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Last Week in Review: Tug-of-War at Play


The Tug-of-War Continues
Stocks, Bonds, and rates are responding to the tug-of-war playing out between vaccine hopes and the rise in COVID-19 cases, along with additional lockdowns.
Pfizer was out this past week saying its vaccine has a 95% effectiveness rate. Moreover, the firm says they will have 50 million doses available before year-end and as much as 1.3 billion doses available in 2021.
On top of this, Moderna has a very effective vaccine and there are dozens of firms ready to deliver additional doses and therapeutics.
Stocks and rates have moved higher because both are forward-looking. Yes, the rise in cases and hospitalizations is a concern, but at the moment the markets are looking four to six months down the road and there is hope that with a high vaccination rate we can return back to normal sometime in 2021.
Home Builders Are Very Bullish
Single-family Housing Starts showed the highest reading since 2007! Historically low-interest rates and shifting demand to move to the suburbs are the drivers.
The main challenge for builders is keeping up with the demand. Available lots and decreased availability of supplies are headwinds for builders.
One thing is for sure: If land and materials are scarce, expect new home prices, currently averaging $326,000, to continue to climb.
Bottom line: Rates hit historic lows, as reported by Freddie Mac, this week. With a vaccine and more stimulus on the way, it may be difficult to see rates improve much, if at all.

Last Week in Review: Financial Markets Get Vaccinated
The big news of last week was Pfizer's announcement that their vaccine was 90% effective against COVID-19. It also appears that some vaccines could be distributed before year-end.

The market's response? "This is a gamechanger." Stocks soared to record highs and mortgage-backed securities and Treasuries prices fell sharply, causing rates to rise.
Markets Tend to Overshoot
Stocks and Bonds tend to overshoot to the upside and downside in response to market-moving news, and last week looks like another example.
Last Monday, when the Pfizer announcement was made, the Dow Jones almost hit 30,000, and since that time has actually lost several hundred points and is well off the best levels of the week.
Rates also endured a similar response with the 10-year yield rising to .98% on Monday, well up from .71% just days before. By the end of the week, the yield settled above .90%, off the highest levels but still a big rise week over week.
The Vaccine Will Be a Headwind for Bonds
Besides Pfizer, there are many more firms close to an effective vaccine. So, over time, we should expect more ways to combat the virus and allow our economy to fully open. While the financial markets may have "overshot" with its initial response to the vaccine, the trend of more progress and economic expansion is bad for Bonds and rates.
Stocks and Rates Were Not the Only Things That Rose
An effective vaccine can't come soon enough. This past week, daily COVID-19 cases and those currently in the hospital hit record levels. This alarming trend has many states paring back their re-opening strategies and reinstituting fresh restrictions. Should we see deeper restrictions that cause uncertainty and/or economic harm, Stocks, and rates may experience volatility and decline from current levels.
More Help Is on the Way
Despite the high uncertainty in politics, a new stimulus package is coming to help many in need. The size and scope of the stimulus is not clear, but will likely consider the current rise in cases as well as the effects of a widely distributed vaccine.
More stimulus is not necessarily good for Bonds and rates because it lifts inflation expectations, adds more Treasury supply to the Bond market, and helps continue economic expansion.
Bottom line: Rates are just above all-time lows. With a vaccine and more stimulus on the way, it may be difficult to see rates improve much, if at all. 

Last Week in Review: Three Things the Markets Told Us About Election Day
Many were expecting uncertainty and chaos emerging from Election Day, and those people were not disappointed. Joe Biden will be the next president of the United States.

Even when the president was unknown, Stocks skyrocketed, and Bond prices soared, causing rates to decline.
What caused such a market reaction?
Here are three things the markets told us about Election Day:

1. It appears we may have a split Congress in 2021 as Republicans may maintain control of the Senate (at least as of this writing). This balance of power will likely lead to more gridlock in Washington D.C. over the next couple of years. This means no radical changes within the economy as it would be hard for Congress to agree on any new policies. Stocks rallied on the notion that any meaningful corporate tax hike would be unlikely. At the same time, both Bonds and rates also did well because they too embrace a government stalemate.
2. The forthcoming stimulus package just got smaller. With a split Congress, expect the next stimulus package to be quite a bit smaller than previously anticipated. We believe and hope we may see targeted stimulus over the next couple of months. Bonds like a smaller stimulus package as it means less new Bond supply, less inflationary pressure, and less aid to the economy.
3. The Fed is not going anywhere. A split Congress makes it difficult to get big fiscal plans passed. This means the Fed may be called upon to do more to help grow the economy and is not likely to hike rates any time soon -- possibly years from now. And this is another reason why Stocks skyrocketed higher this week. This past Thursday, at the Fed Meeting, they reiterated their commitment to buying $120 billion worth of Bonds each month to help keep long-term rates, like mortgage rates, low. As the old saying goes, "Don't fight the Fed." They are committed to helping promote maximum employment and economic growth, which Stocks love.

Bottom line: The backdrop for housing looks amazing and the Fed will continue to support the economy alongside fiscal stimulus from the government. 

