Friday Wrap: Friday Wrap: Jobs, Brexit, and Rates Still Dropping

Volatile Markets Spurred by Politics; Mortgage Rates Hit Another Low

A heightened concern that the economic recovery might be slowing, with no definitive federal stimulus plan in place, has left investors weary. Thursday marked a third straight day of losses on Wall Street as investors weighed their fading hopes of a stimulus plan before the election against the spreading cases of COVID-19 across Europe.

While the Dow closed down a mere 19.8 points, it had been down by more than 300 points in earlier trading. The S&P 500 and the Nasdaq dipped by 0.2% and 0.5%, respectively. The three-day decline marked the longest losing streak for the major averages in nearly a month. Friday’s Dow futures were up more than 100 points thanks to some extremely positive retail sales data from the Census Bureau.

Consumer spending rose by 1.9% in September. Economists had predicted a comparatively paltry 0.7% increase. Core retail sales, which exclude automobile sales, showed an increase of 1.5% against a 0.4% expectation.

Volatility is typical in October, even coming with a term dubbed the “October Effect” for the trend often seen during the month. That volatility is expected to be a constant theme this month with added worries like setbacks for a coronavirus vaccine and uncertainty about an election that’s just a few weeks away. Treasury Secretary Steve Mnuchin and President Trump say they are adamant that a stimulus deal will get done, laying the blame at the feet of Speaker of the House Nancy Pelosi. Pelosi and House Democrats recently passed a stimulus bill worth $2.2 trillion, while Mnuchin and Trump have touted a $1.8 trillion spending plan. Senate Majority Leader Mitch McConnell has admonished both as being too costly and stands by a $500 billion “targeted” plan.

The back and forth of stimulus talks pushed U.S. government debt prices slightly higher in early Friday trading. The yield on the 10-year Treasury note dipped to 0.729%.

While politicians in Washington haggle over a deal, and Wall Street responds with doubt, nearly 900,000 Americans filed initial unemployment claims this past week. That’s the highest level of claims since Aug. 22. While more new claims come in, the continuing claims keep falling and have dipped by 1.165 million to approximately 10 million in total claims. When you look at the less volatile four-week moving average for continuing unemployment claims, they are currently at 11.48 million.

It’s important to note a few things about the Labor Department’s data collection. There is still a segment of the population that is receiving benefits who normally wouldn’t. Under the Pandemic Unemployment Assistance Program, people who work as freelancers and independent contractors have been able to apply and receive some federal assistance. The number of first-time benefit recipients declined by about 91,000 this past week. Overall, about half of the people receiving unemployment benefits as of Sept. 26 fall under the PUA Program. Moreover, California has stopped processing its claims in an attempt to clear a backlog and prevent fraud. The week that California halted processing its claims, they had reported 225,000 claims. That number has been continued to be used by the Labor Department until California gets back online.

There is also a much more concerning demographic that is increasing with regard to job loss. While there are many people returning to work after temporary job losses, there are a number of Americans whose job loss is turning long-term (6 months) or, worse yet, permanent. The chart below from CNBC shows the contrasting sharp decline in temporary layoffs against the steady increase of permanent job loss.

This week the Labor Department also released the consumer price index numbers, showing the CPI increased by 0.2% in September. That’s the smallest increase since May. Over the last year the CPI has increased by 1.4%. The cost of used cars and trucks saw the biggest increase with a whopping 6.7% month-over-month and 10.3% year-over-year.

 

U.K. Braces for No-Deal Brexit

A self-imposed Oct. 15 deadline came and went for the United Kingdom as negotiators failed once again to come to an agreement on a trade deal for Britain’s exit from the European Union. Prime Minister Boris Johnson said Friday, “Unless there’s a fundamental change of approach, we’re going to go to the Australia solution, and we should do it with great confidence.”

The “Australia solution” Johnson alludes to refers to the trade agreement Australia follows with the E.U. The country does not have a comprehensive trade agreement with the E.U. and most of what they have implemented follows World Trade Organization rules. There are some exceptions where they have specific agreements on certain goods.

Johnson’s comments caused the sterling to drop to a session low against the dollar, trading at $1.2870.

 

Interest Rates Drop Again

Interest rates have dropped to yet another historic low as Freddie Mac reports its 30-year fixed-rate mortgage average at 2.81%. That is the tenth time this year that rates have hit an historic low. This time in 2019, the average rate was 3.69%. In 2018? We saw an average of 4.85%.

While the overall percentage of mortgage applications decreased week-over-week, according to the Mortgage Bankers Association, they do expect the high levels of refinance and purchase activity to stay steady throughout the year. The MBA’s Associate Vice President of Economic and Industry Forecasting, Joel Kan, said in a release, “Applications for government mortgages offset some of the overall decline by increasing 3%, driven by a solid gain in government purchase applications and an 11% jump in VA refinance applications. Refinance and purchase activity continue to run well ahead of last year’s pace, fueled by record-low rates and strong homebuyer demand. Housing supply is a challenge for many aspiring buyers, but activity should continue to stay strong the rest of the year.”

While there are many people who would greatly benefit by purchasing a house or refinancing their current home loan with these historically low rates, the issue of unemployment makes that difficult during these times. During the HousingWire Annual this week, Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan addressed that issue. He said, “At the end of 2019, we were at 3.5% unemployment. We think at the end of 2021, it will be roughly double that, around 6%.”

Duncan added that he expects economic recovery to be slow and plodding, estimating about $1.7 trillion in national income was lost during Q2 of 2020. That’s a huge obstacle to overcome. Duncan further predicted the end of 2021 to be the point where he believes we will be back to the pre-pandemic levels of 2020.

 

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