Wall Street, mortgage markets unfazed by political unrest
Markets hit record-highs this week despite the tumult in Washington D.C. The day after the conflict on Capitol Hill and the confirmation of Joe Biden, the Nasdaq traded above 13,000 for the first time ever with the S&P up over 3,800 for the first time. The Dow jumped by 300 points during Thursday’s intraday trading and continues to trade above 31,000 points as of Friday morning.
The tech-heavy Nasdaq hit a setback earlier this week, dropping by 1%. There is an expectation among investors that the Democratic-led executive and legislative branches will institute increased federal spending, more regulation and also increased capital gains taxes. However, economists also feel that the changes will be more gradual instead of sweeping in order to not upset a fragile economy.
This week also marked the first time since March 2020 that the yield on the benchmark 10-year Treasury note rose above 1%. While the increase is an important psychological point, it will be important to watch the market’s expectation for inflation in the coming months and throughout the year. As this happens, expect to see the yield curve continue to steepen.
Right now, the separation between yields on the 2- and 10-year notes is currently trading at 94 basis points. Multiple times during 2019 we saw the curve invert, which is usually a sign of impending recession. The curve also briefly inverted in February of 2020, just before the pandemic hit in full force.
The markets also saw a boost due to positive manufacturing data. This week the Institute for Supply Management released its December analysis of manufacturing sentiment and activity, reporting at reading of 60.7–its highest since August 2018. Any reading above 50 signals an expansion of activity.
The prices paid index also jumped by about 12 points to 77.6 from November to December. That is a significant jump, likely boosted mostly by the cost of commodities like oil, but it’s also an important inflation indicator. Overall, the increase in the prices paid does suggest the low supply and high demand for goods will put upward pressure on the price of domestic core goods.
LACKLUSTER JOBS REPORT REINFORCES ECONOMIC ISSUES
Both the Labor Department and ADP payroll reports show that, for the first time since April, the U.S. workforce has seen a reduction in jobs. The Labor Department’s monthly jobs report for December showed a loss of 140,000 jobs. That is drastically different than the 50,000-job gain predicted by economists. The unemployment rate held steady at 6.7%. Stock futures were unfazed by the news and continue the bullish run with Dow futures up nearly 100 points and the Nasdaq and S&P futures up 77 points and 13 points, respectively.
Economists had also been expecting a modest gain in private payrolls, but ADP reported a decrease of 123,000 private sector jobs in December. As one might expect with reinforced lockdowns and curfews enacted due to a surge in COVID cases, the leisure and hospitality sector bore the brunt of the cuts with 58,000.
Initial claims for unemployment remained steady, coming in at 787,000 for the week ending Jan. 2. The Labor Department’s report also shows continuing claims dipped by 126,000 to just over 5 million total.
WHAT THIS MEANS FOR MORTGAGES
This week the average on a 30-year fixed-rate mortgage dropped to 2.65%, according to Freddie Mac. That is yet another historic low. Economists have been saying for months that rates this low will continue into 2022 as the economy slowly recovers from the fallout of COVID. That was before the Senate runoff elections this week. Now, the prediction is that the slight Democratic advantage in Congress will start putting gradual upward pressure on rates.
That being said, longer-term interest rates are likely to increase. Mortgage rates will tend to follow longer-term rates, but lenders will want to maintain capacity to continue to originate and have some margin to play with. That will keep mortgage rates lower on a relative basis.
Mortgage institutions, like the Mortgage Bankers Association, have revised their 2021 forecasts to include higher interest rates due to the expected increase in federal spending. That means they also expect the refinance boom may have already hit its peak.
MBA Chief Economist Mike Fratantoni said, “MBA anticipates refinance originations to be strong in 2021, but slowing from 2020 to around $1.19 trillion, The prospects of increased spending and deficits will likely put upward pressure on mortgage rates as the year progresses, which in turn could lead to the current refinance wave ending a little sooner.”
The end of December brought a distinct slowdown in the home purchase market, despite interest rates remaining at historic lows. The Mortgage Bankers Association’s data shows just a 3% annual gain in purchases over the last two weeks of the month. Comparatively, the last few months have seen steady 20% annual purchase gains. Home prices are one obvious culprit.
The latest S&P Case Shiller Index shows that, nationally, home prices rose 8.4% annually in October. That is up from 7% in September. It’s been more than ten years since the index has seen that kind of a one-month jump. The demographics of the price increase have also shifted dramatically.
Typically, large cities on the coasts have seen the greater increase in prices due to lack of supply and strong demand. COVID-19 has changed that. Remote working environments have allowed people to spread out away from urban areas and find more spending power in smaller cities. Places like Kansas City, Boise, Pittsburgh and others have shown the strongest price gains right now, according to the Federal Housing Finance Agency.