The Market Today
Mortgage Applications Remain Strong; Virus Trends Remain Concerning
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: The number of newly-reported cases hit a new record high of 58,047 yesterday. The U.S. government signed separate contracts with Novavax and Regeneron to produce a potential vaccine and antibody cocktail shot and GlaxoSmithKline announced a joint clinical trial with Medicago to test an experimental vaccine. Updates from some U.S. hotspots were mixed. Florida’s case count rose by a below-average 3.6% while testing positivity increased from 15% to 16.3%. More concerning were reports that more than 40 hospitals across 21 counties had maxed out their normal ICU capacity. Arizona’s cases also increased 3.6%, below the recent average, while new deaths of 117 set a record. California announced new cases of 6,090, below the 14-day trend, but a record 5,989 hospitalizations and a slightly higher share of positive tests. New Jersey’s transmission rate increased again and became the latest state to announce a mask mandate for its citizens. Texas reported more than 10,000 cases for the first time. New York added three more states to its growing mandatory quarantine list.
Mortgage Applications Remain Strong as Rates Hit New Record Low: Mortgage applications for the week ending July 3 rose 2.2% on another gain in both purchase and refi apps. The national average 30-year mortgage rate fell 3 bps to a new record-low rate of 3.26%. Purchase applications rose 5.3% bringing them to up 25.6% versus the 2019 average. Refi apps inched up 0.4% during the week, now up 94% from the 2019 average. The housing data look strong in the short term. The longer term challenge will be its resilience once the household income supplements have expired.
Consumer Credit: The May Consumer Credit report, scheduled for release at 2:00 p.m. CT, is expected to show another $15 billion decrease in outstanding credit. Credit, which normally grows near $15 billion per month, declined $80.2 billion in March and April.
Equities Ended Their Hot Streak: U.S. equities fluctuated between smaller and larger losses during the first half of Tuesday’s trading, before steadily losing momentum in the afternoon to close near the lows of the day. The losses on Wall Street unfolded as the global equity rally that had persisted since early last week faltered. Most of Asia declined earlier and European stocks finished down 0.6% a couple of hours into the U.S. session. Adding in the more-than-1% drop for U.S. equities, a measure of global stocks slipped 0.9% after climbing more than 5% over the previous six sessions. Some consolidation wasn’t surprising considering the recent rally occurred in the face of some concerns about an uptick in virus infections.
Longer Treasury Yields Tested Low End of Recent Range: A day of Fedspeak reiterated the cautious communication strategy officials have taken since economic activity broke under the pressure of the pandemic (more below) and the latest JOLTS report confirmed the labor market turned a corner in May on what will surely be a long road to recovery (more below). As equities moved lower, gold prices rose and oil fell with Treasury yields. The 2-year yield closed unchanged at 0.16%, essentially where it has traded for the better part of two months, while 10-year yield dipped 3.6 bps to 0.64%, near the low end of a roughly two-month trading range.
Chinese Markets Continue to Accelerate as the Rest of the World Rides the Brakes: Absent continued strength for the major equity indexes in China, price action across the rest of the world has been muted and mixed so far on Wednesday following yesterday’s declines. China’s CSI 300 gained another 1.6% to extend its weekly rally to more than 8%. A majority of the three-day rise was recorded Monday after a state-run media outlet advocated for a bull market, a step seen as a signal the government will continue to provide market support while its economy recovers. Elsewhere, European equities had accumulated small losses around 7:15 a.m. CT while U.S. futures were marginally higher after flipping between gains and losses. A rally for global equities reaching back to early last week ran out of steam on Tuesday as equities returned close to record levels despite case counts continuing to rise across the U.S. The White House task force announced it will hold a briefing on the virus at 10:30 a.m. CT. Treasury yields had inched back up with the 10-year yield 1.6 bps higher at 0.66%.
JOLTS Report Shows Labor Market Improved on “Limited Resumption of Economic Activity”: The latest JOLTS report from the BLS confirmed the labor market appeared to turn a corner in May on what will be a long road to full recovery. Total job openings rose from just below 5.0 million to 5.4 million. Nearly 6.5 million workers were hired during the month, a record level and up from 4.0 million in April, and 4.1 million workers were separated from their jobs, down from roughly 10 million the month before. Among the separations, the number of quits recovered from 1.9 million to 2.1 million, a sign of optimism among workers, while layoffs fell to 1.8 million, a notable decline from levels of 11.5 million and 7.7 million in March and April. As was evident in the May nonfarm payroll report, the sharpest recoveries were realized by those sectors most severely hit by the virus effects, such as retail and leisure.
WSJ – Recession Forces Spending Cuts on States, Cities Hit by Coronavirus: “State and local governments from Georgia to California are cutting money for schools, universities and other services as the coronavirus-induced recession wreaks havoc on their finances. … Widespread job losses and closed businesses have reduced revenue from sales and income taxes, forcing officials to make agonizing choices in budgets for the new fiscal year, which started July 1 in much of the country. … Governments have cut 1.5 million jobs since March, mostly in education, and more reductions are likely barring a quick economic recovery.”
Fedspeakers Focused on the Slow Recovery: Keeping the cautious tone that has pervaded recent communications, separate Fed officials pointed out persistent risks the economy faces during the ongoing pandemic. President Bostic from Atlanta said he has noticed increased concerns among businesses and consumers in his district, a message echoed later by Cleveland President Mester, highlighting that a major driver of economic momentum is the level and direction of economic confidence. Richmond Fed President Barkin said there are signs of better momentum as the economy reopens but believes it’s prudent to be cognizant of the level of activity, not the rate of change. The severity of the downturn will lead to large percentage gains in early-summer data that will not come close to fully recouping the damage done in March and April on an absolute Dollar basis. Governor Quarles acknowledged, “The Covid event is not behind us yet,” and expects a strong banking system to face an increase in non-performing loans. Mester also reiterated that policy will remain accommodative for some time considering the lengthy recovery that lies ahead. Vice Chair Clarida pointed to some improvement in the data since April but stressed the Fed can do more if need, an explicit pledge also made by Barkin and Mester.