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Last Week in Review: Headed Back to the Future

This past week, the U.S. 10-year Note yield, a proxy for long-term interest rates, climbed back above .80% for the first time since June.  At the same time, mortgage-backed security prices, which determine home loan rates, declined to their lowest level since July, pushing mortgage rates higher.
Why?
Stimulus, Stimulus, Stimulus
With two weeks to go before the election, it's not a matter of if, but when a stimulus plan is coming. At the moment, it's looking like a plan of at least $2 trillion or more and the markets are preparing for the "future", which looks like further economic expansion and a growing threat of inflation -- both of which Bonds and rates hate.
In addition to the positive economic outcome, stimulus provides, the new stimulus must be purchased by investors through Treasury auctions and the increased supply weighs on prices and drives yields/rates higher.
Don't Fight the Fed
This recent rise in rates has the Fed's attention. At the moment, the Fed is purchasing $120 billion worth of Treasuries and Mortgage Bonds each month to help pin down rates. Should Treasury yields continue to climb and drag Mortgage Bond prices lower still, causing home loan rates to rise, it is very likely that the Fed will step in and either buy even more Bonds and/or institute some sort of Yield Curve Control (YCC) to pin down long-term rates.
The Fed wants to further stimulate the economy by giving more and more people the ability to refinance or purchase a home, and much higher rates would prevent those efforts.
Bottom line: Rates are just above all-time lows, and as we are already starting to see, they may not be for long.

Last Week in Review: Europe Pain is Bonds Gain

U.S. Bond Market = Safe Haven
Last week, investment dollars around the globe flooded into the U.S. Treasury market as a "safe haven" against growing uncertainty in Europe. Germany, France, and other European countries are seeing record levels of COVID-19 cases and have to decide on if and how to shut down parts of their economy.
At the same time, the European Central Bank (ECB) has not yet shown the willingness to add even more stimulus.
As a result of these bad times in Europe, Bond yields fell further into negative territory with the German 10-year Bund yield falling to -.64%, the lowest since March, and near all-time lows.
The decline in European Bond yields pressured our Treasury yields lower, from .79% on Monday to .69% on Thursday.
Not All Bonds Are Created Equal
The decline in Treasuries doesn't mean lower home loan rates. Home loan rates come from the pricing of mortgage-backed securities -- which didn't improve this week along with Treasuries -- so mortgage rates didn't improve either.
It's Not All Bad and Uncertain
Despite the growing uncertainty abroad, here in the U.S., we continue to see solid economic reports, strong consumer spending, and corporate earnings. And on top of that, a large stimulus package is coming. Along with a stimulus package comes three things Bonds don't like:

1. Added supply of Treasury notes and Bonds to be sold
2. Increased inflation fears
3. Aid to the U.S. economy

Bottom line: Rates are at all-time lows and may not be here for long.

Last Week in Review: Interest Rate Outlook - Three Things to Follow

Three Things to Follow
Home loan rates remain right at historic lows fueling unprecedented refinance activity and driving purchase demand. Many are asking: how long will the good times last? Could rates move another leg lower? What's next for rates?
Here are three things to follow:
1) Don't Fight the Fed
The Federal Reserve, under the leadership of Chairman Jerome Powell, has been a main driver of low home loan rates. In addition to holding the overnight Fed Funds Rate at 0% for what is likely a couple of years, the Fed continues to purchase both Treasury and mortgage-backed securities to the tune of $120 billion per month.
The Fed deserves all of the credit for stabilizing the Mortgage Bond market when COVID-19 hit and for their continued buying support which has pushed home loan rates to historic lows.
The good news for rates is that the Fed recently said, if necessary, that they would purchase even more Bonds to help pin down home loan rates to support the economic recovery.
2) More Fiscal Stimulus on the Way
This past week, President Trump called off negotiations for a larger stimulus bill until after the election and asked Congress to agree on a "targeted" stimulus package to help airlines, restore PPP, direct checks, and more. At the moment, there is hope and speculation of a "slimmer" stimulus package.
One way or another, we should expect more stimulus and likely a lot more depending on who wins the election and what Congress will look like.
Fiscal stimulus, and a lot of it, may be too much of a good thing and actually pressure home loan rates higher over time. How?

• The Treasury will have to sell even more notes and Bonds at auction to pay for the additional stimulus. Currently, home loan rates and Treasury price gains have been capped due to the already overwhelming supply of Treasuries being sold at auction each week. Adding more supply through more stimulus will put further upward pressure on rates.
• More stimulus elevates inflation expectations. Inflation is the archenemy of interest rates. If inflation rises, rates rise.
• Stimulus is an aid to the economy. It will help economic growth in many ways, which is good news. Bonds and rates don't like good news.

3) Back to the 80s
Watch .79% on the 10-year Note yield as it traded near that level this past week. This is a key resistance level that has kept a lid on rates. We have only seen the yield close at or above .79% four times since March.
If the 10-year yield moves up and into the .80%s, mortgage-backed securities will likely be pressured lower, with home loan rates moving higher.
Bottom line: Rates are at all-time lows and may not be here for long.

