Stock Landslide, Rates to Rise
October 10, 2008 — As soon as regulators stopped fiddling with markets for a moment, the stock market collapsed — not just here but across the globe. Speculative money has come roaring out of commodities and oil, and assets around the world are being liquefied in favor of cash and cash-like investments.
A day after Federal Reserve Chairman Bernanke gave a speech which hinted at a forthcoming cut in short-term interest rates, the Fed moved in concert with central banks around the world to lower
those rates. The Fed trimmed both the Fed Funds target and discount rates by a half-percentage point. At 1.5%, the rate is re-approaching historic lows, and the odds are growing that we’ll be back to a 1% Fed Funds rate before long.
The Fed also unveiled yet another anti-crisis weapon: the Commercial Paper Funding Facility, a mechanism where corporations can borrow short-term loans directly from the Fed. These loans can be either secured by pledged assets or be unsecured, provided some form of guarantee is made. Commercial Paper markets, used by companies to meet short-term funding requirements such as equipment acquisition or even payrolls, have been among the most frozen markets.
As mortgage rates go, HSH’s overall indicator of the cost of mortgage money for all borrowers — covering true conforming, private-market jumbo and new “expanded conforming” loans — came in slightly lower. HSH’s Fixed Rate Mortgage Indicator FRMI eased by five basis points to 6.68%, while its companion 5/1 Hybrid ARM series lost six basis points to close the week at 6.52%. See the latest trending charts for these and other series.
Conforming 30-year FRMs began the week near 6%, but climbed sharply on Wednesday, Thursday and Friday, with Friday’s final daily average at 6.22%. Borrowers seeing “mortgage rates are falling” headlines from Freddie Mac’s early-week survey were likely disappointed when they contacted lenders on Thursday or Friday, and indications are that rates will begin next week sharply higher than they finished this week. Such is the issue with surveys which are time-lagged by a day or more in this kind of market environment. HSH releases a fresh FRMI at the close of business each business day to help provide consumers a sense of the direction for rates, and media outlets who have a need for more up-to-the-minute and more precise conforming or jumbo data are encouraged to call HSH as needs arise.
As we mentioned in last week’s Market Trends, “it’s no longer too far-fetched to think that more aggressive and direct government moves into other areas of lending can’t occur, if the banks remain unwilling or unable to do it.” Little did we suspect it would happen so quickly, but if the cascade of liquidity poured into the markets over the past two months at lower rates doesn’t make it out to Main Street USA, more of this sort of thing may be coming. The Fed will simply elbow banks out of the way, or, in one plan, acquire stakes in institutions and ‘influence’ them to beginlending again. “Nationalization” or not, private markets need to begin — at least try — to address their primary missions of lending money, or there may ultimately be no mission left for them at all.
Economically, we also noted that it was a light week for news, and that would leave time for markets to brood, usually a bad thing. Indeed it was — and the three-day weekend here may foster more of the same, though we all certainly hope not.
Along with the trim in short-term rates came an immediate lift in longer-dated Treasuries. Between Tuesday and Friday, 10-year Treasury yields rose by over a third of a percentage point. The upward movement wasn’t unusual after a Fed cut, but the size of the move was pronounced, and perhaps indicates that some even some ’safe’ money was moved back into cash. Regardless, regular readers know that the Fed Funds rate and fixed mortgage rates often move in opposite directions and have little to do with one another.
Aside from crashing equity markets, the economic news really wasn’t all that bleak for a change, with one notable exception. Consumer borrowing cratered in August as the virtual halt in auto sales — either from a lack of financing incentives or a lack of consumer confidence — served to create a $7.9 billion decline in
borrowing, the largest dollar decline on record. On a percentage basis, it was the largest in about 10 years. Borrowing on plastic (revolving credit) eased by $0.6 billion, but installment credit slumped by $7.3 billion. There is little doubt that auto makers and sellers are currently mired in recession.
Price pressures are waning, and fast, due to falling demand and a stronger dollar. The aggregate cost for goods brought into the US declined by a full 3% in September, fast on the heels of a 2.6% decline in August. Oil’s astounding decline from near $147 per barrel to today’s under-$80 price is largely the cause, but other commodities are in retreat as well. Prices remain elevated relative to a year ago, but the 14.5% year-over-year increase noted in September is much tamer than the 21.5% we saw in July, and is declining fast. With labor markets weak and weakening, there is less and less inflation concern for the Fed, leaving them a free hand to slash rates further if warranted. However, the issues that face the markets at the moment are less about the price of money than they are about the availability of money. Not so much for mortgages — our markets burned down long ago and have been in the process of being restored/firmed for months now — but for all the other kinds of lending so vital to the economy.
Daily FRMI rates are available at http://www.hsh.com/. News outlets seeking daily statistics for conforming or jumbo mortgages should
contact HSH for more information.
Along with the slide in prices, and especially due to oil’s effects, the nation’s imbalance of trade narrowed in September to $59.1 billion, down by $2.2b from August. Exports slid by by 2%, while imports dipped by 2.4%. With the stronger dollar making our goods and services relatively more expensive, slowing demand across our trading partners will probably see exports fall more than imports in the coming months, so the gap probably won’t improve much from here.
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Home sales continue to stumble around a bottom as they have for months. However, we did note a minor lift in construction spending for residential projects in August, the first gain this year, and the Realtors’ index of pending home sales powered 7.4% higher during the month, too. Falling prices and foreclosure sales are likely the drivers, but it is important to note that sales will occur when a market-clearing price can be reached for a property. Although access to funding remains more restricted than a few years ago, solid-credit borrowers should find fairly acceptable financing conditions.
Weekly unemployment claims retreated from their storm-bloated levels, but remain quite high. The 478,000 new applications filed during the week ending 10/9 did represent the first decline in claims in some six weeks, and that’s something to be encouraged by. Encouragement is already in short supply, as the weekly ABC News/Washington Post survey of Consumer Comfort dipped back to -43 after spending three weeks at -41. That decline occurred during the week ending 10/5, and doesn’t account for the latest retirement-busting swoon in stocks. Darker moods are a reasonable bet for next week, and perhaps beyond.
We’d normally discuss the minutes of the last Fed meeting to try to discern future policy implications, but in the present environment, those discussions are largely rendered moot. The Fed is in a fully-reactive mode and trying valiantly to become proactive in its stance for policy and programs, but the wrenching of markets can force any number of policy changes at any time. The Fed next has a regularly-scheduled policy meeting at month’s end. With global central bankers now fully in the mix, more changes and responses are certain to come before then.
US markets are closed on Monday, and there’s little economic data due out on Tuesday. After that, a torrent of fresh information comes, including the Fed’s own survey of regional economic conditions, PPI, CPI, Housing Starts and plenty more. It’s unclear if stock markets have finished having their moment of seizure and spasm, and as there are tremendous piles of cash which might be put to work at any moment (and possibly yanked out only moments later) it’s hard to have a sense of where we’ll be this time next week.
One thing is likely, though. Mortgage rates will be rising to start the week. Present indications are for a sizable increase from this week’s averages, but perhaps up by only an additional 10-12 basis points from the final Friday number noted above.
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