Last Week in Review: Fed Pushes Everything Higher, Except Rates
“We’re not even thinking about thinking about thinking about raising rates.” — Fed Chairman Jerome Powell, August, 2020
This recent quote by Fed Chair Powell says it all.
Coronavirus has caused the largest shock to the U.S. economy in living memory. Second Quarter GDP declined at a 33% annual rate — the worst reading in American history.
What has also been unprecedented?
The policy response. The Federal Reserve, Treasury, and administration have responded with trillions of dollars in stimulus measures to help underwrite, or carry, the economy through this temporary nightmare — and more is coming.
As the Fed eluded in the quote above, they will be keeping the overnight Fed Funds Rate at zero for years. This means rates on short-term loans like autos, home equity lines of credit, and credit cards will remain historically low for a long time.
Additionally, the Fed said they will do “whatever it takes” to keep long-term rates relatively low. They are doing this through an open-ended quantitative easing program where they purchase both Treasuries and mortgage-backed securities. These “buying operations” will continue to keep long-term rates, like mortgages, relatively low.
They also have other “tools” they can use to pin down rates, including Yield Curve Control. We shall see if they use this in the months ahead to further “tell” the markets they are committed to keeping rates lower for longer.
How have the markets responded?
This week, virtually everything traded higher. Stocks were nicely higher, with the NASDAQ hitting all-time highs. Precious metals like gold and silver were sharply higher, and Bonds traded higher causing yields to fall to historic lows. The 10-year Note yield entered the weekend at .51% — the lowest “closing” yield since George Washington crossed the Delaware River.
Stocks are at all-time highs creating a positive wealth effect for millions of Americans. States and economies continue to re-open with millions of Americans back to work. The economic damage caused by the coronavirus will take a while to repair, so expect even more policy response with the Fed leading the charge.
Next week will be interesting and could disrupt the good vibes seen in the market this past week. The Treasury “supersized” next week’s Treasury auctions by adding billions in Treasuries to be sold. It will be important to follow the buying appetite for all of this new Bond supply with rates at historic lows. On the economic calendar front, we do have some inflation readings to follow. Inflation is a concern down the road as the economy makes progress, but not today. If inflation does rise, home loan rates will rise too.
Last Week in Review: The Good, The Bad, The Ugly
The path of the economy will depend significantly on the course of the virus.” — Fed Monetary Policy Statement, July 29, 2020
This past week, home loan rates hovered at all-time lows in response to uncertainty surrounding the economic impact of COVID-19 and the realization that the Fed will keep rates low for a very long time.
The 10-year Note yield has moved convincingly beneath .60% for the first time since March 9th and that could lead to a further decline in yield in the days, and potentially weeks, ahead. This means that mortgage-backed securities, the driver of home loan rates, will have room to improve even further.
Housing continues to be the bright spot in the U.S. economy. Pending Home Sales soared this week and the real estate community has boosted their sales forecasts for 2020, suggesting the good times in housing will continue for the foreseeable future.
Stocks hate and Bonds love uncertainty. There was plenty of it this past week.
On Thursday, President Trump issued a tweet suggesting the election will be delayed until people can vote in person safely.
Technology shares, which have risen sharply since the lows in late March, experienced sharp price losses midweek as CEOs from Apple, Google, Amazon, and Facebook were gathered for an antitrust hearing and “grilled” by lawmakers on Capitol Hill. The hearings elevated fears that further regulation, and potentially the breakup of some very large companies like Amazon and Google, are in the future. Come Thursday, the argument that these firms are too big might have become stronger as each firm posted very strong corporate earnings and guidance, sending their Stock shares to all-time highs heading into the weekend.
Congress, which can never seem to agree on anything, is at it again this week as both sides are not even close to coming up with a new stimulus measure to further help the economic recovery. There is likely to be a resolution, but it’s unclear as to when and how significant it will be.
Gross Domestic Product (GDP), which measures U.S. economic output, came in at -32.9% for the second quarter. This was the worst quarterly economic decline in U.S. history. The markets were expecting an ugly number so the market reaction to this backward-looking data was a bit muted.
