Market Update – 9/14/2020

Unemployment, Inflation, and Housing Bidding Wars — OH MY!

Initial Jobless Claims remained below 1 million during the week ending September 5, as another 884,000 people filed for unemployment benefits for the first time. While on the surface this is a step in the right direction, the headline figure does not account for Pandemic Unemployment Assistance (PUA) Claims, which are an equally significant amount. In addition, Continuing Claims, which measure people who continue to receive benefits, increased by 93,000 to 13.4 million. 

Inflation was also in the news, as both the Consumer Price Index and the Producer Price Index (which measures inflation at the wholesale level) showed that inflation was on the rise in August. Rising inflation is always important to monitor, as it can have an impact on fixed investments like Mortgage Bonds. More about why this is significant below.

Despite the challenges many businesses are facing, optimism among small businesses was also on the rise in August. The National Federation of Independent Business Small Business Optimism Index increased 1.4 points to 100.2, which was higher than expectations of 98.9.

Lastly, evidence of low supply and high demand continues in the housing market. For the fourth consecutive month, over half of home offers from Redfin faced a bidding war, with 54.5% of homes sold in a bidding war in August. This was a slight drop from 57.3% in July, but still a significant amount.

Looking Beneath the Headlines on Jobless Claims

Another 884,000 people filed for unemployment benefits for the first time during the week ending September 5, which was unchanged from the previous week. California (+237K), Texas (+66K) and New York (+65K) reported the largest gains. However, Continuing Claims, which measure people who continue to receive benefits, increased by 93,000 to 13.4 million.

While the media has celebrated the fact that Initial Jobless Claims are under 1 million, it’s important to take a step back and ask: Are things really getting better?

The headline jobless claims figures do not count Pandemic Unemployment Assistance (PUA) Claims. People can apply for PUA benefits when regular unemployment benefits expire. PUA benefits are also for people like gig workers and contractors who usually would not be approved for unemployment benefits.

Initial PUA Claims, which again are separate and in addition to the headline figures, totaled 839,000 in the latest week. Continuing PUA Claims increased by 1 million after increasing by 2.6 million in the previous week.

Given that it’s September, it’s possible many people are applying for PUA benefits because their regular benefits have expired. If this is the case, we’re not really seeing an improvement in unemployment, but rather a transfer of people from regular to PUA benefits.

All in all, the total number of people receiving some type of benefits is around 29 million, which would bring the real-time estimate of the unemployment rate to around 17%.

Inflation Heats Up

Inflation was on the rise in August at both the wholesale and consumer levels. The wholesale-measuring Producer Price Index (PPI) showed that headline PPI increased 0.3% in August from July, which was slightly higher than the 0.2% expected. On a year over year basis, headline PPI increased from -0.4% to -0.2%. Core PPI, which strips out volatile food and energy prices, was up 0.4% in August and increased from 0.3% to 0.6% year over year.

The more closely watched Consumer Price Index (CPI) came in at 0.4% in August, while the year over year reading increased from 1.0% to 1.3%. The Core reading, which again strips out food and energy prices, also increased by 0.4% month over month and the year over year reading increased from 1.6% to 1.7%. Within the report, rents are rising 2.9% across the US, which is down from 3.1%. The medical care index rose 4.5% from last year.

Inflation has been rising sharply, especially on a month over month basis. If we saw 0.4% inflation each month, it would equate to a 5% inflation rate. For now, the year over year Core CPI reading is 1.7%, but it’s the hottest it’s been in 6 months. This rate could continue to rise, especially as the economy opens back up. Demand is likely to come much faster than supply, as we know supply chains have been compromised. If that were to occur, rates can rise.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it reduces their value. Home loan rates are inversely tied to Mortgage Bonds, and as Bonds worsen or move lower, home loan rates can rise. Though many factors impact the markets, this is why it’s always important to keep an eye on inflation headlines.

Small Business Optimism Rises in August

The National Federation of Independent Business Small Business Optimism Index rose 1.4 points in August to 100.2. Plans to hire, positions not able to fill, and plans to increase inventory all rose, while capital spending plans were unchanged. Current compensation rose 3 points to a 5-month high, but future compensation plans were unchanged.

The NFIB’s chief economist, Bill Dunkelberg, said, “Small businesses are working hard to recover from the state shutdowns and effects of COVID. We are seeing areas

of improvement in the small business economy, as job openings and plans to hire are increasing, but many small businesses are still struggling and are uncertain about what the future will hold.”

