Forecast plus what’s driving mortgage rates today

Average mortgage rates fell again on Friday, as we predicted. It was another worthwhile fall that means some borrowers could be looking at close to all-time lows. But it’s worth noting that mortgage rates have been moving more slowly than many other markets, which on Friday closed their worst week since the 2008 financial crisis. So don’t see screaming headlines about stock indexes and assume changes in those rates will match them.

First thing this morning, markets seemed to be taking cheer from recent promises from the Federal Reserve and other central banks to support their economies in the face of the coronavirus. But it’s unclear just how much those banks can do. And it’s far from certain that this rally will last long. Indeed, as this was being written, some stock indexes switched from positive to negative and others were losing steam.

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Amid such volatility, we have little confidence that our forecasts will hold good for long. But judging from a snapshot of markets first thing, mortgage rates today look likely to hold steady or just edge lower. But, 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 unchanged or slightly lower. By approaching 10 a.m. (ET), the data, compared with roughly the same time on Friday morning, were:

• Major stock indexes were mixed. (Neutral 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 $1,602 an ounce from $1,617. (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 higher to $45.80 a barrel from $45.24. (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 tumbled to 1.07% from 1.17%. A year ago, it was at 2.76%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
•  CNN Business Fear & Greed index held steady at 9 out of a possible 100 points. (Neutral 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 quiet day for mortgage rates. But with such excitable markets, nothing’s certain.

This week

Virus still big factor for mortgage rates

The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the mayhem we saw in global markets during the last seven business days of February. The virus now has a confirmed presence on five continents and in 71 countries, up from 56 on Friday.

And the World Health Organization (WHO) announced last week that, for the first time, there were more new cases confirmed outside China than inside. You might think the challenges of containing Covid-19 have grown exponentially since it stopped being effectively restricted to one country. South Korea, Japan, Italy and Iran each has hot spots with infections in the thousands and six others in the hundreds. Here at home, the US has 88 cases, up from 66 on Friday.

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.

New China economic data deeply worrying

And data that emerged from China over the weekend could bring more volatility in coming days. On Saturday, the country’s National Bureau of Statistics unveiled its February official Purchasing Managers’ Index (PMI), which is an important indicator of economic activity.

Prior to the release, Reuters had polled analysts over their expectations and the consensus forecast was that it would fall to 46.0 index points from 50 in January. In reality, February’s actual figure was 35.7. That’s a record low for modern China, and more granular figures within the index paint an even grimmer picture for manufacturing production and new orders.

Most worryingly, this suggests that the analysts on whom markets rely when assessing risks and rewards have been grossly underestimating Covid-19’s economic impacts. And, if those sorts of falls are soon to be replicated within other major economies, we could all be in for very big trouble. It’s hard to imagine investors shrugging off the news.

Meanwhile, earlier today, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecast 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.

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.

Of course, those countries with sizable outbreaks are taking exceptional measures to contain the virus. But, from a purely economic standpoint, the inevitable and correct responses of governments that face sudden epidemics are negative. Travel bans, forced isolations and the closing of public spaces, schools and workplaces all cramp growth in gross domestic products. And disruption to global supply chains can be especially damaging. It’s for those reasons that markets have responded so sharply to recent news.

Mortgage rate volatility ahead?

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

Health experts can agree neither on the likely speed of the outbreak’s spread nor the severity of its outcomes. As ominously, they can’t decide the lead time between becoming infected and showing symptoms. And they often issue contradictory statements almost simultaneously.

Meanwhile, 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. 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: movements have been fevered but the direction has been one-way. But it’s too soon to rule out the Tigger scenario in the future.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 89,843 (up from 83,906 on Friday) cases around the world, and has killed 3,069 (up from Friday’s 2,869). 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 (3.4%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).

In fact, typical “seasonal” influenza (just your ordinary flu that comes around each year) has a death rate in America of about 0.1% of those who contract it, though that’s likely higher in less developed countries. And you should note Covid-19’s current 3,069 death toll in that context. According to WHO, worldwide deaths from seasonal flu have averaged between 290,000 and 650,000 annually in recent years.

And, like seasonal flu, this new strain most severely affects those who are older (over 60 years) or who already have medical conditions that compromise their immune systems. Fatalities among those infected who are younger or middle-aged adults in good health are relatively rare.

But it would be premature to assume that Covid-19 is going to act in similar ways to seasonal flu. The president’s belief that it will fade out when spring arrives and the weather improves may well be proved correct. But many specialist doctors don’t share his confidence and say it’s too soon to be sure.

Still grounds for health fears

Of course, scientists are still learning about the outbreak’s epidemiology. So its mortality rate may rise or fall. And the virus itself could change (mutate) and become more or less infectious or deadly.

Meanwhile, you can certainly argue that our method of calculating the virus’s death rate is too crude. Tens of thousands are still sick and their outcomes unknown.

So, if you look only at the known outcomes (those previously infected and now officially declared well against those who’ve died) the mortality rate is closer to 6%. But that, too, is unreliable. Because most current patients are likely in low-risk groups. And many of those infected may have symptoms that are so mild (or nonexistent) that they don’t even realize they have the virus.

Some experts are predicting a final mortality rate of between 1% and 2%. But it’s too soon to make definitive judgments.

Economic impact

But, leaving aside the health and human effects, the economic impact this outbreak has already had is severe. In early February, UBS economists slashed their 2020 GDP forecast for China to between +4% and +5%, down from +6.1% in 2019.

And it’s not just China that’s affected. On Feb. 12, UBS forecast that the Australian economy would shrink by between 0.1% and 0.5% this quarter, directly as a result of Covid-19. And many other countries are at risk of slower growth, with Japanese, Italian and South Korean governments all warning about the potential impact. Last Friday, Bank of England Gov. Mark Carney (the UK’s equivalent of our Federal Reserve chair) said in an interview, “We would expect world growth would be lower than it otherwise would be, and that has a knock-on effect on the UK.”

Indeed, on Feb. 11, Federal Reserve Chair Jerome Powell warned the House Financial Services Committee of the risk it poses to the economic outlook for the US as well as the rest of the world. And Goldman Sachs last Thursday announced that it expects American companies to experience zero earnings growth in 2020. It calculates that the S&P 500 could fall another 7%.

But you don’t need the milky crystal balls used by economists to judge the risks. Markets are providing their own analyses.

Beyond China’s borders

During late February, several American companies — including Apple, Microsoft and Anheuser-Busch InBev — said they expect their revenues to be seriously hit by Covid-19.

On Feb. 5, Chinese executives estimated that the nation’s oil consumption would be 25% lower that month, something that has since been disrupting oil markets worldwide. Meanwhile, other sectors inside China and outside are also being affected. Foreign importers are experiencing shortages in the goods they normally buy from the country. And, on 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.

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

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.

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 (forecast 54.8%) and ADP employment report (no forecast but 291,000 new private-sector jobs 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.