Producer prices, retail sales tank in April
The United States economy took massive blows in April as Americans simply weren’t spending money. Dow futures dropped by 200 points Friday morning on the heels of the latest retail sales data from the Commerce Department. Monthly retail sales tanked by 16.4% in April, a record for this data point. Economists had expected a drop of 12.3%.
In addition to the negative retail sales, Dow futures reacted to the Commerce Department’s decision to block semiconductor shipments to Huawei, a Chinese technology company. According to the Commerce Department, the plan is to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”
The Dow had just broken a three-day losing streak on Thursday, jumping 300 points on the backs of banks and the oil market. OPEC and its allies announced another cut in production, just as demand is starting to rise with states reopening. That pushed oil prices to surge by 9%, up to $27.56 per barrel. Meanwhile, banks like Bank of America and JPMorgan Chase gained 4% each.
The gains for oil and banks were a welcome reprieve from the latest wave of unemployment statistics released Thursday morning. More than 36 million Americans have filed initial unemployment claims over the last two months. Data from the Bureau of Labor Statistics shows that nearly three million more Americans filed initial unemployment claims last week to push the total number to just over 36 million.
The number of continuing claims only went up by less than half a million, which is somewhat encouraging because that means people are going back to work. That’s more than likely a result of states slowly beginning to reopen. However, the number of Americans making continuing claims is still more than 22 million, which is a staggering data point.
Treasury yields dropped in reaction to the Labor Department’s report, continuing their slide that started Wednesday. Yields started dropping on Wednesday after Federal Reserve Chair Jerome Powell’s warning about “significant downside risks” due to the pandemic. Early Friday, the 10-year Treasury yield was trading at 0.606% as the bond market appears to be consolidating around .60% for now.
Powell’s warning was part of an interview by the Peterson Institute for Economics. Powell’s grim outlook on the economy was sobering for many. “There is a sense, growing sense I think, that the recovery may come more slowly than we would like,” he said.
Richmond Federal Reserve President Thomas Barkin, in an interview with CNBC, cast doubt on the potential for negative interest rates in the United States. While he did agree with Powell that recovery would be slow, Barkin put the onus on the United States Congress to do its part to continue to spur economic recovery for businesses that have been shut down due to COVID-19.
Many economists are predicting we will enter a period of deflation as demand for goods and services continues to decrease due to COVID-19. The Labor Department’s producer price index just saw its biggest decline since 2015 with a year-over-year drop of 1.3% in April.
Consumer prices also posted a steep drop. April’s consumer prices dropped by 0.8%, the largest drop for that statistic since 2008. Year-over-year, however, consumer prices are up 0.3%. More concerning was the core consumer price index (CPI), which excludes volatile products like gasoline. The core CPI saw a 0.4% drop in April, its largest decline since 1957. Both apparel and transportation services dropped by 4.7% each. Year-over-year, the core CPI rose by 1.4%, which is its smallest increase since 2011.
Fannie, Freddie Extend Foreclosure Freeze, Housing Picks Back Up
Government sponsored enterprises Fannie Mae and Freddie Mac, along with the department of Housing and Urban Development (HUD), extended their freeze on foreclosures and evictions through June as more people apply for loan forbearance. Set to expire on May 17, the temporary suspension of evictions and foreclosures will go through at least June 30.
Federal Housing Finance Authority Director Mark Calabria said, “During this national health emergency, no one should be forced from their home. Extending the foreclosure and eviction moratoriums protects homeowners and renters with an Enterprise-backed mortgage and provides certainty for families.”
On a related note, the number of loans going into forbearance continues to rise. The Mortgage Bankers Association weekly survey shows 7.91% of all mortgage loans in America are in forbearance. Before COVID-19, that number was around 0.25%. The one silver lining is that the number of requests has slowed down.
When you look at the type of loans that are in forbearance, mortgages with Ginnie Mae lead the pack. Nearly 11% of Federal Housing Administration (FHA) and Veterans Administration (VA) loans are currently in forbearance, according to the MBA’s weekly survey. For Fannie Mae and Freddie Mac, just over 6% of their loans are in forbearance.
Purchases seem to slowly be gaining steam according to the latest data from the Mortgage Bankers Association. Although down 10% compared to last year, applications for purchase were up 11% week-over-week in the MBA’s latest weekly survey. Refinances were down 3% weekly, but still up more than 200% year-over-year.
“There continues to be a stark recovery in purchase applications, as most large states saw increases in activity last week. In the ten largest states in MBA’s survey, New York – after a 9 percent gain two weeks ago – led the increases with a 14 percent jump. Illinois, Florida, Georgia, California and North Carolina also had double-digit increases last week,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “We expect this positive purchase trend to continue – at varying rates across the country – as states gradually loosen social distancing measures, and some of the pent-up demand for housing returns in what is typically the final weeks of the spring home buying season.”
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.