Home Hack of the Week

Fall is fast approaching. Tick these easy seasonal maintenance items off your to do list, then sit back and enjoy the season.

Schedule a service call to make sure your furnace, chimney and fireplace are in working order so they’ll be ready when you need them.

Test your smoke and carbon monoxide detector batteries and be sure to always keep extra batteries on hand.

Add weatherstripping and door sweeps to any drafty areas to keep your heating bill low.

Drain all outdoor faucets and disconnect garden hoses from outside spigots to help keep water from freezing and prevent burst pipes.

Seal cracks in your concrete driveway or patio to prevent water from seeping in, which can then freeze, expand and cause the crack to grow. Fixing small cracks before temperatures fall can help prevent more expensive repairs down the road.

What to Look for This Week

We’ll get a double dose of manufacturing news, starting Tuesday with the Empire State Index’s update on September activity in the New York region. The Philadelphia Fed Index follows Thursday.

On Wednesday, the latest Retail Sales figures for August will be reported and we’ll get a read on builder confidence with the National Association of Home Builder’s Housing Market Index for September. Plus, the Statement from the two-day meeting of the Federal Open Market Committee will be released, which always has the power to move the markets.

Finally, Thursday will bring the latest weekly Jobless Claims figures, as well as an update on Housing Starts and Building Permits for August.

Technical Picture

The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. After trading in a narrowing range between the 25 and 50-day Moving Averages, Mortgage Bonds are right at their 25-day Moving Average. If we see a solid break above the 25-day Moving Average, there is significant upside potential. Support is also nearby at the 50-day Moving Average, now that the range has gotten so tight. A breakout is coming one way or the other, so stay tuned.

Crossing the Continental Divide, The Grand Prismatic Spring and Mortgage Rates Remain Relatively Flat

Crossing the Continental Divide – I haven’t had a haircut since March 12th
The Grand Prismatic Spring of Yellowstone. The colors correspond to temperature and the type of bacterial that likes to live in that temp.

September 8, 2020

Mortgage rates have remained effectively flat or at near record lows for the last month. However, there are some interesting compositional shifts as the 10-year Treasury rate has increased modestly over the past month while mortgage spreads have declined. Spreads may decline even further but the rise in Treasury rates will make it difficult for mortgage rates to fall much more over the next few weeks.

I took few days away with some close friends and rode my motorcycle out to Northwestern Wyoming to see two of the oldest National Parks in the federal system. Grand Tetons and Yellowstone. Just spectacular, they are, these two national treasures. We were smart enough to wait until late in the season to make the journey. Not as hot and far fewer people. If you’ve never been, go. You won’t believe how close you can get to the “wild”-life. Plus, the scenery, in general, is really something to behold. Until this trip, I only knew the beauty of Yosemite (because it is in my backyard) but what we saw of these two parks was pretty spectacular.

Week in Review – Week of August 31st, 2020

The labor sector dominated headlines last week, as several important reports were released. First in on Wednesday was the ADP Employment report, which measures private sector payrolls. August brought a gain of 428,000 jobs, less than half of the 900,000 expected. However, July’s figure was revised higher.

On Friday, the highly anticipated Jobs Report from the Bureau of Labor Statistics (BLS) showed that 1.4 million jobs were created in August, which was in line with expectations. The unemployment rate also improved, but there is more to that story due to the misclassification error, as explained below.

Meanwhile, another 881,000 people filed for unemployment benefits for the first time during the week ending August 29. This was 130,000 fewer than the previous week, while the number of Continuing Claims, measuring people who continue to receive benefits, also fell by 1.2 million to 13.3 million. While these latest numbers are an improvement, they still represent a staggering number of people. They also do not account for Pandemic Unemployment Assistance Claims, which greatly add to the unemployment figures overall.

Lastly, over in the housing sector, home prices continued to appreciate in July per CoreLogic’s Home Price Index report. But perhaps the biggest headline is the change in their forecast for appreciation for the coming year. Read on for more about this.

August Jobs Report a Step in the Right Direction

The Bureau of Labor Statistics reported that there were 1.4 million new jobs created in August, which was in line with expectations. There are two reports within the Jobs Report, and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, meaning it may be more reflective of actual job numbers, and the Household Survey showed that there were 3.76 million job gains in August (as compared to the 1.4 million job gains in the Business Survey).

The Unemployment Rate decreased from 10.2% to 8.4%, which was much stronger than expectations of 9.9%. While the Household Survey showed there were 3.8 million job gains, the labor force increased by 1 million people, which is a good thing and means more people are being counted among it. Because there were so many

more job creations than the increase in the labor force, the unemployment rate improved significantly.

