Have you seen HSH's latest Two-Month Forecast for mortgage rates?

Have you seen HSH's latest Two-Month Forecast for mortgage rates?

Softer Surprises

May 7, 2021 -- Just when everything across the economy seems to be gaining strength its to be expected that this will show in the various reports that track a wide range of components. Certainly, the economy is on the right track, but it appears that a seemingly more frenetic pace of activity has throttled back a bit to start the second quarter of 2021.

That's not to say that the data isn't strong; it is. It's just that expectations have been revved up over the last few months as optimism regarding the virus has increased and restrictions to control it decreased. Mixing in significant direct fiscal stimulus and stimulative monetary policy, and you've got ammunition for lofty expectations, but as is often the case, reality is somewhat different than dreams.

Take the employment report for April. March was a blowout month, one where 916,000 new hires took place. Falling initial claims for unemployment benefits in recent weeks and other indicators gave some suggestion that hiring in April might be at least as strong as March, and when the payroll management company ADP posted a expansion of 742,000 private-company jobs added was released on Wednesday, it looked as though April would even best March's figure.

But this was not to be. April's new hires figure came in at "just" 266,000 new jobs created, missing expectations by a wide mark. At the same time, it would seem that March's gain was overestimated by the Bureau of Labor Statistics, and the original 916K was pared back by 146,000 to 770,000 for the month (February was revised up by 68,000, taking at least some of the sting out of the downward revision). More meager hiring during the month despite an increase in the labor force meant that the unemployment rate -- expected to decline to perhaps 5.8% -- instead increased to 6.1%, although the labor force participation rate did gain to 61.7%, its highest level since the onset of the pandemic more than a year ago.

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Perhaps there were fewer hires in April because there were fewer folks who lost jobs -- that is, folks were retained rather than let go, and so both didn't add to unemployment statistics or new hiring numbers for the month. In fact, the number of initial claims for unemployment assistance downshifted again in the week ending April 30, falling 92,000 for the week to 498,000 -- the first time it has cracked the 500K level since the week of the pandemic declaration. That said, the current improved figure is still about 77% higher than the week before mandatory restrictions kicked in, and would be considered an awful level in almost any other context.

Other indicators seemed to point to increasing strength in the labor market, too, including the 22,913 announced layoffs tracked and reported by the outplacement firm Challenger, Gray and Christmas. The April figure was the fewest terminations in this series since way back in Y2K, so it would stand to reason that if companies were hanging onto workers at a time when economic activity was kicking higher that they would also be looking to hire new folks, too.

There were at least a couple of significant indicators that the April employment report might come in below expectations. These could be found in the employment components of the twin surveys from the Institute for Supply Management, where overall activity levels also stepped back a bit. The ISM report covering manufacturing posted an April value of 60.7, a four-point settling back from March's 37-year high and still a very strong reading, but one that confounded forecasts of a gain. In the report, measures covering new orders dropped back by 3.7 points to 64.3, and the employment component by 4.5 points to a more moderate 55.1 level. One thing that did continue in an "up and to the right" pattern was the "prices paid" component, which rose another 4 points in April to 89.6, the highest value since 2008.

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If supply chain issues permit it to, manufacturing activity should pick up as we move deeper into the spring. At least that's the indication from inventory levels at wholesalers in March. Overall holdings rose by 1.3%, part of a three-month string of solid increases in inventory levels. However, with demand firing, sales at wholesalers rose by 4.6%, and this thinned out stockpiles a bit, leaving just 1.2 months of supplies on hand at the current pace of sales. As this is a pretty thin level, new orders to manufacturers should continue to strong just to re-fill the pipelines. We'll see how final consumer demand is holding up when the retail sales report for April comes out next week.

Of course, manufacturing makes up a small portion but important component of the economy; the service sector is far larger and holds more sway. Still, the April ISM report covering service business concerns also throttled back a bit, declining by 1 point to 62.7 for the month. As with manufacturing, forecasts called for a gain, which failed to materialize. New orders for services dropped back by 4 points to a still-robust 63.2, but unlike the 4.5-point gain in the employment subindex for March, only a 1.6-point rise to 58.8 was seen for April, so hiring momentum was about one third as strong in April as March. On the inflation front, the prices paid index here also continued to power higher, with the 76.8 reading for April the highest since July 2008.

To be fair, both ISM reports were very solid, but simply failed to live up to loftier expectations.

Folks with jobs worked harder in the first quarter of 2021. For the period, worker productivity rose at a 5.4% annual rate. With millions of folks still on the employment sidelines, those with jobs are were pressed to try to meet demand being fostered by falling restrictions on activity and trillions of dollars in fiscal stimulus hitting bank accounts and pocketbooks. With the surge in output, the labor cost per unit produced eased by 0.3%, so folks could be paid more without adding to price pressures. The April employment report noted a 0.7% increase in average hourly earnings, so perhaps some folks are seeing the benefits of their increase in output to start the year.

