Positive Jobs Report Boosts Markets as Tech Drags
The unemployment rate in the United States is back below 10% for the first time since March. The data released Friday morning by the Bureau of Labor Statistics shows unemployment is down to 8.4% with 1.37 million non-farm payroll jobs created in August. This is much better than economists had predicted. The report notes fairly significant, temporary job gains in the government sector due to the 2020 Census reporting. Other industries seeing notable gains include retail trade, in professional and business services, in leisure and hospitality and in education and health services
Dow futures picked up more than 100 points after the release of the data Friday morning. Meanwhile, the S&P 500 stayed flat as the Nasdaq started to dip. Dragged down by tech shares, many investors predict a Nasdaq correction after it hit all-time highs earlier this week. Apple was down by 2.5% in early Friday trading, with Facebook, Amazon and Netflix all in the red as well.
Markets have been volatile this week thanks mainly to tech stocks and employment numbers. Private payrolls increased by 428,000 jobs in July, but severely underperformed against the expectation of 1.17 million jobs added. The report from ADP showed that big business had the biggest gains. Companies with 500 or more employees added nearly 300,000 jobs in July.
The poor ADP report was part of the reason stocks took a nosedive on Thursday with the Dow slipping more than 900 points. The S&P 500 and Nasdaq, which both closed at record highs on Wednesday, slid 4% and 5.5%, respectively, on Thursday. In a reversal of what we’ve seen lately, tech stocks led the decline.
Weekly jobless claims were significantly lower than expected this week, coming in at just over 880,000 against 950,000 expected. It is important to note that the Labor Department adjusted its methodology for this week of data. Typically, the department will give adjusted numbers based on seasonality. For example, at the end of summer there would be a spike in unemployment claims because temporary summer jobs end. That means it’s likely that the unemployment numbers given during the pandemic may have been slightly higher than if they had been adjusted due to seasonality.
In any case, the numbers are still exponentially higher than they ever were pre-COVID. You can see in the chart below from CNBC just now drastic the rise was and the subsequent incremental fall.
While the question of labor is top of mind, directly affecting daily market moves, there are underlying economic currents related to the pandemic whose effects will be felt over the long-term. According to the Congressional Budget Office, the federal budget deficit is expected to hit a record $3.3 trillion. That means, the deficit will likely surpass the gross domestic product for the United States in 2021. That phenomenon has not happened since the end of WWII.
The deficit, released Wednesday, is more than three times the deficit from just a year ago. This is obviously due in large part to the $2 trillion COVID relief economic stimulus from the government. Another piece of the pie is smaller income tax returns. Individual income tax collection is down 11% from 2019 with corporate income taxes down 34% from last year.
We are also watching the yield curve on Treasury bonds. Just last year there was great concern for a recession as the yield curve inverted between the 10-year and 3-month Treasury notes. Now, the spread between the two Treasury yields has steepened to its widest level in two months. The bond market started steepening as investors prepared for the Federal Reserve’s recent inflation announcement. Once it became official that the Fed will let inflation run higher than normal for a period of time, longer-term debt yields started to rise. Initially, the 2-year note yield held steady at 0.16% while the benchmark 10-year note rose to 0.74%. In early Friday trading, the 10-year traded at 0.636% with the 2-year note trading at 0.127%.
Rates Stay Low, But Maybe Not Much Longer
The latest numbers from Freddie Mac show that the average for a 30-year fixed-rate mortgage is standing at 2.93%, relatively unchanged. However, as we see the yield on the 10-year Treasury note increase, mortgage spreads are declining. Freddie Mac’s economists note that even if mortgage spreads decline, the increase in Treasury yields might make it difficult for rates to stay this low much longer.
Another factor that could influence rates is the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, trying to raise capital in an attempt to go public. A proposal from the Federal Housing Finance Authority to help the GSEs raise capital would likely mean Fannie and Freddie would have to raise their guaranty fees. Known as g-fees, those fees are what Fannie and Freddie charge when they sell packaged mortgage-backed securities to investors in order to guarantee the interest will be paid. The rise in g-fees will likely be passed on to lenders and eventually consumers in the form of higher interest rates.
Some good news this week from Fannie and Freddie is that forbearance rates for loans backed by the GSEs fell to a four-month low. However, the total forbearance rate remains unchanged, according to the Mortgage Bankers Association, because the rate for loans backed by Ginnie Mae (VA and FHA) went up. The MBA’s chief economist, Mike Fratantoni, said in the release, “The loss of enhanced unemployment insurance benefits, coupled with a consistently high rate of layoffs and uncertainty about the job market, are having a disproportionate impact on FHA and VA borrowers.” Fratantoni was referenced the $600 weekly stipend for unemployment which expired at the end of July.
Last week both Fannie and Freddie joined the FHA in extending a moratorium on evictions through the end of 2020. This week, President Trump announced that the Centers for Disease Control would invoke its authority to also halt evictions in order to curb the spread of the coronavirus.
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