Market Update – 10/12/2020

Unemployment, housing and the Fed All On Watch Count

Initial Jobless Claims are still staggeringly high, as another 840,000 people filed for unemployment benefits during the week ending October 3. Meanwhile, another 11 million people are continuing to receive benefits, though this was an improvement by about 1 million from the previous week. The caveat to this data is that California, which makes up 20% to 25% of claims, did not report which means the number of claims filed could have been much better…or much worse.   

There was more evidence that the housing sector remains a bright spot in the economy, as CoreLogic’s latest Home Price Index report showed that homes appreciated nearly 1% from July to August. Prices were also 5.9% higher than compared to August of last year. In addition, Veros Real Estate Solutions released their forecast, showing that they believe home prices will rise 5% over the next twelve months, which is a strong upward revision to their previous forecast of 3.5% last quarter. 

The Fed released the minutes from their September 15-16 meeting, which showed that not all members agreed with the strategy for keeping the Fed Funds Rate at zero through 2023. This is the rate at which banks lend money to each other overnight and it’s important to note that it is not the same as home loan rates. Find out why the members disagreed – and how the disagreements differed – below.  

Jobless Claims Remain High, With Caveat 

 Initial Jobless Claims

Another 840,000 people filed for unemployment benefits for the first time during the week ending October 3, which is still a very high number of new claims. An additional 11 million people are continuing to receive benefits after their initial claim has been filed, which is an improvement of roughly 1 million people.  

In addition, 11.4 million people are receiving Pandemic Unemployment Assistance (PUA), which people can apply for when their regular unemployment benefits expire. PUA benefits are also for people who would not typically be approved for unemployment, like gig workers and contractors.  

All in all, the total number of individuals receiving some kind of unemployment benefits is at 25.5 million, which improved by 1 million. By comparison, there were 1.4 million people receiving some type of unemployment benefits during this same week last year. 

It’s important to note that California did not report due to an internal review they conducted to try and flush out some fraud they were experiencing, which means these numbers need to be taken with a grain of salt. California makes up 20% to 25% of claims due to its large population, so the numbers could have been much better or worse depending on how California did.  

The bottom line is that the lack of people working will continue to pressure supply chains. And with the economy becoming busier, this will only add to higher inflation. More about why this matters below. 

Home Prices Continue to Appreciate 

CoreLogic released their Home Price Index report for August, which showed that home prices increased nearly 1% from July and they’re up 5.9% compared to August of last year. Idaho, Arizona and Maine experienced the strongest price growth in August, up 10.8%,9.7% and 9.6%, respectively. 

CoreLogic also forecast that home prices will rise 0.2% in the year going forward, which is a decline from the 0.6% increase forecasted in the previous report. However, keeping this in perspective, CoreLogic had forecasted only a 0.1% monthly gain for August and the data came in at 1%, and the same thing happened last month as well. In addition, not too long ago CoreLogic forecasted a 6.6% decline in home prices in the year going forward, which they have revised significantly to now a positive 0.2% gain. With demand for housing so high, appreciation should continue.  

“The imbalance between homebuyer demand and for-sale inventory is particularly acute for lower-priced homes,” noted Dr. Frank Nothaft, chief economist at CoreLogic. “Because of this imbalance, homes priced more than 25% below the median were up 8.6% in price over the last year, compared with the 5.9% price increase for all homes.” 

Fed Strategy and Inflation 

The minutes from the Fed’s September 15-16 meeting were released on Wednesday and they showed that several Fed officials balked at the new interest rate strategy to keep the Fed Funds Rate at zero through 2023, in part because the guidance could limit the central bank’s flexibility. Note that the Fed Funds Rate is the rate banks use to lend each other money overnight and it is not the same as home loan rates.  

These Fed members also argued that by influencing the market’s view about the future path of short-term interest rates, “such guidance could contribute to a buildup of financial imbalances that would make it more difficult for the Fed to achieve its objectives in the future.” 

In addition, a few Fed officials argued against the strategy for different reasons. They wanted the Fed commitment to keep the Fed Funds Rate near zero to be even stronger and less qualified. They wanted the Fed to say that the policy rate would remain near zero until inflation had moved above 2% for some time. 

Remember rising inflation is especially important to monitor, as inflation reduces the value of fixed investments like Mortgage Bonds. And since home loan rates are tied to Mortgage Bond performance, if Bonds worsen or lose value as they can when inflation rises, then home loan rates can increase as a result. 

Home Hack of the Week  

For most families, a washing machine is one of the most crucial appliances in their home, which means preventing a breakdown is equally crucial. These tips from Apartment Therapy will help yours last for a long time. 

Help prevent mold and mildew by wiping any moisture off the door, the gasket around the door and the inside of the machine after each load. Removing clothes right away and keeping the door open so the interior can dry can also help. 

Follow the recommended guidelines for detergent type and amount for your machine. Clean the detergent dispenser frequently to prevent buildup.  

Each month, inspect hoses for tight fittings, cracks or leaks to help prevent floods. It’s also a good idea to periodically run a self-cleaning cycle per the instructions in your owner’s manual and to double check that the machine is level. 

What to Look for This Week  

After the market closures on Monday in honor of the Columbus Day holiday, inflation news will be making headlines. On Tuesday, look for September’s Consumer Price Index, followed by the Producer Price Index on Wednesday, which measures wholesale inflation. 

We’ll also get a read on small business optimism Tuesday with the NFIB Small Business Index for September. 

Jobless claims remain crucial to monitor when the latest report releases on Thursday, as usual. Thursday also brings a double dose of manufacturing news with October’s Philadelphia Fed Index and the Empire State Index, the latter of which measures activity in the New York region. 

Ending the week on Friday, we’ll learn how Retail Sales fared in September. 

Technical Picture 

The Fed continues to provide stability to the markets via its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds are trying to hold the line at the 25-day and 50-day Moving Averages, which is a very important floor of support as there is significant downside risk if they break beneath this level. 

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