Folks appear to be both borrowing and spending strongly of late. As noted, we'll see what's up with retail sales for April next week, but March sported an eye-popping 9.8% gain. Consumer borrowing, too is on the rise, likely powered by growing optimism for the future, rising equity markets and government stimulus helping to make payments. Whatever the reason, consumer credit balances rose by $25.8 billion in March, pairing with an equal binge in February ($26.1). Most of the borrowing was of the installment variety (things like auto, personal and education loans), which expanded by $19.4 billion for the month, but also pressed higher by a $6.4 billion increase in revolving credit balances (usually credit cards), a component which also expanded smartly in February, and the back-to-back revolving gains were the strongest collective pair since late 2017.

Consumers are apparently taking advantage of somewhat less-restrictive underwriting standards for loans and credit cards, too. The Fed's Senior Loan Officer Opinion Survey covering the three months that ended in April revealed that sizable portions of the banks polled noted that underwriting standards "eased somewhat" for things like auto loans and credit cards and the like, and that demand for financing things using these loans was about the same as it was earlier in 2021. Banks are sitting on piles of cash, a lot of which had been held in reserve to account for expected losses during the pandemic, but for the most part those have turned out to be less severe than expected, and easing lending conditions are one way to get those holdings into more productive use, and this could be important to keeping the economy going when fiscal stimulus and monetary policy begin to eventually tighten.

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That the installment portion of consumer borrowing continues to be strong isn't surprising when you consider that the Bureau of Economic Analysis reported that sales of new cars and light trucks are surging, posting another 3.1% increase in April to 18.51 million (annualized) units sold. This was the highest level since July 2005. Auto manufacturers are said to be struggling with a shortage of computer chips, necessitating production cuts and creating sales bottlenecks, but it appears that this will be an issue that affects future sales to a greater degree than current.

The nation's imbalance of trade suggests strengthening economic activity both here and elsewhere. For much of the last year, the gap in value between imports and exports was market caused by exports being weak while imports were better supported, and while this continue to be the case, exports seem to be picking up some steam of late. During the month, the value of goods and services leaving the U.S. rose by $12.4 billion to $200.0 billion for the month; while improving, exports are still about $11 billion below levels seen before the pandemic upended everything. Not so the case for imports; the $16.4 billion increase simply added on top of the already complete recovery for imports, which largely bridged the COVID-created gap about four months ago. Our trading partner's economies are still somewhat more impaired than is ours, and that may be the case for a while yet, given the difficult disease situation across the globe.

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Spending on new construction project eked out a 0.2% gain in March, an increase solely due to a 1.7% increase in outlays for residential construction. There were contractions in the other two facets of the report, as non-residential spending shrank again, with a 0.7% monthly decline the 10th in the last year. Spending for public-works projects also retreated, posting a 1.5% fall in March, the third consecutive decline in this component. We wonder if outlays are being tempered as states, cities and municipalities wait to see if President Biden's spending plans that includes billions of new dollars for infrastructure come to fruition before pressing on with new projects.

With a very solid but apparently not surging economic climate, interest rates have fewer reasons to push higher, but unless there is significant slowing or easing of price pressures, they aren't very likely to fall much either. That's also the case for mortgage rates, of course, so it may be hard for refinancing activity to move upward by very much, while homebuying activity is throttled by a lack of homes to buy. That being the case, requests for new mortgage credit will probably continue to be to the softer side, or at least backing and filling at best. In the week ending April 30, requests for new mortgage credit as reported by the Mortgage Bankers Association eased by 0.9%, pulled down by a 2.5% decline in purchase-money mortgage applications, but help up a little by a 0.1% increase in those for refinancing. With mortgage rates holding below 3% for a third consecutive week, somewhat more borrowers are getting a chance to lower their interest rate and monthly payments.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Apr 30Apr 02May 01
6-Mo. TCM 0.04% 0.04% 0.13%
1-Yr. TCM 0.05% 0.06% 0.17%
3-Yr. TCM 0.35% 0.35% 0.26%
10-Yr. TCM 1.63% 1.72% 0.64%
Federal Cost of Funds 0.845% 0.876% 1.112%
30-day SOFR (daily value) 0.01000% 0.00000% 0.02533%
FHLB 11th District COF 0.377% 0.408% 0.603%
Freddie Mac 30-yr FRM 2.98% 3.13% 3.26%
Historical ARM Index Data

So after a couple months of seeing beneficial surprises in the incoming economic data, April's data are surprising to the downside to a degree. There's certainly no concern about any kind of economic stumble, or that things aren't progressing well as we look to return to normal. Rather, such softer data simply serves as a reminder that the path ahead is rarely one that is straight ahead, and that there can be some fits and starts along the way. Those fits and starts will probably help interest rates to remain rangebound longer, perhaps for a number of weeks yet if there is no surprisingly stronger data to offset it. We'll get some inflation data next week, retail sales and a few other items, but none seem likely to cause a change in direction for interest rates.

That being the case, and with mortgage rates at a virtual standstill for the last three weeks, we might see a basis point or two decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac when next Thursday morning rolls around as mortgage rates also continue to be surprisingly softer than one might have expected just a month ago.

For a look at where we think rates are headed beyond next week, and where we expect them to travel until mid-June, why not have a look at our latest Two-Month Forecast for mortgage rates?

2021's just got to be better than 2020, right? Maybe, but it all depends on how you look at it. To see our take on mortgage rates, home sales, home prices, the Fed and more, check out our 2021 Outlook

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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