Forecast plus what’s driving mortgage rates today

Average mortgage rates rose yesterday, which was the opposite of what we expected. At the risk of making excuses, it’s unlikely anyone could possibly have anticipated the wild ride markets took following a shock half-point rate cut by the Federal Reserve that morning (more below). Still they remain uberlow — well below their closing point last Friday.

This morning, stock markets were rebounding yet again. But other markets were much more mortgage rate-friendly.

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You’ll understand that, amid such wild volatility, we hesitate to stick our neck out. But our best guess is that mortgage rates today will fall. Still, 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. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were all 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 soared to $1,644 an ounce from $1,607. (Good 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 moved higher to $47.91 a barrel from $47.60. (Neutral 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 0.97% from 1.13%. A year ago, they were at 2.72%. (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 13 from 20 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

Today might be a better day for mortgage rates. But with such excitable markets, nothing’s certain.

This week

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 82 countries, up from 77 yesterday. Here at home, the US has 128 cases, up from 103 yesterday.

China, South Korea, Japan, Italy and Iran each has infections in the thousands and six others in the hundreds. China, Japan and Italy each ranks among the world’s top-10 economies, while South Korea occupies the No. 11 slot.

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.

The Fed acts

Early yesterday, we suggested, “So why did stock market indexes rise yesterday [Monday]? It’s because investors in those markets expect central banks, and especially the Federal Reserve, to quickly unveil interest rate cuts and perhaps other stimulus packages that will buoy those indexes.”

But then, at 10 a.m. (ET) yesterday, the Fed did indeed announce a 50-basis-point (a basis point is one hundredth of one percentage point) cut. And that was especially significant for two reasons:

1. No announcement was due and such emergency cuts are rare — The last one was in 2008
2. Most such cuts are of 25 basis points — So, with a 50 BPS one, the Fed was signaling that it was acting decisively in the face of something huge

What’s really strange is what happened during the rest of the day. Yes, stock markets rallied on the news. But then they tumbled even more sharply. And yields on 10-year Treasurys also fell: they’re currently below 1.0% for the first time ever. Presumably, markets responded in precisely the opposite way from how the Fed had expected.

The Fed effect

Having scanned as many financial media outlets as possible, we can find few credible explanations for what happened yesterday beyond the obvious. And that is that, having previously yearned for a cut, investors realized that such a sharp and sudden one meant the Fed shared their worst fears about the economic effects of Covid-19. Overnight, Guardian Financial Editor Nils Pratley offered his take:

Yet the Fed gave the impression only last week that it would prefer to see some hard economic data before changing stance. What’s “evolved” so quickly? The US central bank risks giving the impression that it’s been spooked. Was it last week’s stock market falls, Donald Trump’s lobbying for a cut or behind-the-scenes intelligence about the spread of the virus? None of those possibilities convey confidence.

The Bank of Japan, European Central Bank and Bank of England have all signaled a willingness to act, presumably with rate cuts, in recent days. They may now be rethinking their tactics, if not their strategies.

Worldwide worries

Data suggest Covid-19’s economic consequences are likely to turn out to be severe. Already, several governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. And, on 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.

As worryingly, there are signs that economists and analysts are underestimating the virus’s likely economic impacts. Last Saturday, China’s official purchasing managers’ index (PMI), which is an important indicator of economic activity, came in at 35.7 index points for February.

But analysts polled by Reuters had expected it to be 46.0, down from 50 in January. February’s actual figure was a record low for modern China, and more granular figures within the index painted an even grimmer picture for manufacturing production and new orders.

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%. Reinforcing that point, on Feb. 24, The Wall Street Journal carried the headline, “World Economy Shudders as Coronavirus Threatens Global Supply Chains.”

Covid-19 likely to spread within US

The Centers for Disease Control and Prevention (CDC) warned last Tuesday 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 94,343 (up from 92,298 yesterday) cases around the world, and has killed 3,222 (up from yesterday’s 3,130). 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 (3.3%) 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 between 1% and 2%. 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.

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 this week. But it’s too soon to rule out the Tigger scenario in the future.

Economic reports this week

Last week, some quite important economic reports were effectively ignored by markets as the coronavirus monopolized their attention. We’ll have to wait to see whether the same fate awaits this week’s publications, but so far that has been the case.

The most important of those is the official, monthly employment situation report, which comes out on Friday. But earlier in the week, we’ll also see indexes from the Institute of Supply Management (ISM) for the manufacturing (Monday) and nonmanufacturing (Wednesday) sectors. And in more normal times, investors might pay attention to fourth-quarter productivity (Thursday) and the trade deficit (Friday).

Of course, 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: ISM manufacturing index (actual 50.1%; forecast 50.5%) for February, and January’s construction spending (actual +1.8%%; forecast +0.9%)
• Tuesday: Nothing. But motor vehicle sales for February will emerge during the day (forecast 16.8 million vehicles)
• Wednesday: February ISM nonmanufacturing index (actual 57.3%; forecast 54.8%) and ADP employment report (actual 183,000 new private-sector jobs; no forecast but 291,000 in January)
• Thursday: Quarter 4 of 2019 productivity (forecast +1.3%) and unit labor costs (forecast +1.3%) Plus January factory orders (forecast -0.2%)
• Friday: February employment situation report, including nonfarm payrolls (forecast 170,000 new jobs), unemployment rate (forecast 3.5%) and average hourly earnings (forecast +0.3%). Plus January’s trade deficit (forecast -$46.9 billion)

We’ll have to wait to see whether any of these reports are sufficiently great or awful to cut through markets’ viral obsession.