It is important to note, however, that there has been a misclassification error where people were classified as absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the unemployment rate would have been 0.7% higher or 9.1%.

Looking deeper into the numbers, 238,000 of the job gains in the headline job number were temporary 2020 Census workers. Without those jobs, the unemployment rate would be 1.5% higher at 9.9%. Adding in the misclassification error, it would be 10.6%.

The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, decreased from 16.5% to 14.2%.

Average hourly earnings increased 4.7% year over year, down slightly from 4.8%, while average weekly earnings, which we focus on more, rose by 5.3%, down from 5.4%. 

All in all, this report is a positive step in the right direction for the labor sector, but we still have a long way to go to return to pre-pandemic levels.

Private Payrolls Show Slow Recovery

The ADP Employment Report showed that there was a gain of 428,000 new jobs in the private sector in August. While this is positive news at face value, it was less than half of the 900,000 new jobs expected. July’s report was revised higher by 45,000 new jobs, from 167,000 to 212,000.

Leisure and hospitality led with 129,000 new jobs while education and health services contributed 100,000 and professional and business services grew by 66,000. Construction also added 28,000 and manufacturing was up 9,000 new jobs. 

Overall, small businesses (1-49 employees) added 52,000 jobs, midsized businesses (50-499 employees) added 79,000 and large businesses (500 or more employees) added 298,000.

After losing 19.7 million jobs in March and April we’ve gotten back a total of about 8.5 million. Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said,

“The August job postings demonstrate a slow recovery. Job gains are minimal, and businesses across all sizes and sectors have yet to come close to their pre-COVID employment levels.”

Digging Deeper into Jobless Claims Figures

The latest jobless claims report showed that another 881,000 people filed for unemployment benefits for the first time during the week ending August 29. This was 130,000 fewer than the previous week with California (+236K), New York (+63K) and Texas (+57K) reporting the largest gains. The number of Continuing Claims, measuring people who continue to receive benefits, also improved by 1.2 million to 13.3 million.

While these latest numbers are an improvement, they still represent a staggering number of people and there is more than meets the eye.

There are Pandemic Unemployment Assistance (PUA) Claims that are not captured in the headline figures. People can apply for this when regular unemployment benefits expire. They’re also for people who usually would not be approved for unemployment benefits, like gig workers and contractors. These Initial PUA Claims totaled 759,000 in the latest week while Continuing PUA Claims increased by 2.6 million to 13.6 million.

Given that it’s September, people could be falling off regular benefits and applying for PUA benefits, and if that’s the case it means we are not really seeing an improvement in unemployment. All in all, the total number of people receiving some type of benefits is around 28 million, which would bring the real-time estimate of the unemployment rate to around 18%. 

Home Prices Continue to Appreciate

Research firm CoreLogic released their Home Price Index report for July, showing that home prices increased 1.2% during the month and 5.5% when compared to July of last year.

But perhaps the biggest headline is in their forecasts, where they have said home prices will rise 0.1% in August and 0.6% in the year going forward. This is a big revision to their annual forecast from two months ago, where they estimated a 6.6% drop in the year going forward, which they revised to a 1% drop last month.

While a 0.6% gain is a big change, it is possible appreciation could be even stronger. The housing market has been hot and homes have been appreciating at a very solid level, mainly due to strong demand and tight supply.

Builders are going to have a tough time keeping up with demand because in the beginning of the Covid-19 crisis, they slowed production in anticipation of a slow housing market. When the housing sector outperformed expectations, there was much more demand than supply, causing lumber prices to spike.

What’s more, even though inflation is currently low, when the economy does come back full swing, demand for housing will return much faster than supply. This can cause a sharp rise in inflation and is something we have to monitor, especially since the Fed has mentioned they would allow inflation to run hotter for periods of time.

 What to Look for This Week

After the market closures on Monday in honor of the Labor Day holiday, the economic calendar is relatively quiet. On Tuesday we’ll get an update on how small businesses are feeling with the NFIB Small Business Optimism Index while Thursday brings the latest news on weekly and continuing Jobless Claims. Inflation will also make headlines, with the wholesale-measuring Producer Price Index for August releasing on Thursday, followed by the Consumer Price Index on Friday. 

Technical Picture

The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds have fallen below support at their 25-day Moving Average. They are currently in a range between the 25-day Moving Average, which has now become a ceiling of resistance, and support at the 50-day Moving Average.