10-year note yield on the rise, Biden plan revealed
A new stimulus plan has emerged as President-elect Biden starts to outline his immediate plans for COVID-19 relief. Initially the thought was the plan would be worth around $1.3 trillion, but Biden revealed a $1.9 trillion spending plan in line with what was enacted last summer with the CARES Act. Biden’s plan, titled the American Rescue Plan, would dole out $1,400 direct payments to most Americans, increase unemployment benefits and extend the moratoriums on evictions and foreclosures until the end of September 2021, among other features. Markets had mostly priced in the stimulus plan so trading was only slightly affected, with the Dow trading up 150 points early Thursday before closing relatively flat. The S&P 500 finished just under breakeven on the day with the Nasdaq hitting an all-time high, up 0.7% in intraday trading, only to close up just 0.3%. Tech stocks Facebook and Microsoft each fell by 1% with other FAANG stocks Amazon, Netflix and Alphabet all trending lower. Markets were also little affected by a second impeachment of President Donald Trump and not swayed by the news of a single-dose vaccine being tested effectively by Johnson & Johnson. Investors, while positive about the future of a Biden administration for its expected relative normalcy, seem to be keeping a realistic view of the next few months of the current economic issues related to COVID-19. The yield on the 10-year Treasury note was trading at 1.10% early Friday morning. Expect the trend to move higher the next few weeks as inflation expectations move higher, especially with the new Biden stimulus plan. Time will tell on what that plan ultimately looks like. Jobless claims surged to nearly 1 million this past week, hitting the highest level since August. The report of 965,000 initial unemployment claims from the Labor Department was in sharp contrast to the 800,000 predicted by Wall Street. Continuing claims also rose, jumping by almost 200,000 to hit 5.27 million. The numbers did little to jostle Wall Street, however, as Thursday’s announcement from President-elect Joe Biden stirred positivity among investors. The current COVID relief plan allows for an extra 11 weeks of unemployment insurance payments, which runs through March 14. This continues to support people who are self-employed or typically would not qualify for state benefits, plus those who have exhausted their time limit for state benefits. Retail sales released Friday morning showed a disheartening 0.7% drop in December, according to the Commerce Department. November’s data was also revised down to 1.4% from 1.1%. When you look at the core retail sales, which exclude readings for gasoline, building materials and food, retails sales dropped by 1.9%. EARNING SEASON SHOWS HEALTHY BANKS Fourth quarter earnings released this week show major financial institutions like JPMorgan Chase and Citigroup faring much better than expected during 2020. JPMorgan Chase hit Q4 earnings per share of $3.79 against the forecast of $2.62. Revenue for the bank hit $30.16 billion, nearly $1.5 billion more than what was expected. Meanwhile Citigroup was slightly below expectations with $16.5 billion in revenue and more than $2 per share in earnings. That equals out to about a 10% drop in revenue and a 7% dip in earnings. CEO Mike Corbat said the results show a definite sign of “strength and durability of our diversified franchise” as revenues were fairly flat compared to 2019. Both banks got a boost from releasing reserve funds they had set aside to help mitigate any loan losses due to COVID-19-related defaults. Jamie Dimon, JPMorgan’s CEO, said government stimulus as well as the debut of effective vaccines for COVID were two main reasons for releasing the reserves. JPMorgan and Citigroup released $2.9 billion and $1.5 billion in reserves, respectively. POWELL DOUBLES-DOWN ON RATE FORECAST Federal Reserve Chairman Jerome Powell says the Fed is going to stand pat on interest rates for the foreseeable future. Addressing the crowd during a Q&A sponsored by Princeton University, Powell made the Fed’s course of action clear. “When the time comes to raise interest rates, we’ll certainly do that,” said Powell. He continued, adding “that time, by the way, is no time soon.” Currently, the Fed is buying about $120 billion in bonds each month. The overnight lending rate continues to hover around zero with inflation sitting at 1.4%, well under the 2% target rate. Powell added during the Q&A that any long-term issues don’t present any “obvious imbalances that threatened the ongoing expansion.” FEAR OF RISING RATES SPURS MORTGAGE MARKET Refinance holdouts stormed the market in the first week of 2021 as the fear of missing out on the historically low rates finally caught up with them. The predictions of rising rates this year helped spur a 20% spike in home loan refinance applications, according to the Mortgage Bankers Association. Refinance volume was 93% higher than this time last year. MBA associate vice president of economic and industry forecasting, Joel Kan, said in the release, “Booming refinance activity in the first full week of 2021 caused mortgage applications to surge to their highest level since March 2020, despite most mortgage rates in the survey rising last week,” Kan continued, saying “The expectation of additional fiscal stimulus from the incoming administration, and the rollout of vaccines improving the outlook, drove Treasury yields and rates higher.” Another encouraging data point for the housing market is the marked improvement in purchase applications for new homes. The MBA’s Builder Application Survey Data for December shows a small increase of 0.2% month over month, but a whopping 42.2% annual increase in purchase applications for new homes. Again, the issue of price especially on new construction can cause problems for some homebuyers. The average loan size for a new home increased by about $10,000 in December, to $367,502. The main headwinds of price and availability are what continue to stymie the purchase market for now, rising just 8% week over week according to the MBA’s data. However, the silver lining is that 9.2% of the purchase applications were for FHA loans. That signals, according to Kan, “a positive sign of more lower-income and first-time homebuyers returning to the market.” While rates did increase, they still remain below 3% on average. Freddie Mac’s weekly survey showed an average of 2.79% for a 30-year fixed-rate mortgage. Chief Economist for Freddie Mac, Sam Khater, expects that while mortgage rates will increase, the jumps will remain modest, continuing to support demand for purchases and refinances. Another important piece of the housing industry to keep in mind is the end of many forbearance relief programs coming up in March. While forbearance rates have slowed, hitting 5.46% this past week according to the MBA, they’re not declining as fast as they were previously. And as homeowners stay in the forbearance cycle longer, the less likely it is for them to be able to get back on track.