Week in review for week of March 8, 2021

As the economy improves given labor market optimism, continued vaccination roll-out and additional stimulus pending, mortgage interest rates increased this week. But even as rates rise modestly, the housing market remains healthy on the cusp of spring homebuying season. Homebuyer demand is strong and, for homeowners who have not refinanced but are looking to do so, they have not yet lost the opportunity.

Week of March 8, 2021 in Review

Last week was filled with important news as key inflation reports were released, two auctions made headlines and more stimulus is on the way!

Consumer inflation remains tame for now, with the headline Consumer Price Index (CPI) increasing from 1.4% to 1.7% annually, as expected. Core CPI, which strips out volatile food and energy prices, fell from 1.4% to 1.3% year over year, which was slightly cooler than expected. However, inflation is expected to heat up in the coming months – which could impact both Mortgage Bonds and the home loan rates tied to them. Don’t miss the explanation below.

Inflation at the wholesale level has already started to rise, with the Producer Price Index (PPI) for February up 0.5% monthly and jumping from 1.7% to 2.8% year over year. Core PPI, which again strips out volatile food and energy prices, also moved higher on both a monthly and annual basis.

The National Federation of Independent Business released its Small Business Optimism Index, which increased 0.8 points in February to 95.8. Of significant note within the report, those looking to raise prices rose 8 points to 25% (the highest since August 2008), while positions not able to fill jumped 7 points to 40% (the highest since 1980). Both of these data points can lead to inflation.

Meanwhile, the latest Jobless Claims data showed that the number of people filing for unemployment for the first time declined by 42,000 in the latest week, as Initial Jobless Claims were reported at 712,000. Continuing Claims, which measure people who continue to receive benefits, also decreased by 193,000 to 4.144 million. While these declines appear like good news on the surface, there is more to the story as noted below.

Lastly, investors were closely watching the 10-year Treasury and 30-year Bond Auctions held on Wednesday and Thursday, respectively, while President Biden signed the $1.9 trillion relief plan into law. Read on for a breakdown of the critical details on these items. 

Consumer Inflation Remains Tame … For Now

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.4% in February while the year over year reading increased from 1.4% to 1.7%, as expected.

Core CPI, which strips out volatile food and energy prices, was up 0.1% in February but fell from 1.4% to 1.3% year over year, which was slightly cooler than expected.

The report also showed that rents are rising 2.0% across the country, which is down from 2.1% in the previous report. However, many markets are actually experiencing much higher rent gains, as the data is being weighed down by the pandemic’s impact on rent in larger cities like New York and San Francisco.

While consumer inflation is tame at the moment, it’s important to dig deeper and understand why inflation may rise in the coming months – and why that’s significant.

Higher inflation typically drives home loan rates higher. That’s because inflation is the arch enemy of interest rates, since it erodes the buying power of the fixed return that a mortgage holder receives.

As noted above, the current year over year rate of inflation, as measured by the Core Consumer Price Index, is at 1.3%. This inflation reading was just released for the period of March 2020 to February of 2021.

However, in the coming months, this rate is expected to rise significantly, as the readings for the more current months replace the older readings from 2020. It’s quite possible to see the rate of inflation rise towards 2.5%. It’s likely that this will influence higher interest rates.

While inflation may then cool off later this year, rest assured I will be keeping a close eye on the news to keep you informed of all the latest inflation data, and its impact on Mortgage Bonds and the home loan rates tied to them.

Wholesale Inflation Jumps in February

This potential for higher inflation has already started at the wholesale level, as the Producer Price Index (PPI) rose by 0.5% in February and jumped from 1.7% to 2.8% year over year.

Core PPI, which again strips out volatile food and energy prices, was up 0.2% for the month and increased from 2.0% to 2.5% year over year.

Part of the increase in the headline reading was due to the monthly rise in energy prices (+6%) and food prices (+1.3%). Transportation costs rose significantly as well.

We may see further increases in wholesale inflation as the readings for the more current months replace the readings from 2020.

Looking Past the Headlines on Jobless Claims 

The number of people filing for unemployment for the first time declined by 42,000 in the latest week, as Initial Jobless Claims were reported at 712,000. However, there were revisions to the previous week that made this decline look bigger than it really was. Ohio (+127K), California (+106K) and Illinois (+62K) reported the largest number of claims.

Continuing Claims, which measure people who continue to receive benefits, also decreased by 193,000 to 4.144 million.

While this decline seems like good news on the surface, it’s important to dig deeper into the data. Pandemic Unemployment Assistance Claims, which provide benefits to people who would not usually qualify, increased by 1.1 million, while Pandemic Emergency Claims, which extends claims by 13 weeks after regular benefits expire, also increased by 1 million. Both of these numbers are at pandemic highs.

The total number of continued benefits in all programs is now at 20.1 million, an increase of 2.1 million from the previous week. There were just 2.1 million weekly claims filed for benefits in all programs in the comparable week in 2020.

The bottom line is that while the headline figures appear better and are near pandemic lows, much of the decline in Continuing Claims is due to the expiration of benefits and people moving into Pandemic Unemployment and Emergency Claims.

Auctions in the News

Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively. 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 cause turbulence in the Bond market and have a negative effect on rates.

While the 10-year auction on Wednesday was mediocre, the market did not react negatively, probably due to some relief that it was not as bad as the 7-year auction that was held a few weeks ago. Thursday’s 30-year Bond auction was soft with a yield of 2.295%, a touch above the when-issued yield. However, one positive was that direct and indirect bidders bought 81% of the auction versus the 12-month average of 79%.

Update on Stimulus

President Biden signed the $1.9 trillion relief package into law, which includes direct payments of $1,400 to individuals who meet the income requirements. The additional $300 per week in unemployment benefits has also been extended until September 6.

Pandemic Unemployment and Emergency Claims that were set to expire March 14 have also been extended to September 6.

In addition, the package also waives federal taxes on an individual’s first $10,200 of unemployment benefits collected last year. Married couples who file a joint tax return wouldn’t be taxed on the first $20,400 of unemployment income. However, note that states may not waive the tax, as more than half currently levy a state income tax on unemployment benefits.

What to Look for This Week

A full slate of reports across a wide spectrum of the economy are ahead this week, beginning with news on manufacturing in the New York region when March’s Empire State Index is reported on Monday.

On Tuesday we’ll get an update on Retail Sales for February. Plus, the National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, will also be reported on Tuesday.

Housing news continues Wednesday with February’s Housing Starts and Building Permits, while more manufacturing news follows Thursday with the Philadelphia Fed Index. The latest Jobless Claims figures will also be reported as usual on Thursday.

But perhaps the biggest and most important event will be the Fed’s 2-day meeting of the Federal Open Market Committee which starts on Tuesday, with their Monetary Policy Statement released on Wednesday. This always has the potential to move the markets and of note, there has been chatter that the Fed may start to perform Operation Twist (where they sell shorter term maturity holdings on their balance sheet and buy more longer maturity Bonds). They may also do something like the European Central Bank and say they are going to ramp up their buying of Mortgage Backed Securities and Treasuries when the see an interest rate they don’t like, which is a form of Yield Curve Control.

Technical Picture

Mortgage Bonds ended last week right at the 100.133 support level. This is an important threshold because if Bonds break beneath it convincingly, the next floor of support is 99.50. The 10-year is also trying to hang on at the 1.61% ceiling. If yields break to the upside, they will likely test 1.67%.