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Investors remained focused on news about the coronavirus this week. For financial markets, there were two primary changes. First, daily volatility was significantly lower, and the net change in mortgage rates for the week was relatively small. Second, the labor market data more fully reflected the decline in economic activity since the outbreak began.
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The mortgage market has not been functioning as smoothly as usual over the past couple of weeks. While long-term Treasury yields are near record lows, and the Fed is buying enormous amounts of mortgage-backed securities (MBS), mortgage rates have not improved at a comparable pace.
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One reason is simply that the rapid decline in yields has caused an avalanche of refinancings that has far outpaced the industry's capacity to process all the loans. In addition, the prepayment feature contained in MBS reduces their value relative to Treasuries during periods of rapid declines in yields. However, the current crisis has created other issues as well.
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The $2 trillion government relief package encourages a temporary stoppage of mortgage payments (forbearance) for homeowners who have suffered financial hardship. This is a logical step to implement quickly to help relieve the financial burden on those hurt by the crisis. The problem for the mortgage industry, however, is that the government has not yet made clear how it expects firms to handle an abrupt stop to a significant number of scheduled payments.
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The resulting uncertainty has made it more difficult for lenders to evaluate the level of risk associated with loans. Additional underwriting requirements are being added, complicating the approval process. Industry officials expect that over time the system will gradually return to more normal conditions, especially as the government clarifies the process for mortgage firms to handle the period of forbearance.
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On Thursday, weekly filings for new Jobless Claims far exceeded the expected levels. They rose to an unheard of 6.6 million, more than double the consensus forecast of 3.1 million, and up from 3.3 million last week. For perspective, a typical reading in 2019 was around 250,000 and the highest level seen following the 2008 financial crisis was 665,000. The reaction to the data was relatively small, however, since investors know that a massive surge in unemployment has taken place. They are interested in its total magnitude, while the exact timing of whether it is captured in one report or the next is of lesser consequence.
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Similarly, Friday's important monthly Employment report indicated much larger than expected job losses. Against a consensus forecast of -150,000, the economy lost 701,000 jobs in March, which was the first monthly decline in payrolls since September 2010. Roughly two-thirds of the losses came from the hospitality industry. The unemployment rate increased from 3.5% to 4.4%, well above the consensus of 4.0%, to the highest level since August 2017.
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Looking ahead, the coronavirus will remain the main focus. Investors will be watching for news about additional Fed actions or government fiscal stimulus programs. The major economic data is expected to reflect the negative impact of the epidemic to a greater degree. The most closely watched release will be Weekly Jobless Claims on Thursday. The Consumer Price Index (CPI) will come out on Friday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.
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| Weekly Change |
| 10yr Treasury |
fell |
0.10 |
| Dow |
fell |
500 |
| NASDAQ |
fell |
100 |
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| Calendar |
| Thu |
4/9 |
Jobless Claims |
| Thu |
4/9 |
PPI |
| Fri |
4/10 |
CPI |
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