Weekly Market Update

Week of March 30th, 2020 in Review

March did not go quietly "out like a lamb" this year, with the impact of the COVID-19 pandemic evident in key labor sector reports. The Bureau of Labor Statistics reported 701,000 job losses in March, much worse than expectations, while the ADP report showed 27,000 job losses. Unfortunately, the latest Initial Jobless Claims filings broke another record, almost doubling the record figures from the previous week.

GDP is also feeling the impact. While the early estimates were for first quarter to be down by 6%, this has been revised to -9%. Meanwhile, second quarter GDP is expected to be down 34%. This is shocking and clearly spells a recession this year.

Also of note, the CARES Act is providing help for homeowners struggling with their mortgage payments. While this is great news, it's important to understand key differences between mortgage forbearance and mortgage forgiveness, as explained below.

The Fed continues its asset purchase program, which includes purchases of Mortgage Backed Securities. Last week, the Fed bought enough MBS for market stability, but not too much, which is a positive development that can hopefully prevent problems for lenders, including margin calls.

Initial Jobless Claims Hits Record High … Again

The numbers are in … and, as anticipated, they aren't pretty. Initial Jobless Claims showed that 6.6 million individuals filed for unemployment benefits for the first-time in the latest week. This was much higher than most estimates and almost double the previous report.

And these numbers will continue to climb, as New York only reported 366,000 claims and California only 878,000 in this report. These figures are obviously very low for those

respective states and leads us to believe that many people have not filed yet in those areas but will.

Job Losses Roar On

The ADP Employment Report showed that there were 27,000 job losses in the month of March. Believe it or not, this was stronger than expectations, which were calling for 125,000 to 170,000 job losses. Unfortunately, this number will only get worse, as the figures were derived on the 12th of March or earlier, so the number does not fully take into account the effect of the pandemic.

Small businesses accounted for all of the reductions, slicing 90,000 from payrolls, with 66,000 of those reductions coming from companies that employ 25 people or less. Medium-sized businesses (with between 50 and 499 employees) added 7,000 jobs while big companies hired 56,000. Again, this has changed since March 12, and April's report will more fully reflect this.

The Bureau of Labor Statistics (BLS) reported that there were 701,000 job losses in the month of March, which was much worse than expectations of approximately 150,000 losses. Let's unpack what this means.

There are two reports within the Jobs Report: the Business Survey where the headline job number comes from and the Household Survey where the Unemployment Rate comes from. The Household Survey also has a job loss component.

There is a fundamental difference between these two surveys. The Business Survey is based predominately on modeling, while the Household Survey is done by actual phone calls to homes, meaning it may be reflective of actual job losses.

Why is this significant? While the headline number from the Business Survey showed 701,000 losses, that figure is likely very understated. Remember that there have been 10 million individuals who filed for unemployment benefits over the past 2 weeks - so the losses have to accelerate. Meanwhile, the Household Survey showed that there were almost 3 million job losses.

The Household Survey also reported that the Unemployment Rate increased from 3.5% to 4.4% but keep in mind that over 1.6 million people left the labor force. The Unemployment Rate would have been much higher if we didn’t have so many people leave the labor force.

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, increased from 7% to 8.7%.

Rounding out the report, average hourly earnings increased from 3.0% to 3.1% on an annual basis, probably because lower-paid workers were cut first. Hours worked, however, fell by 0.2 hours. The more important weekly earnings figure, which takes this into account, was down from 3% to 2.2%.

The labor sector is certainly feeling the brunt of the pandemic, and upcoming reports will likely show this even more, once the data fully reflects the virus in full swing.

Take "CARE" Regarding Forbearance

The Government has created the CARES Act to assist homeowners whose income may have been adversely impacted by the COVID-19 virus. This includes the possibility of mortgage forbearance.

However, mortgage forbearance and mortgage forgiveness are not the same thing. Forbearance means that the payments will be suspended for a short period of time, initially up to six months, and then payments will need to be caught up when the forbearance period is over.

Think of it this way. When you buy something at a furniture store, for example, that offers “no payments” for three months, you still must pay for the furniture - the payments are just deferred.

Mortgage forbearance can have dangerous consequences if borrowers fail to catch up on their payments. Lenders can enforce their right to be paid, which ultimately could lead to foreclosure, and borrowers could lose all the equity in their home in the process. That's why forbearance is designed to help those as a measure of last resort.

Housing Data to Note

Housing data that was reported last week still reflects a pre-virus environment. The Case-Shiller Home Price Index is considered the gold standard for home appreciation and features several important indexes, including the National Index which covers all nine U.S. Census divisions and reported a 3.9% annual gain in January. This was an increase from 3.7% in December. Meanwhile, the 20-city Index increased from 2.8% to 3.1% on an annual basis, with Phoenix (6.9%), Seattle (5.1%), and Tampa (5.1%) leading the gains. Due to the lag time of the report and the impact of the pandemic on the economy, this reading has much less significance than it typically does.

Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were up 2.4% in February. This reading was much higher than the -1.6% expected. Sales were also up 9.4% annually, which is the highest pace in 3 years. Unfortunately, many of these signed contracts may have to be cancelled, but it's currently unclear the amount and details.

However, NAR's chief economist, Lawrence Yun said, “Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals.”

Family Hack of the Week

Many people are missing social outings with friends and family, but thanks to the various social gathering platforms, a virtual dinner and a movie or game night together is still possible. Here are some simple tips for having a virtual night in with loved ones near and far.

Pick a social platform that works for everyone. Some easy-to-use options include Zoom, Skype, FaceTime or Google Hangouts. There are plenty of tutorials available for people new to the platforms.

Next, choose a menu that's easy enough for everyone to make, and doesn't require too much prep time. This will let you plan to connect on screen ahead of time with appetizers or for "happy hour." Consider making it a theme or costume night, which can be fun for kids and adults alike. For example, have everyone dress in 80's clothes or, if you're planning to stream a movie together after dinner, the meal and attire can be tied into the movie.

Staying connected is so important right now, and these simple ideas for virtual hangouts can help.

What to Look for This Week

Most importantly, we will be looking for updates on some of the studies underway for drugs with a therapeutic response to COVID-19, like Azithromycin and Hydroxycloroquine. We stand hopeful and optimistic.

On the economic news front, Initial Jobless Claims will be the focal point again when it releases on Thursday. Unfortunately, it's likely to be another whopping, record-setting number.

Inflation reports will also make headlines, as wholesale inflation for March will be reported via the Producer Price Index on Thursday, while the Consumer Price Index follows Friday. We should expect inflation numbers to move lower in these reports and moving forward. This would only make sense because starting in March, which these reports measure, and beyond there really has not been any pricing pressure that would lead to inflation. Inflation happens when you have too many dollars chasing too few goods, causing prices to rise. We are not seeing that, as demand has fallen due to the coronavirus. Expect inflation to turn negative month over month, if not in these reports, then soon.

In addition, there will be a 10-year Note and 30-year Bond Auction, which can influence the markets and tell us where traders believe yields will go. It's also likely that the rampant volatility we have seen in the markets will continue, depending on the headlines regarding the pandemic.

Technical Picture

Mortgage Bonds continue to trade in a wide range between support at the 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for Mortgage Backed Securities.  Where MBS stand now, they are only about 80bp from this level.  The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.