Low Rates Here to Stay, Housing Hits a Hurdle
This week the Federal Reserve Open Market Committee concluded its two-day policy meeting with the expected announcement that interest rates would stay in the target range of 0%-0.25%. The most compelling information, however, was that all but four individual members of the FOMC project that the rates will stay within that range until 2023. Fed Chair Jerome Powell is adamant that “rates will remain highly accommodative until the economy is far along in this recovery.”
Within that meeting, the FOMC also clarified its policy change on the inflation goal. Last month, the committee decided it would allow inflation to run moderately above the 2% target rate in an effort to stimulate inflation. The post-meeting statement noted, “With inflation running persistently below this longer run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”
The statement went on to say, “it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” The FOMC believes it will take us until at least 2023 to return to the 2% inflation goal.
The announcement did little to move the needle on Wall Street Wednesday, and government bonds were relatively unchanged. Furthermore, the FOMC updated its gross domestic product (GDP) and unemployment projections. Members now see a 2020 full-year decline of 3.7% instead of 6.5% GDP, but also lowered its 2021 outlook from 5% to 4%. For unemployment, the committee lowered the outlook to 7.6% down from 9.3%.
While the FOMC announcements didn’t shake up markets initially, tech and airlines stocks definitely spurred more volatility. Dow futures dropped more than 300 points in Thursday’s premarket trading with tech stocks like Tesla and Netflix leading the way. The market was also continuing to evaluate the Fed’s message, which also pushed futures lower. Carnival Corp and United Airlines also dropped by 2% in the premarket trading.
Thursday trading ended with another sharp market sell off as investors are taking a more cautious approach after the Fed’s message. The Nasdaq was pulled down by tech stocks, eventually hitting its worst close in five sessions and slipping back into correction territory. Apple, Amazon and Facebook were the main stocks dragging the market down. It seems the Fed’s message made investors rethink how sharp of a rebound the economy would see after the depths of the pandemic. The Dow also snapped a four-day winning streak on Thursday.
Friday’s futures were mixed with the Dow showing little change, and the S&P 500 and Nasdaq both trading up. At this point in the month, Apple, Microsoft, Amazon and Facebook have all lost at least 10% of their value. The 10-year Treasury note yield was little changed Friday morning but trading down at 0.671%.
Thursday’s unemployment report brought some good news as first-time unemployment claims fell under expectations with 860,000 people filing. More importantly, the number of people filing continuous claims, which are claims of at least two straight weeks, fell by 900,000 to 12.63 million. While this is an improvement, it’s not a significant one and indicates the return from March’s nadir will continue to move at a glacial pace.
August was not a good month for consumer spending as many Americans lost buying power after extended unemployment benefits ended. The $600 supplemental payment ended in July and the $300 August supplement is not available in all states. All told, economists project that the reduced unemployment benefits cut income by about $70 billion last month. That makes it very unsurprising that the Commerce Department’s report shows core retail sales falling by 0.1% last month. July’s total was also revised down to a 0.9% increase. Core retail sales exclude cars, gasoline, building materials and food services. When you include those more volatile categories, retail sales increased 0.6% in August.
Not only are Americans tightening up their spending habits, they’re also losing places to spend their money. On Wednesday, Yelp released its Economic Impact Report. The data indicates that 60% of the companies listed on Yelp’s platform have closed permanently. That’s a little more than 97,000 businesses. Other businesses that are simply closed temporarily total more than 163,000 for the month of August.
An Update on Oil
Oil prices continue to falter which has prompted action from OPEC+. Earlier this week the group delivered its monthly report in which members cut their forecast for oil growth in 2020. The forecast also came with a warning that risks remain “skewed and elevated to the downside” for 2021.
Although they did not announce any additional output cuts, OPEC did leave any action open-ended. In a statement released after their meeting on Thursday, OPEC said “The JMMC (Joint Ministerial Monitoring Committee) observed that the recovery has not been even across the world and an increase in COVID-19 cases has appeared in some countries. In the current environment, the JMMC emphasized the importance of being pro-active and pre-emptive and recommended that participating countries should be willing to take further necessary measures when needed.”
Since the beginning of the year, oil prices have dropped by 35%. This is due in large part to a lack of demand in travel-related oil expenditures.
A Material Problem Arises in Housing
For all intents and purposes, the housing industry is going strong. This week interest rates held steady with Freddie Mac’s 30-year fixed-rate average at 2.87%. Even better, Freddie Mac notes that first-time homebuyer activity jumped by 19% month-over-month in August as the low interest rate environment gives homebuyers more purchasing power.
The Mortgage Bankers Association weekly survey shows that overall mortgage application has slowed. However, that doesn’t mean it’s not strong. The MBA’s chief economist Joel Kan notes, “Purchase activity has outpaced year-ago levels for 17 consecutive weeks, with a stronger growth in loans with higher balances pushing MBA’s average loan size to a new survey high of $370,200.” Refinance activity is also still 30% higher than 2019 levels at this same time.
Also, homebuilder sentiment reached another 35-year high, hitting 83 points on the monthly NAHB/Wells Fargo Housing Market Index. Housing starts overall declined by 5.1%, but that was mainly due to a drop in multi-family construction, according to the Commerce Department. Single-family housing starts actually increased by 4.1% in August. Those new homes will be crucial to keep the retail purchase industry thriving. The big question is whether or not the projects can be finished and completed in a cost-effective manner.
In the recent NAHB/Wells Fargo Housing Market Index, builders continue to express concern about the lack of skilled labor. The new problem is the expense of building materials with wildfires across the West and another hurricane that just made its way through the Southeast. The cost of lumber has ballooned by 170% since April. According to the National Association of Homebuilders (NAHB), that materials cost has added $160,000 to the cost of each new home build. It’s now a wait-and-see moment for many lumber mills in the Pacific Northwest as they assess the damage to their acres of forest.
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