Last Week in Review: Markets Enter the Great Unknown

COVID-19 Hits the White House
Last Friday morning, President Trump and the First Lady tested positive for COVID-19. The news shocked the financial markets around the globe, with global Stocks declining in response to the uncertainty. The news adds the potential for large market swings as we approach the general election in just a few weeks.
Stimulus or No Stimulus
Another big story to follow as it relates to the economy and financial markets is if and when Congress can agree on a fresh fiscal stimulus plan. As of last Friday, Congress has been unable to agree on a plan and this has added to the already incredible uncertainty for the financial markets. Stocks endured heavy losses in September due most in part to the political uncertainty and the lack of a new stimulus plan. Will Congress come together with a large plan to help the economy recover further? If so, how much? And when? These are the questions the financial markets are looking to have answered.
Bright Outlook for Housing
This past week, Pending Home Sales, a forward-looking view on housing, showed the highest reading since 2006. The demand for housing is very strong and the confidence required for individuals to purchase a home cannot be understated. There's a lot of optimism in the housing sector and the tailwinds of low mortgage rates, an improving economy, and continued improvement in the labor market should fuel housing for the foreseeable future.
Back to Work
Low rates are wonderful, and it's a major driver of housing and will likely be for quite some time. However, if you don't have a job, you can't pay a mortgage. The good news is that jobs continue to return. The September Jobs Report, reported this Friday, showed the unemployment rate at 7.9%, a major improvement from the 14.7% seen in the darkest moments of COVID-19 back in April. We should expect continued improvement in the labor market as states continue to re-open and heavily impacted sectors of our economy -- such as travel, leisure, and hospitality -- attempt to recover. As mentioned, housing will continue to benefit from the improved conditions.
Bottom line: Rates are at all-time lows and even though a fourth stimulus package is up in the air, we are hopeful it will happen. And if a package is agreed upon, it will likely be good for Stocks and bad for Bonds as it brings even more supply and inflation fears.

Last Week in Review: Uncertainty Takes Over the Markets

Fiscal Stimulus
Fiscal stimulus refers to policy measures undertaken by a government that typically reduce taxes or regulations and increase government spending in order to boost economic activity.
This past week, both Fed Chair Powell and Treasury Secretary Mnuchin called for more "fiscal stimulus" to help millions of Americans still in need.
The Fed has injected plenty of "monetary stimulus" by holding short-term rates at zero and buying Bonds, like Mortgage Bonds, to help keep long-term rates low. One problem is that many Americans can't benefit from taking out a business loan if they can't pay it back -- hence, why more fiscal stimulus is needed.
Uncertainty Climbs
Congress can never seem to work together on behalf of the American people and when the Fed called out Congress for more at its Fed Meeting a little over a week ago, it seemed like something might happen.
But then the passing of Ruth Bader Ginsburg elevated political uncertainty to an extreme and seemingly removed any political will to see a new stimulus package prior to the election.
Adding to the uncertainty are renewed fears of another surge in coronavirus cases this fall and winter, like we are seeing in other parts of the globe, such as Europe.
Stocks and Rates Don't Always Move in Tandem
September has been an awful month for Stocks with all market indices in a 10% correction or close. Normally, such a swift decline in Stocks would provide even better rates, but home loan rates actually ticked higher.
Supply and Inflation Fears
The Treasury sold $155 billion in securities this week, which weighed on the entire Bond market and limited the gains in price and rate. And ever since the Fed altered their approach towards inflation in late August, long-term rates like mortgages stopped improving and actually ticked higher.
Housing Continues to Shine
August New Home Sales came in at a 1.011 million annual rate -- the best reading since 2006. The overwhelming demand for new homes, fueled by low rates, should continue for the foreseeable future.
Bottom line: Rates are at all-time lows and even though a fourth stimulus package doesn't appear likely at the moment, sometimes Congress can surprise us. And if they come to an agreement, it will likely be good for Stocks and bad for Bonds as it brings even more supply and inflation fears. 

Last Week in Review: The Fed Spoke, the Markets Reacted

Last Wednesday, the Federal Reserve issued its Monetary Policy Statement and held a press conference.
An unofficial mandate for the Fed is to maintain "market calm" and not say anything to roil either Stocks or Bonds. Overall, the Fed statement and press conference were extremely "dovish" -- meaning they still want loose monetary policy to help stimulate the economy.
And of course, there was no change to rates. In fact, the Fed has forecasted no hikes to the overnight Fed Funds Rate until 2024 or later.
Normally, both Stocks and Bonds would like such a backdrop. However, since Fed day, both Stocks and rates have dropped. What happened?
Bonds Love Uncertainty -- Stocks Hate it
Fed Chair Powell said, "More fiscal support is likely needed", which means the Fed can't support the "highly uncertain" economy by itself.
Translation: "Congress needs to come together quickly and agree on a fourth stimulus package to help the many people still in need."
The markets took this as a real problem in the short-term, as Congress has been unwilling to agree on a new package up until now.
Stocks have enjoyed incredible gains since the early summer and are using this "uncertain" opportunity to sell off, with Bonds and rates being the beneficiary.
Bottom line: Rates are at all-time lows, this new uncertainty of a fourth stimulus package could be short-lived, and this modest improvement caused by the uncertainty could quickly evaporate.