securities purchases. The latest statement out of the Federal Open Market Committee read, “To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.”
Rates Keep Dropping, Forebearances Keep Rising
Mortgage rates hit an all-time low for Freddie Mac this week. The 30-year fixed-rate mortgage average came in at 3.23%, the lowest ever since Freddie Mac began keeping records in 1971. While that is good news for current homeowners who might be able to benefit from a refinance, it’s not terribly helpful for folks who are out of work and cannot get a mortgage loan without a job.
The latest data from the Mortgage Bankers Association shows that, despite the millions of Americans without a job, purchases went up last week by 12% compared to the week before. As expected, the year-over-year number is down for purchases but that weekly increase is a big positive as we move into phased reopenings of state economies.
The MBA’s Vice President of Industry and Economic Forecasting, Joel Kan, was upbeat in his remarks. “The ten largest states had increases in purchase activity, which is potentially a sign of the start of an upturn in the pandemic-delayed spring homebuying season, as coronavirus lockdown restrictions slowly ease in various markets,” said Kan. “California and Washington continued to show increases in purchase activity, with New York seeing a significant gain after declines in five of the last six weeks.”
Kan went on, saying, “Contributing to the uptick in purchase applications was that mortgage rates fell to another record low in MBA’s survey, with the 30-year fixed rate decreasing to 3.43%. However, refinance activity declined 7%, as rates for refinances likely remained higher than those for purchase loans. Lenders are still working through pipelines at capacity, and observed changes in credit availability for refinance loans have also in turn impacted rates.”
On the other end of the spectrum is the total number of loans in forbearance. With more than 30 million Americans unemployed or furloughed, the number of forbearance requests has gone up significantly. According to the MBA’s weekly Forbearance and Call Volume survey, nearly 10% of loans backed by Ginnie Mae (FHA, VA, USDA etc) are now in forbearance.
The MBA’s Senior Vice President and Chief Economist, Mike Fratantoni, delved further into the numbers. “Over 26 million Americans have filed for unemployment over the last month, leading to nearly 7% – 3.5 million – of all mortgage borrowers asking to be put into forbearance plans,” said Fratantoni. “For FHA and VA borrowers, the share of loans in forbearance is even higher, at 10%.”
“While the pace of job losses have slowed from the astronomical heights of just a few weeks ago, millions of people continue to file for unemployment,” Fratantoni continued. “We expect forbearance requests will pick up again as we approach May payment due dates. The combination of stimulus payments, expanded unemployment insurance benefits, further fiscal and monetary actions and states reopening will hopefully begin to stabilize forbearance requests and the overall economy.”
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.