Coronavirus fears have driven interest rates across the developed world to historic lows. Equity markets have reacted violently to the uncertainty around how this new disease may disrupt global supply chains and affect overall economic activity.
In response to these concerns, the Federal Reserve stepped in earlier this week with an emergency 50 basis point rate cut. This cut was an attempt to promote confidence throughout the financial system and push down short-term interest rates, which will help corporations and individuals attain lower-cost financing.
There is no way of knowing what affects this virus will have on the globally interconnected economy and if it will send the world into a recession. What we do know is that it will eventually run its course and that disruption will stop once our scientific community develops remedies to combat the virus. It is important to note while the virus is very contagious, it does not appear to be extremely deadly for most healthy individuals. As a result, travel and leisure businesses will be hit hardest should the virus spread. On the other hand, the U.S. service economy (70% of the U.S. economy) is derived from service) may adjust better than currently being forecasted in the equities market given all the technology tools that permit employees to work remotely.
In other news, the February jobs report was a good one with a better than expected job creation number, while unemployment remained at 3.500%. However, even a good jobs report didn’t matter as the equity markets shrugged off the good news.
Government-guaranteed interest rates have touched levels most of us believed we would never witness unless we were in a full-on depression. The 10-year Treasury ended the week at .78%, which is remarkable, but also a bit scary. While banks lowered interest rates, it is important to note that as rates approach zero, it becomes increasingly difficult for banks to earn a net margin. The result is that mortgage rates remain higher than what some customers believe mortgages should be priced at. Should interest rates remain low, we would expect mortgage rates to continue to slide lower. However, we do expect that rates will move up once a clearer picture on the coronavirus emerges. It is our belief that rates will remain low for quite some time.
The 30-year U.S. Treasury bond hit an all-time low on Friday as investors fled riskier assets and sought the safe haven of U.S. government-guaranteed debt. The causes for concern were weak overseas manufacturing data and ongoing uncertainty in handicapping how the coronavirus (now named “COVID-19”) will affect economic growth in the coming months. Should this virus become more of a problem, interest rates will plunge. For now, no one knows how this virus will evolve, but to date, it appears to not be as deadly as biologically similar infections.
Earlier in the week, bond yields held firm even after hotter than expected PPI and Core PPI inflation readings.
Home buying season should be a good one with interest rates remaining low for the foreseeable future. Supply and affordability will be the bigger issue, especially in the more expensive coastal markets. Building permits surged but housing starts fell which should put even more pressure on short term supply concerns.
With rates near historic all-time lows, we continue to believe that locking-in is the right course of action. The wild card is the potential threat that the coronavirus will have on global productivity. For now, that risk is low, but it may change. If the virus becomes an international pandemic, expect the U.S. 10-year Treasury to touch 1% or lower.
The U.S. equity markets traded at all-time highs on the last full trading week of the year. The market’s soaring prices were propelled to record levels by accommodative monetary policy, positive news on the U.S. – China trade deal, a strong consumer, and unwinding of recession fears. Final GDP 3rd quarter numbers were also released on Friday and were not revised, showing economic growth growing at a respectable 2.1%. Overall, the U.S. economy is in good shape and the recent stock market gains are a vote of confidence, supporting that narrative.
Homebuilders remain confident and housing starts surprised to the upside earlier in the year. Most economists had predicted the 10-year U.S. Treasury would end 2019 at above 3.000%. The plunge lower in rates (10-year U.S. Treasury currently at ~1.92%) has been a big factor in spurring home purchases and refinances, as well as underpinning the surge in equities and other asset prices. If rates remain low, we would expect the consumer to remain bullish and continue to spend on autos, homes, and other high-cost durable goods.
Banks remain aggressive on pricing and mortgage banks continue to serve the demand by self-employed borrowers who face challenges documenting their income. Rates are low and should be locked-in. Continued positive data both in the U.S. and abroad could lift rates higher. Then again, maybe they won’t.
Stocks rose this week following good earnings news from America’s best companies, as well as some positive news on the China-U.S. trade issues. News can change on a dime on this issue so please take this into consideration when reading this post. While durable good orders were down slightly and the China trade conflict has created challenges for U.S. companies doing business in China, feedback from third-quarter earnings supports the slowing economy here in the U.S. and removes the recession narrative for now. Also, with over a 90% probability of a rate cut next week by the Fed, the yield curve has steepened. This is another good indicator that there is no near-term recession on the horizon and that the Fed has gotten out in front of the threat of recession.
New housing purchases slowed as interest rates rose from near-historic lows which put more pressure on borrowers to qualify. Rates are still very attractive and have definitely helped to spur purchase and refinance activity. With the 10-year now at ~1.80% from below 1.500% not too long ago, we continue to advise locking-in interest rates.
In closing, the U.S economy continues to be in a “Goldilocks” trend as inflation is muted, unemployment rates are low, and businesses are doing fairly well. Keep an eye out for results of the Fed committee meeting along with numerous other economic reports which will be trickling in next week.
In another volatile week in the markets, the September jobs report helped soothe recession fears with a report that came in close to estimates. After a poor ISM reading (Institute of Supply Management) and service sector reading earlier in the week, some forecasters were fearing a terrible jobs number. We are happy to report that this not come to fruition. While we are certain that volatility will be a given, it is hard to argue that a recession is on the horizon considering the very low 3.500% unemployment rate.
The September jobs report was solid for a number of reasons. First, the market was primed to expect a major dud. Secondly, there were upward revisions from the past previous reports (i.e. there have been even more people working). Thirdly, unemployment dipped to a 50-year low and the U-6 reading, which includes those working part-time and those “discouraged” workers who’ve stopped job-hunting, dipped to 6.9%. Finally, wage inflation is under control which puts a lid on bond yields.
Housing has rebounded, and low-interest rates are boosting mortgage applications. Lower monthly housing payments free money up in consumers’ budgets, which can be spent on other goods and services, which helps the overall economy.
With the September jobs report behind us, and the 10-year Treasury yielding around 1.51%, we are recommending locking-in loans at this level. While rates could go lower, it is hard to imagine a <1% 10-year Treasury yield for the moment, given the current generally healthy state of the U.S. economy.
Mortgage bonds had another good week as interest rates remain low. This week served up several market-moving headlines highlighted by impeachment headlines, positive news on the U.S.- China trade talks, and good housing numbers. Inflation picked up a touch, with the Fed’s favorite inflation gauge, the Core PCE, ticking up to 1.8% annualized inflation rate from a previous reading of 1.6%. However, this annual rate of inflation is still below the Fed’s 2% target and for the moment a non-threat to the bond market. Inflation and economic expectations for the future are what drive longer-dated bonds.
Next week will be a big week with the September jobs report. Given the slowdown in manufacturing and the recent lower reading on consumer confidence, we will be watching the jobs report with much interest. The U.S. economy has been resilient through the present moment and is the envy of the developed world. The big question has been how long can the U.S. continue to outperform other large economies. The jobs report will shed some important light on this question.
In housing news, the National Association of REALTORS® reported a pick up in homes under contract, thanks to lower interest rates. With interest rates near all-time lows, we continue to believe that locking-in interest rates are the way to go as playing the market is simply too risky, especially with lenders near capacity.