Forecast plus what’s driving mortgage rates today

Average mortgage rates actually edged higher on Friday, defying trends in other markets and confounding our prediction. Read about the probable causes below. It’s not time to panic yet: Average rates last Friday evening were appreciably lower than those the previous one. But anyone who’s the slightest bit risk-averse must surely be thinking hard about locking soon.

First thing this morning, markets were again in virus-related uproar. This time, the trigger was Saudi Arabia, which is reacting to the failure of oil cartel OPEC to reach a price-setting deal. It’s raising production and cutting already falling prices, causing mayhem in most markets. Things were so bad on Wall Street that an automated trading brake was triggered when the S&P plunged 7% in five minutes.

Normally, we could confidently predict that such markets would result in sharply lower mortgage rates today. But things have changed (see below). And we may well see those rates holding steady or even edging higher. However, as always, events may overtake that prediction.

Market data affecting today’s mortgage rates

First thing this morning, markets looked set to deliver mortgage rates today that are lower. But pressures on lenders may see them actually unchanged or even higher. Soon after 10 a.m. (ET), the data, compared with roughly the same time on Friday morning, were:

• Major stock indexes were all tumbling precipitously. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys down and increases yields and mortgage rates. The opposite happens when indexes are lower
• Gold prices fell to $1,666 an ounce from $1,685. (Bad for mortgage rates*.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower
• Oil prices fell to $34.04 a barrel from $43.36 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• The yield on 10-year Treasurys fell to 0.54% from 0.70%. A year ago, it was at 2.63%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
•  CNN Business Fear & Greed index fell to 3 from 6 out of a possible 100 points. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones

Read the next few paragraphs to discover why these market conditions may mean mortgage rates today act differently from how you’d normally expect.

This week

Why mortgage rates are untethered from other markets

We’re usually quietly proud of our record for predicting the day’s changes in average mortgage rates. But recently, our forecasts have been less accurate. Why’s that?

Well, we can only base our predictions on what’s happening in other markets with which mortgage rates traditionally have more or less close relationships. But those relationships have been drifting apart recently.

That’s not wholly surprising amid the sort of volatility we’ve been seeing recently. But it’s more than that. Last Friday was only one example of key markets acting in mortgage-rate-friendly ways — yet those rates still rising. So what’s going on?

Lenders managing supply and demand

The Mortgage Bankers Association reckons refinance applications during the last week of February were more than twice as numerous than (up 224% on) the same week a year earlier. And that sort of growth has been going on for a while now.

So some lenders simply lack the human resources to process all the applications they’re receiving. And even those with all-online offers and scalable IT infrastructures that can get them over that administrative hurdle face another problem.

The standard mortgage lending model sees loans bundled up into bond-like financial instruments (mortgage-backed securities) and sold on a secondary market soon after closing. But lenders need to have cash reserves to get them past closings. And those finite reserves are stretched by sudden and unexpectedly high demand, while adding to them takes time. So those lenders have to manage demand for their products (mortgages) in order to match supply (money for closings).

And you don’t need to have attended even Economics 101 to know that the fastest way to manage excessive demand for a product is to raise (or at least moderate) its price.

Virus still the biggest factor for mortgage rates

The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the chaos seen in global markets since Feb. 20. The virus now has a confirmed presence on five continents and in 110 countries, up from 95 on Friday. Here at home, the US has 566 cases, up from 233 on Friday.

China, South Korea, Japan (including the cruise ship harbored in Yokohama, Japan), Italy, Iran, France, Germany and Spain each has infections in the thousands or tens of thousands. And 13 other countries have them in the hundreds. China, Japan, Italy, France and Germany rank among the world’s top-10 economies, while South Korea occupies the No. 11 slot and Spain the No. 13.

While markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on Covid-19’s health implications. Their concern is the virus’s economic consequences, which are a byproduct of the medical ones.

Worldwide worries

Data suggest those economic consequences are likely to turn out to be severe. Over the weekend, the Italian government announced that it was implementing a strict quarantine on 16 million residents, representing a quarter of the country’s population. The economic implications for the regions affected boggle the mind.

Meanwhile, last Friday, a poll by Reuters of economists based in China found:

The coronavirus likely halved China’s economic growth in the current quarter compared with the previous three months, more severe than thought just three weeks ago and triggering expectations for earlier interest rate cuts.