On a brighter note, it appears the recession ended in the second quarter while the third quarter is likely to show the largest increase in GDP in U.S. history. This is also expected as the economy improves sharply from what essentially was a shutdown for most of the U.S. economy.
Next week will provide a look into the labor market with the ADP report on Wednesday and the Jobs Report on Friday. At the moment, unemployment is too high, and inflation is too low, so the Fed is not likely to raise rates for years.
Bottom line: Housing continues to shine, and unemployment continues to decline, but at a slower pace due to COVID-19. Rates are at a historic low with a chance to move even lower, and the Fed just told us they are likely to remain low for the foreseeable future.
Last Week in Review: Stocks and Bonds are Getting Along, for Now
This past week, Freddie Mac reported the average 30-year mortgage is at an all-time low of 3.01%
At the same time, the NASDAQ and Stocks overall are hovering right near all-time highs. Typically, when Stocks move higher, so do rates. Not this time around. So, what’s happening?
Bond prices are moving higher and rates lower in response to fear and uncertainty surrounding COVID-19, along with the reality that inflation will remain low and unemployment will remain elevated for the foreseeable future. Also, helping Bonds and rates is the daily buying of Treasuries and mortgage-backed securities from the Federal Reserve.
Stocks are hovering near all-time highs due to state and economy re-openings, positive economic data, along with an overwhelming monetary response from the Federal Reserve and Treasury.
It’s very likely that both Stocks and Bonds will continue to remain elevated in price, with rates remaining low, as we work through COVID-19 while monetary response remains in place.
Once we move past COVID-19 — and we will — the monetary response will ratchet down significantly and the next directional move in Stocks, Bonds, and rates will be determined by the health of the economy, inflation, corporate earnings, and the relative performance of the U.S. versus the globe.
Bottom line: Home loan rates will likely remain historically low for quite some time as it will take a while to fully repair the economic damage caused by COVID-19.
Last Week in Review: Home Builders and Homebuyers Feeling Really Good
This past week, the National Association of Home Builders (NAHB) reported that their Sentiment Index for June rose sharply to 72, thereby lifting the index to exactly where it was in March, prior to COVID-19.
Within the report there were sharp increases in the following three components:
- Sales conditions
- Sales expectations
- Buyer traffic
Builders in the Northeast and Midwest are seeing a surge in demand after being sidelined from COVID-19.
One of the interesting parts of the report came from Robert Dietz, NAHB’s chief economist, who shared this, “Nonetheless, the important story of the changing geography of housing demand is benefiting new construction. New home demand is improving in lower density markets, including small metro areas, rural markets, and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”
On top of this great housing story, Freddie Mac reported that the average 30-year mortgage hit an all-time low of 2.98%, making homebuyers feel very good.
Bottom line: Housing will continue to shine for the foreseeable future as low rates, household formation, migration to suburbs, and flexibility to work remotely provide a tailwind.
Last Week in Review: Low Rates Plus Buying Demand Equals Good News
This past week, Freddie Mac reported mortgage rates hit an all-time low of 3.03%. What is most impressive with the improvement in mortgage-backed security prices and rates, is it happened as Stocks enjoyed nice gains, with the NASDAQ hitting all-time record highs.
Typically, when Stocks improve in price, it is at the expense of Bonds and rates, but not this week.
On Wednesday, the markets received a signal suggesting rates will remain low for quite some time and they might even go lower.
Every couple of weeks the Treasury Department sells or auctions off Treasury Notes and Bonds to help fund our government. Now, with the unprecedented amount of stimulus, the Treasury will be selling even more Bonds for a long time to cover the tab.
The good news? The buying appetite for the 10-year Note auction was the best ever — with the yield hitting a record low .65% in the auction.
This means investors continue to seek the “safe haven” of the 10-year Note from other markets, and even though investors are only receiving a paltry .65% yield, it far outweighs other yield options around the globe where negative rates are common.
This past weekend, the 10-year Note yield had dropped further and beneath .60% for the first time in months and only did so a couple of times. This is important to follow as a sustained move beneath .60% would help push mortgage-backed securities higher and pull home loan rates lower.
