Forecast plus what’s driving mortgage rates today

Average mortgage rates rose yet again yesterday, as we predicted. The increase was sharp, but not quite as sharp as Tuesday’s and Wednesday’s. But it’s too soon to read much into that. And, for now, we may continue to see those rates mainly determined by the factors we describe in the first three sections of “This week,” below.

First thing this morning, it was looking as if most markets may recover a little today. That would normally be bad news for mortgage rates. But their relationship with markets has broken down recently, meaning stock indexes and Treasury yields are poor guides to what might happen.

Still, given that lenders are still facing demand issues, we may well see mortgage rates today rising again. With luck, that increase may be smaller than we’ve gotten used to in recent days. But that’s far from certain. And, as always, events may overtake that prediction.

Market data affecting (or not) today’s mortgage rates

First thing this morning, markets (or, rather, other factors) looked set to deliver mortgage rates today that are higher. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were appreciably higher. (Bad 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 moved lower to $1,574 an ounce from $1,589. (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 edged up to $32.52 a barrel from $30.61 (Bad 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 moved higher to 0.97% from 0.67%. A year ago, it was at 2.61%. (Bad for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
•  CNN Business Fear & Greed index inched higher to 3 from 2 out of a possible 100 points. A month ago, it stood at 60. (Bad 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

Recently, mortgage lenders have been increasing rates even on days that were disastrous for most markets. And they may do so again today while markets are generally unfriendly to rates.

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 become untethered recently.

That’s not wholly surprising amid the sort of volatility we’ve been seeing recently. But it’s more than that. Yesterday and Wednesday were only the most recent examples of some key markets acting in extremely mortgage-rate-friendly ways — yet those rates still rising sharply. So what’s going on?

Lenders overwhelmed

On Wednesday, the Mortgage Bankers Association announced its figures for mortgage applications during the week ending March 6. And it said applications for new loans jumped by 55.4% from one week earlier. Those for refinances increased 79%. Both were at their highest levels since April 2009

So some lenders simply lack the skilled professionals to process all the applications they’re receiving. On Monday, senior originator Ted Rood told Mortgage News Daily, ” … some lenders are not accepting new loans or locks, and lock pricing engines are crashing repeatedly due to excessive volume.”

And all lenders — even those with all-online offers and scalable IT infrastructures that can get them over that administrative hurdle — face two other problems.

Supply and demand

First, the standard mortgage lending model sees loans bundled up into bond-like financial instruments (mortgage-backed securities — MBSs) and sold on a secondary market soon after closing. It’s demand in that secondary market that actually determines mortgage rates. But investors are loath to buy them (something that pushes up rates) because they currently see MBSs as a bad bet.

That’s because the current wave of refinances means they’re getting a much lower return on MBSs acquired in recent years than normal. They don’t expect many 30-year mortgages to actually last 30 years. But they do rely on them lasting several. And those now being refinanced after just a few months or a year or two deliver lower profits than anticipated — or even losses.

And the second reason rates are untethered from other markets concerns cash flow. Lenders need to have cash reserves to fund each closing and get them through until they sell the MBS. 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 administrative capacity).

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 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 132 countries, up from 125 yesterday. Here at home, the US has 1,832 cases, up from 1,364 yesterday. And that American number may be much higher in reality: A shortage of kits and the cost to uninsured patients of testing means many more cases must surely go unconfirmed than in countries without those issues.

China, Italy, Iran, South Korea, Spain, France, Germany, Japan (including the cruise ship harbored in Yokohama, Japan) and now the United States and Switzerland each has confirmed infections in the thousands or tens of thousands. And 22 other countries and territories have them in the hundreds. China, Japan, Italy, France, Germany and the US comprise a majority of the world’s top-10 economies, including all the top-4. Meanwhile, South Korea occupies the No. 11 slot and Spain the No. 13 one, while Switzerland comes in at No. 20.

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.