And, already, several other governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. Indeed, last Monday, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecasts to 1.5%, almost half the 2.9% it was expecting before Covid-19 took hold. It also warned that the virus could “plunge several countries into recession this year,” according to The Guardian.

The dangers of global connectedness

Globalization has brought much more sophisticated and diverse supply chains. So, for instance, if you want to build a car in America, you’ll likely rely on parts from several other nations. And that means you’ll be vulnerable to any disruption in those other countries.

As long ago as Feb. 4, Bloomberg noted:

China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.

But it’s not just China. If global reliance on it for intermediate goods is 20%, the rest of the world accounts for 80%. And, as worryingly, some supply chains are so sophisticated that manufacturers may not realize the ultimate source of essential parts. This morning’s Financial Times reported, “Many companies are unaware that they are exposed to parts shortages because of outbreak.”

Central banks face problems

Traditionally, central banks intervene during troubled times to prop up their economies. And it seems certain most important ones will do so in response to Covid-19. The Bank of Japan, European Central Bank (ECB) and Bank of England have all signaled a willingness to act, presumably with rate cuts, in recent days.

But when the Federal Reserve did so last Tuesday morning, markets responded badly to a shock, half-point cut in interest rates. They seemed to suspect that it was acting precipitously. Was it bending to political pressure from the White House or was it overreacting to stock market falls? More scarily yet, did it know things that investors didn’t?

That suggests central banks will have to tread warily when intervening. But few of them have much room to maneuver anyway. They already have exceptionally low rates (the ECB’s is currently -0.5% — yes, a negative rate) so are limited in their use of that traditional stimulus tool. And quantitative easing (sometimes compared to printing money) brings its own dangers.

Some economists have been warning for years about the dangers of keeping interest rates artificially low during times of good economic growth. They feared that would limit options when the next recession loomed. We may be about to discover whether they were right. And, if so, the extent to which their fears were justified.

Covid-19 likely to spread within US

The Centers for Disease Control and Prevention (CDC) warned on Feb. 23 that the coronavirus would probably spread within American communities. Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told journalists:

It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen. … We are asking the American public to prepare for the expectation that this might be bad. … Disruption to everyday life might be severe.

The following day, in a news conference, President Donald Trump provided a more upbeat take on the danger posed. “We’re very, very ready for this,” he said, adding that the risk to the US was “very low” and that he expected the outbreak to end swiftly. He announced that Vice President Mike Pence will lead the administration’s response.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 111,650 (up from 100,696 last Friday) cases around the world, and has killed 3,886 (up from last Friday’s 3,412). Yes, those figures — assuming they’re accurate — show it to be way more infectious than others, such as SARS and MERS. But they also reveal a much lower death rate (3.5%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).

And that crude death rate calculation is almost certainly too high. Some experts are predicting a final mortality rate of around 1%. But it’s too soon to make definitive judgments.

Mortgage rate volatility ahead?

In coming days and weeks, volatility will likely be driven by changing news cycles. Good news about the virus (and consequently its economic effects) should normally see mortgage rates rise while bad news typically pushes them down. But such news isn’t always reliable.

Scientists are still trying to reach a consensus over many medical aspects of the virus. And governments are increasingly trying to craft narratives that head off panic over both the health and economic consequences of the epidemic. And not all of them are scrupulous about avoiding fake news. For example, some remain suspicious of China’s and Iran’s numbers.

So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. Still, our recent warning that “mortgage rates could bounce up and down like Tigger on E” has so far turned out to be wrong, at least until last week. But it’s too soon to rule out the Tigger scenario in the future.

Economic reports this week

It’s a relatively quiet week for domestic economic reports. But given that, in recent weeks, even seriously important ones have failed to cut through investors’ obsession with Covid-19, that may make little difference.

Unless the coronavirus magically disappears during the next few days, expect none of this week’s reports to make much difference to mortgage rates. The ones that more normally might have done so include Wednesday’s consumer price index (CPI) and Friday’s consumer sentiment index.

But, more normally, any economic report can move markets, as long as it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.

Forecasts matter

That’s because markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect.

And that means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead.

Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.

This week’s calendar

This week’s calendar for economic reports comprises:

• Monday: Nothing
• Tuesday: Nothing
• Wednesday: February consumer price index (forecast 0.0%) and core CPI (forecast +0.2%)
• Thursday: February producer price index (forecast -0.1%)
• Friday: March consumer sentiment index (forecast 95.0 index points)

The chances of any of these cutting through the Covid-19 gloom seem slim.