Bottom line: Interest rates are going to remain relatively low for a long time, which will help many families restructure their debt while providing a tailwind for housing for the foreseeable future.
Home loan rates continue to hover at historic lows, presenting an incredible opportunity for existing and future homeowners.
Will rates move another leg lower or is this the bottom? Stocks had a rough week. What’s next for them?
There are 3 things to track as we move through summer:
- Spikes in coronavirus cases in several states: This is a real concern that comes with both a human and economic toll. We have to watch and pray that hospitalizations don’t increase significantly. From an economic standpoint, there will be a negative effect. At the very least, it delays state re-openings and continues the “incremental” improvement in the economy. Should cases rise significantly and cause even more chaos, Stocks may decline, thereby helping Bonds and rates.
- Overwhelming policy response: The Fed, Treasury, and administration are spending trillions of dollars to help underwrite the economic recovery, and many trillions more will be spent. There are rumors that another PPP (Paycheck Protection Program) plan will come together before Congress recesses in August. There is also a $1 trillion infrastructure bill being debated. In addition, the Fed will continue to purchase mortgage-backed and Treasury securities in the open market, and will hold rates near zero for as far as the eye-can-see. Stimulus helps both Stocks and Bonds, but Stocks even more, as the overwhelming support takes a bit of risk out of the markets … hence the term, “Don’t fight the Fed.”
- Watch the technicals: For all rates — including home loan rates — to improve much further, the 10-year yield has to move beneath .60%. This is something that has only happened a couple of times during the darkest moments of COVID-19. For Stocks, the S&P 500 is trying to remain above its 200-day moving average, currently at 3,020, an important technical marker. If Stocks regain some of this week’s losses, it could be at the expense of Bonds and rates. Should the S&P 500 move sharply beneath its 200-day moving average, we will likely see an extended selloff, thereby helping Bond prices.
The next directional move in the financial markets and the overall economy will likely be determined by the first two bullets, with the technicals further confirming this move.
Bottom line: With rates at all-time lows, now is a wonderful time to lock in a mortgage. No one knows what the future will bring, but we do know the policy response will continue to grow which generally helps Stocks and limits Bond/rate gains.
Last Week in Review: Fear Versus Hope Driving the Markets Again
This past week, Freddie Mac reported mortgage rates hit the lowest in U.S. history — 3.13%.
The improvement in rates is a direct result of jobs returning, lowering the risk of mortgage default, coupled with increased competition forcing the industry to “sharpen” pricing.
What happens next for rates?
We are watching fear versus hope play out again and the coronavirus is taking the headlines.
A spike in cases and hospitalizations in several “re-opened” states is causing fear, anxiety, and uncertainty, which Stocks hate and Bonds and interest rates love.
On the other side of the coin, there are many positive, optimistic, and hopeful reasons why Stocks remain elevated and are limiting the improvement in rates. These include:
- States and businesses re-opening.
- Fed stimulus continuing to support Stocks and Bonds.
- Low rates helping homeowners and fueling consumer spending.
- Pent-up demand. The savings rate hit 33%, with many Americans staying home and just starting to get outside.
- Homeownership demand and housing is doing extremely well and will add to the economy.
- Additional Treasury and administration stimulus will be passed to underwrite the economic recovery.
Bottom line: With home loan rates at historic lows, housing demand increasing, and many positive forces at play, today makes an incredible time to lock at the best rates ever. If the positive forces mentioned win the day and a second surge in cases doesn’t reemerge, rates may not improve much further, if at all. Finally, remember that the 10-year Note yield has not moved beneath .60% for any sustained time during the darkest days of COVID-19. This means that in order for rates to improve much further, things may have to get even more uncertain than those times.
Last Week in Review: Fed says Zero – Rates Improve
About every six weeks the Federal Reserve meets and decides whether to make potential changes to the Fed Funds Rate, an overnight lending rate. They also release their Monetary Policy Statement which includes the reasoning for their action or inaction.
This past week, it was Fed Week and while they didn’t change rates or offer any big surprises it was the actual “zero” which ultimately hurt Stocks and helped Bonds and home loan rates.
The Fed said they are likely to keep the Fed Funds Rate at the current rate of zero, potentially through 2022.
