Market Update – 12/14/2020

COVID cases and decline in Paycheck Protection Program money taking us in the wrong direction.

The rise in COVID cases and decline in Paycheck Protection Program money is having a worsening impact on businesses and workers around the country, unfortunately, as jobless claims trended in the wrong direction in the latest report. The number of people filing for unemployment benefits for the first time increased by 137,000 to 853,000. The number of people continuing to receive benefits also rose by 230,000 to 5.575 million.  

However, hope is on the horizon as a federal advisory panel recommended emergency use of Pfizer’s vaccine, which could lead to distribution quickly as soon as it’s approved by the FDA.  

Consumer inflation remained tame in November, per the latest Consumer Price Index report. Headline inflation was up 0.2% in November while the year-over-year reading remained unchanged at 1.2%. Core inflation, which strips out volatile food and energy prices, was also up 0.2% monthly while the annual reading was unchanged at 1.6%. Inflation was also tame at the wholesale level per November’s Producer Price Index. More below about why tame inflation matters to Mortgage Bonds and home loan rates. 

While inflation remains tame now, there is a point to note from the latest National Federation of Independent Business Small Business Optimism Index, which dropped 2.6 points in November to 101.4, a three-month low. Within the report, those seeing higher selling prices rose 3 points to the highest level since May 2018, which is just 1 point from matching the highest since 2008. This data speaks to businesses not having enough people to help their supply meet demand, which is a sign that temporary inflation could be on the horizon. 

Lastly, you may have heard recent reports in the media about an “affordability” crisis when it comes to home prices. The good news is that these reports are untrue, as explained below. 

Initial Jobless Claims Rise in Latest Week 

 jobless claims

Another 853,000 people filed for unemployment benefits for the first time during the week ending December 5, which is an increase of 137,000 claims from the prior week. California (+178K), Illinois (+106K) and New York (+63K) reported the largest increases.  

Continuing Claims, which measure people who continue to receive benefits, also increased by 230,000 to 5.575 million. 

In addition, remember that when regular benefits expire, people can file for Pandemic Emergency Unemployment Compensation (PEUC), which extends their benefits for another 13 weeks. The number of Pandemic Unemployment Assistance claims did decline by 313,000, but unfortunately for all the wrong reasons as benefits are expiring. 

Keeping an Eye on Inflation 

The latest Consumer Price Index (CPI) showed that inflation at the consumer level was tame in November, up 0.2% from October. The year over year reading remained unchanged at 1.2%. Core CPI, which strips out volatile food and energy prices, was also up 0.2% on a monthly basis while the year over year reading was unchanged at 1.6%.  

Also of note, rents are rising 2.4% across the US, which is down from 3.5% last year. 

Inflation was also tame at the wholesale level, as November’s Producer Price Index showed that headline inflation increased by 0.1%, which was in line with market expectations. On a year over year basis, headline PPI increased from 0.5% to 0.8%. The Core rate, which again strips out volatile food and energy prices, was also up 0.1% for the month, and increased from 1.1% to 1.4% year over year.  

While these numbers are still relatively low, the year over year readings could continue to move higher as demand outpaces supply for goods and services. Those higher producer costs could translate to higher consumer costs and inflation. 

Why does this matter?  

Inflation erodes the buying power of a Bond’s fixed coupon over time, meaning rising inflation can cause Bonds to worsen or move lower. Home loan rates are inversely tied to Mortgage Bonds, so when Bonds worsen, home loan rates can rise. Though many factors influence the markets, tame inflation can benefit Mortgage Bonds and help home loan rates remain low.  

The Affordability “Myth” 

You may have heard some recent reports in the media about problems with home affordability. The truth of the matter is that the “problem” being reported about affordability is in fact a myth. Homes remain affordable today and in some cases are even more affordable today than they were a year ago. 

What causes this confusion?  

Sometimes, the media mistakenly looks at the significant move higher in the median home price, which is currently up 15% versus last year. But the median home price does not measure appreciation. Instead, it marks the middle price point of recent home sales. 

Home prices have appreciated in the last year, but only 7% per the latest reports. Meanwhile, rates have fallen in this same period. This means that for many people, the monthly principal and interest payment to buy a home today could actually be lower than last year! 

In addition, weekly earnings have risen 5.9%, so some people have even more money each month to put toward their mortgage and other monthly expenses. 

The bottom line is that there is reason to feel positive and not negative about the housing market. With rates near all-time lows, there are great opportunities for people hoping to buy a home next year! 

Family Hack of the Week  

Like many traditions this year, holiday parties may be virtual for many of us. Here are some fun ways to make the occasion memorable. 

A day of virtual decorating, baking and listening to holiday music together is sure to put everyone in the holiday spirit. You can even plan contests for best decorated cookies, tree, mantle and more. 

Sharing holiday memories can also make everyone feel closer. Plan a card exchange before the party, whereby guests draw a name and write a card saying what the person means to them. Cards can be read aloud during the party or shared privately. 

A game of holiday and seasonal trivia is always a fun idea, with prizes for who brings the most impressive stats. For example, per Guinness World Records, did you know that Residents of Bethel, Maine, and nearby towns completed the world’s tallest snowman (which was actually a snow woman) on February 26, 2008 and that it measured 122 feet and 1 inch tall, just a few feet shorter than the Statue of Liberty?   

Lastly, watching holiday movies together is always a treat. From classics like A Christmas Story to newer favorites like Home Alone, you can plan a marathon filled with options everyone will enjoy. 

What to Look for This Week  

The middle of the week is jam-packed with key report across multiple sectors of the economy. 

On Tuesday, we’ll get an update on manufacturing in the New York region with December’s Empire State Index, followed by the Philadelphia Fed Index on Thursday. 

In housing news, we’ll get a real-time update on builder confidence Wednesday with the National Association of Home Builders Housing Market Index for December, while Thursday brings the data on Housing Starts and Building Permits for November.  

In addition, the Fed’s two-day meeting begins Tuesday with their Monetary Policy Statement being released Wednesday. November Retail Sales will also be reported on Wednesday, which will reveal how retailers fared given the uptick in COVID cases. And on Thursday, the latest jobless claims figures remain critical to monitor. 

Technical Picture 

The Fed continues to provide stability to the markets thanks to its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds continue to ride the 25-day Moving Average, which has provided solid support in recent days. Bonds have room to move higher until reaching resistance at 103.953 and if Stocks continue to sell off, we could see Bonds move higher in this range. 

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