Virus news roundup

The seriousness of the Covid-19 outbreak and its likely economic consequences can be seen in headlines and announcements over the last 24 hours:

• At a press conference yesterday, British Prime Minister Boris Johnson said, “We’ve all got to be clear, this is the worst public health crisis for a generation … I must level with the British public: many more families are going to lose loved ones before their time”
• At the same press conference, the British government’s chief scientific adviser Sir Patrick Vallance told reporters that the UK’s current tally of 596 confirmed cases meant actual infections were probably running at 5,000-10,000. He said that sort of multiplier likely applied to all nations that had effective testing regimes — and higher multipliers in those with less effective ones
• Dr. Anthony S. Fauci, head of the National Institute of Allergy and Infectious Diseases, told the House Committee on Oversight and Reform of problems with testing in the US: “The system is not really geared to what we need right now, what you are asking for. That is a failing,” he said. “It is a failing. I mean, let’s admit it”

• Ohio Department of Health Director Amy Acton told reporters at a press conference: “We know now — just the fact of community spread says that — at least 1%, at the very least, 1% of our population is carrying this virus in Ohio today,” she said. “We have 11.7 million people. So the math is over 100,000.”

• Stock markets yesterday seemed to shrug off the president’s Oval Office broadcast on Wednesday. They experienced their worst day since “Black Monday” in 1987

• All plays and musicals on Broadway will be closed for 32 days
• The Walt Disney World Resort in Florida and Disneyland Paris said they’d close until the end of this month
• More countries announced they’d be closing schools and universities and banning public events for more than 500 people

And these are just a selection of the more eyebrow-raising stories to emerge in the last 24 hours.

Worldwide worries

Data suggest the economic consequences of Covid-19 are likely to turn out to be severe. For example, Italy has been especially badly hit. And its government has implemented a strict quarantine on all 60 million of its residents. It’s also enforcing the temporary shuttering of all but essential customer-facing outlets, including restaurants, bars, coffee shops and all retail outlets. Only grocery stores and pharmacies are allowed to stay open. The implications of that for the Italian economy boggle the mind.

Meanwhile, on March 6, 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, on March 2, 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.

But there are other threats that aren’t as immediately apparent. For instance, very low oil prices globally are likely to place some American oil companies under severe financial strain. But some of those are highly leveraged (have borrowed in ways that now seem imprudent) and face collapse if prices don’t soon recover. And such extensive bankruptcies could have further consequences for those who lent to them.

The dangers of global connectedness

Globalization has brought much more sophisticated and diverse supply chains. So, for example, 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. Monday’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. However, yesterday, the European Central Bank (ECB) surprised many when it declined to join the Federal Reserve and the Bank of England in implementing rate cuts.

The ECB did, however, announce a different stimulus measure: an increase in its asset purchase program of 120 billion euros ($135 billion). That falls far short of the Fed’s potentially $1.5 trillion stimulus also unveiled yesterday. That’s more than twice as much as went on 2008’s bank bailouts.

But will even that be enough? Initially, stock markets thought so, recovering from earlier losses. But within an hour they were back down to their previous positions. Perhaps they’re having second (or third) thoughts today.

All this 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 the quantitative easing measures currently on the menu (sometimes compared to printing money) bring their 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. And, sure enough, it’s been proved right.

After originally playing down the virus’s threat to health, President Donald Trump on Monday acknowledged that its economic dangers were all too real. At a White House press briefing, he told reporters of plans to limit damage to the economy. And he said:

We have a very strong economy, but this blindsided the world.

Ideas currently being floated by the administration include delaying the tax payment deadline and cutting payroll taxes. Meanwhile, progress seems to be being made on reaching a deal over a House bill that would provide for paid sick leave and free testing for the coronavirus.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 139,004 (up from 129,386 yesterday) cases around the world, and has killed 5,116 (up from yesterday’s 4,749). 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 (3.7%) 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% — 10 times that of seasonal flu. But it’s too soon to make definitive judgments.

However, on Wednesday, German Chancellor Angela Merkel said she expected 70% of all Germans to eventually be infected by Covid-19. That’s not too far off the UK government’s March 3 forecast of 80% for its population.

If those worst-case projections turn out to be roughly correct and that infection rate occurs globally, the coronavirus’s final toll could be enormous, even with a 1% mortality rate. If 75% of the world’s population (of 7.7 billion people) becomes infected and 1% of those die, that’s 58 million deaths.

More market volatility ahead?

In coming days and weeks, volatility will likely be driven by changing news cycles. 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. But the extent to which those movements might affect mortgage rates is unclear. Because, for now, it seems not to be the usual markets that are determining those rates.

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 (actual +0.1%; forecast 0.0%) and core CPI* (actual +0.2%; forecast +0.2%)
• Thursday: February producer price index (actual -0.6%; forecast -0.1%)
• Friday: March consumer sentiment index (actual 95.9 index points; forecast 95.0)

*Core CPI is the CPI with food and energy prices, which can be volatile, stripped out.