Why would the Fed not hike rates for possibly 18 months or more?
It’s important to understand the Fed’s dual mandate and primary functions: to promote full employment and manage price stability (inflation). At the moment unemployment is highly elevated at 13.5% and it will take time for the labor market to get back to the 3.5% we saw just a few months ago.
The other reason is inflation or price stability. At the moment, inflation is running well below the Fed’s target of 2.00% and is likely to do so for the foreseeable future. With inflation currently no threat, there is no pressure for the Fed to raise rates.
What does this mean for mortgage and housing? Mortgage-backed securities are Bonds which influence home loan rates. Inflation is the main driver which pushes them higher or lower. If inflation indeed remains low as the Fed is currently forecasting, then home loan rates will remain relatively low for the foreseeable future.
Supporting the notion for low inflation in the near-term is the incremental re-opening of states and businesses. This will make consumer demand return more slowly as well.
In addition to the status quo on rates, the Fed also said they will continue to buy Treasuries and mortgage-backed securities on a daily basis to “sustain smooth functioning” of the markets. This action will also help keep home loan rates lower for longer.
The bottom line: The backdrop for housing and the economy continues to be bright. Inflation is low, jobs are returning, consumers are eager to spend, housing demand is increasing, and we should expect the Fed, Treasury, and administration to do whatever it takes to underwrite a full economic recovery.
Last Week in Review: Four Reasons Why Rates are on the Rise This Week
This past week, home loan rates ticked a bit higher from their best levels in U.S. history. More importantly, this increase in rates may be the start of a trend in higher rates.
Here’s four reasons why rates rose and why they may continue to do so:
- Economic optimism: More and more states are reopening, and people are getting back to work. Friday’s Jobs Report showed 2.5 million jobs were created, when 8 million jobs were expected to be lost. The unemployment rate rose to over 13%, but expectations were for a much worse 20% unemployment rate. Bonds and rates don’t like good news, and this was good news.
- Overwhelming policy response: The Fed and U.S. Treasury’s response to help the economy get through the coronavirus impact is by far the largest monetary stimulus in the history of the country. This is more positive news which has helped Stocks trade to their best levels since March 4. As Stocks move higher, many times rates do as well. We saw that this week.
- Coronavirus uncertainty abating: Hope and optimism are rising now that we are well beyond the worst of the coronavirus. If states continue to see unemployment and new cases go down, the optimism will be justified and better times will be ahead. Stocks and rates increase during better days.
- Global yields are increasing: In Germany, their 10-year Bund yield has moved from -.60% to -.27% as of this weekend. This is for the same three previous reasons. If yields in Germany continue to move higher from negative territory, U.S. rates, including home loan rates, will continue to tick higher as well.
The good news: Any uptick in rates in the near-term may be limited for two reasons. The Fed continues to purchase Bonds on a daily basis, thereby holding yields down, and economies are reopening slowly, so rates should increase slowly over time as well.
Bottom line: With rates at all-time lows, if you can secure a home loan to either refinance or purchase a home, now is a great time.
Last Week in Review: All-Time Low Home Loan Rates
This past week, Freddie Mac reported the 30-year home loan rate hit an average all-time low of 3.15%.
As the unofficial start of summer has begun and states continue to reopen, this is welcome news, but there is even more to the story.
- Refinance activity remains elevated and with the average refinance loan amount declining, it means many borrowers with smaller loan amounts are able to lower their interest rate expense. This can be a positive economic contributor in the months ahead.
- Housing demand has increased sharply over the past couple of weeks and the low interest rates have been a contributing factor.
There was a lot of bad economic data this past week, but most of it was backward-looking. Within Weekly Initial Jobless Claims was continuing claims, a ray of sunshine and a leading indicator of labor market strength.
Last Thursday, nearly 4 million more people than expected came off unemployment benefits — meaning people are finding work or have gotten rehired. We are watching to see if this trend continues as the U.S. economy continues to reopen.
Bottom line: With rates at all-time lows, housing demand remaining strong, people going back to work, and optimism rising, we should expect the housing market and broader economy to continue to improve and ultimately thrive in months ahead.