Forecast plus what’s driving mortgage rates today

Average mortgage rates rocketed yesterday — more quickly than this observer’s ever seen. Few saw that coming. But it means mortgages will no longer be inexpensive — at least until we see some falls.

And, frustratingly, nobody seems to be able to provide a cogent reason for what’s happening to those rates. They remain largely untethered from other markets. And, if the Federal Reserve’s new quantitative easing program was behind Monday and Tuesday’s falls, it stopped having an effect yesterday. The only possible explanation is that “bond traders could be waking up to the fact that the U.S. government’s fiscal deficits will start to finally matter,” according to MarketWatch. That could make all bonds (including mortgage-backed securities) less attractive.

So what does that mean for mortgage rates today? We simply don’t know. If I personally had to decide on whether to lock, I’d hang on for a day or two to see if there’s a downward bounce after yesterday’s huge rise. But that’s just a gut feeling. And it’s one laden with risk.

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

First thing this morning, markets and other factors provided few clues to what may happen to mortgage rates today. But we’re hoping they might go lower today, tomorrow. or soon By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were lower, though not as sharply lower as yesterday at this time. (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 $1,471 an ounce from $1,506. (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. But if they’re not worried now …
• Oil prices fell to $21.79 a barrel from $24.01 (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 rose to 1.10% from 1.05%. A year ago, it was at 2.54%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
•  CNN Business Fear & Greed index nudged up to 6 from 5 out of a possible 100 points. A month ago, it stood at 51. (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

Today is effectively unreadable. A few weeks ago, we were predicting that markets and mortgage rates could soon be bouncing up and down “like Tigger on E.” We should have stuck with that simile.

This week

Federal Reserve’s Sunday announcement

If the Fed’s dramatic unveiling on Sunday of a massive rate cut (to close to zero) and $700-billion stimulus package (“quantitative easing”) was intended to reassure investors, it didn’t work. True, stock markets partially recovered on Tuesday after a disastrous Monday. But they had a poor day yesterday and they’re still looking less than good this morning.

More importantly, what does the Fed’s move mean for mortgage rates? On its website, Mortgage News Daily has a masterly overview of what’s going on under the hood. But if you just want headline information, the following might help:

1. Fed rate cuts don’t directly affect new mortgage rates. So don’t expect your lender to be offering you a lower rate as a direct result of Sunday’s announcement. Monday’s fall was probably down to “quantitative easing” (QE) or some other factor and not the cut
2. The Fed’s $700-billion stimulus package (QE program) includes $200 billion for buying mortgage-backed securities (MBSs).
3. QE is designed to drive mortgage rates lower. It may have worked on Monday and Tuesday but it sure didn’t yesterday
4. Excessive demand, mostly for refinances, was behind last week’s sharp rises in mortgage rates. Lenders struggled to cope and investors didn’t want to buy all the MBSs on offer when rates and yields were low. Those higher rates may have killed much of that demand

We wish we could give you a better guide to what the future holds. But this is unknown territory, folks.

Virus still the biggest factor for mortgage rates

The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) has certainly been behind the chaos seen in global markets since Feb. 20.

The virus now has a confirmed presence on five continents and in 176 countries, up from 170 yesterday. Here at home, the US has 9,464 cases, up from yesterday’s 6,533.

And that American number may be much higher in reality: A shortage of kits and the cost (until now) to uninsured patients of testing mean many more cases must surely go unconfirmed than in countries without those issues. And even those nations acknowledge a huge gap between their confirmed numbers and the actual infection rates, sometimes using multipliers of 20 or 25.

Seventeen countries have confirmed infections in the thousands or tens of thousands. And, of the world’s top-10 economies, only India and Brazil have fewer than 1,000 cases. Meanwhile, dozens of other countries and territories have them in the hundreds.

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 when trading 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 since we last published yesterday morning:

• As the administration’s plans evolve, it seems likely that Americans will receive two checks each from the federal government
• They should cost $500 billion
• The same amount could go on bailing out hard-hit businesses
• President Donald Trump has signed a stimulus bill that provides up to $100 billion to Covid-19 victims. Benefits include sick leave, higher unemployment benefits, increased food stamp payments and free virus testing
• There were no new infections reported in China yesterday, suggesting its draconian containment measures may have paid off
• The European Central Bank has launched a €750 billion ($816 billion) Pandemic Emergency Purchase Program (PEPP) quantitative easing program
• The US dollar is surging in value against many other currencies. It looks set to hit for a second day a 35-year high against the British pound
• All 50 US states now have confirmed infections

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

Worldwide worries

Data suggest the economic consequences of Covid-19 are likely to turn out to be severe. Economists, central banks and governments are slashing their forecasts for growth. And a growing number anticipate recessions.

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. The outlook has become considerably grimmer since that was published.

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.

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. On March 9, The 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 (if they haven’t already) in response to Covid-19. However, last Thursday, 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 for the financial sector also unveiled last Thursday. That’s more than twice as much as went on 2008’s bank bailouts.

Then, on Sunday, the Fed unveiled a dramatic cut in its interest rates that took them close to zero. And it also announced a huge stimulus program. Yet the following day stock markets experienced their worst session since 1987.

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.

Fed meeting

The Federal Open Market Committee was due to meet this week. That’s normally important because the FOMC is the Federal Reserve body that sets that organization’s interest rates — and therefore many others.

However, it preempted itself when it made its Sunday announcement. And this week’s scheduled meeting has been canceled.

To be clear, Fed rates don’t directly affect mortgage rates — except on existing adjustable-rate mortgages (ARMs) and variable-rate second mortgages such as home equity lines of credit (HELOCs). But they do influence the markets that do determine mortgage rates.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 225,724 (up from 204,732 yesterday) cases around the world, and has killed 9,278 (up from yesterday’s 8,270). 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 (4.1%) 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% — about 10 times that of seasonal flu. But it’s too soon to make definitive judgments.

However, On March 11, 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. A recent report from Imperial College London projected a worst-case death toll of 2.2 million Americans, though additional containment measures could halve that.

Economic reports this week

It’s a mostly quiet week for domestic economic reports with only Tuesday’s retail sales falling into the blockbuster category. That was deeply disappointing. But in recent weeks, even seriously important ones have failed to cut through investors’ obsession with Covid-19, And those figures made little difference.

Unless the coronavirus magically disappears during the next few days, expect none of this week’s reports to have much direct impact on mortgage rates.

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: February’s retail sales (actual -0.5%; forecast +0.1%) and retail sales excluding autos (actual -0.4%; forecast +0.1%). Plus February industrial production (actual +0.6%; forecast +0.5%) and capacity utilization (actual 77.05%; forecast 77.1%)
• Wednesday: February housing starts (actual 1.599 million homes started, annualized; forecast 1.498 million) and building permits (factual 1.464 million permits, annualized; forecast 1.5 million). No Fed announcement on interest rates
• Thursday: February leading economic indicators (actual +0.1%; no forecast but +0.8% in January)
• Friday: February existing home sales (forecast 5.5 million homes sold, annualized)

Only Tuesday’s retail sales figures seemed likely to stand any chance of cutting through the Covid-19 gloom. And they didn’t.