Monday Market Update – 02/16/2021

Mortgage Rates Remain Flat for the Second Consecutive Week

It’s a tale of two economies. The services economy remains in the doldrums, but the production side of the economy remains strong. New COVID-19 cases are receding, which is encouraging and that has led to a rise in Treasury rates. But, the run-up in Treasury rates has not impacted mortgage rates yet, which have held firm. The residential real estate market remains solid given healthy purchase demand while implied real-time home price growth is high, due to the inventory shortage that is plaguing the housing market.

Week of February 8th, 2021 in Review

The economic calendar may have been quiet, but the reports that were released continue to show the impact of the pandemic on our economy. Plus, two important auctions made headlines.

Another 793,000 people filed for unemployment benefits for the first time in the latest week. Though this was a decline of 19,000, there were upward revisions to the prior week’s data which added 33,000 claims, unfortunately. Continuing Claims, Pandemic Unemployment Assistance Claims, and Pandemic Emergency Claims all remain in the millions. The total number of continued benefits in all programs for the week ending January 23 was 20 million, versus just 2.2 million weekly claims filed for benefits in all programs in the comparable week in 2020.

Small businesses are certainly feeling the pressure as well, which has had an impact on confidence. The National Federation of Independent Business (NFIB) Small Business Optimism Index dropped 0.9 points in December to 95, which is a 9-month low. The Index is now at the lowest level since May, right in the heat of the pandemic. In addition, owners expecting better business conditions over the next six months also reached its lowest level in over seven years, as that reading fell seven points to a net negative 23%.

Consumer inflation remains tame per the latest Consumer Price Index (CPI) report, with Core CPI (which strips out volatile food and energy prices) flat in January and down from 1.6% to 1.4% year over year. Both of these readings were below expectations. Inflation is important to monitor when it comes to Mortgage Bonds and home loan rates, which are tied to them.

Last but certainly not least, all eyes were on the 10-year Treasury and 30-year Bond Auctions on Wednesday and Thursday, respectively. More on their significance below.

Jobless Claims Still Staggeringly High
 jobless claims

The number of people filing for unemployment benefits for the first time fell by 19,000 in the latest week, as Initial Jobless Claims totaled 793,000. However, there were revisions to the prior week’s data, which added 33,000 claims.

Continuing Claims, which measure people continuing to receive benefits, decreased by 145,000 to 4.5 million.

Pandemic Unemployment Assistance Claims, which provide benefits to people who would not usually qualify, and Pandemic Emergency Claims, which extend claims by 13 weeks after regular benefits expire, increased by 1.5 million and 1.2 million respectively.

The total number of continued benefits in all programs for the week ending January 23 was 20 million, an increase of 2.6 million from the previous week. By comparison, there were 2.2 million weekly claims filed for benefits in all programs in the comparable week in 2020.

The bottom line is the unemployment situation remains dire and this was reiterated in remarks by Fed Chair Jerome Powell last week. Powell cited the misclassification errors that have plagued the Labor Department’s reporting since the pandemic began last March and noted that without these errors the unemployment rate would be closer to 10%. Powell also made it clear that the Fed is willing to sacrifice increasing debt to help the economy and that now is not the time to stop their purchases of Mortgage Backed Securities and Treasuries, which have helped stabilize the economy.

Consumer Inflation Remains Tame

Consumer inflation rose by 0.3% in January per the latest Consumer Price Index (CPI) report. The year over year reading remained stable at 1.4%, which was less than the 1.5% expected.

Core CPI, which strips out volatile food and energy prices, was flat in January and fell from 1.6% to 1.4% year over year. Both the monthly and yearly figures were 0.2% beneath expectations and show that inflation is really nowhere to be seen.

Why is tame inflation noteworthy?

Remember inflation erodes a Bond’s fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates move higher. Though many factors influence the markets, keeping an eye on inflation is always important.

Also of note, the CPI report showed that rents are rising 2.1% across the US, which is down from 2.3% in the previous report. However, the slowdown is really only happening in big cities like New York, San Francisco and Boston where, according to RealPage, rents are down 16%, 22% and 9% respectively. Of the 150 large metro areas they study, rent gains were seen in 119 markets, including Phoenix, Memphis, Detroit, and Cleveland.

All Eyes on Auctions

Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively. With 10-year yields near their highest level since March and 30-year yields at the highest level since February, investors were looking to see if there would be more demand for Treasuries and Bonds at auction.

Why is this significant?

Demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

While the 10-year Note Auction had below average demand, there was strong foreign demand (which is shown by direct and indirect bidders taking down 80% of the auction vs the 12-month average of 75%). As a result, it did not have much of an impact on Mortgage Bond prices, but yields did move a little lower on the 10-year after the release.

The 30-year Bond Auction was also met with below average demand, which caused Mortgage Bonds to move a bit lower afterwards.

What to Look for This Week

After the market closures Monday for the Presidents Day holiday, the rest of the week is filled with key reports on housing, manufacturing and more.

Kicking off the week on Tuesday, we’ll get an update on manufacturing in the New York region for February with the Empire State Index, while the Philadelphia Fed Index follows Thursday.

On Wednesday we’ll get a real-time read on builder confidence with the National Association of Home Builders Housing Market Index. Thursday brings data on Housing Starts and Building Permits for January, with January’s Existing Home Sales being reported on Friday.

In addition, we’ll get an update on how retailers fared in January when the latest Retail Sales figures are reported on Tuesday, while Wednesday brings news on wholesale inflation with the Producer Price Index and the minutes from the Fed’s January 26-27 meeting. And on Thursday, the latest Jobless Claims figures remain critical to monitor when they’re reported at their usual time.

Technical Picture

The Fed continues to provide stability to the markets with its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds accelerated their losses after breaking beneath the 200-day Moving Average and almost touched right on the next floor of support at 102.497, which did hold the last time it was tested on January 12th. The 10-year broke above 1.19% and has room to move higher until testing 1.25%.

Christian Carr, NMLS# 1466899
Christian Carr NMLS #1466899 Mortgage Loan Officer Cell: 650.207.4364

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