All Things in Moderation

Vital Statistics:

Stocks are limit down after the Fed made an emergency cut over the weekend. Bonds and MBS are up.

Yesterday, the Fed cut interest rates to zero and re-initiated QE. The Fed will begin purchasing up to $500 billion in Treasuries and $200 billion in mortgage backed securities over the coming months. For what its worth, stocks are unimpressed. S&P 500 futures went limit down immediately on the Asian open and have been sitting there ever since. The 10 year is trading at 77 basis points pre-open, which is much higher than where it was a week ago.

Mortgage backed securities seem to like the re-introduction of quantitative easing. The current coupon TBA is up about 2 points, but it is early and we could just be seeing some short covering. The NY Fed plans to purchase $80 billion of TBAs over the next month.

Companies have been taking down their lines of credit to maximize cash on the balance sheet. This is another reason for the rate cut. Banks have been getting clobbered in the sell-off, with the XLF down 25% since the start of the Coronavirus contagion. The Fed is watching to make sure we don’t see a repeat of 2008 when businesses were unable to borrow in the commercial paper market. The banks have all suspended their stock buyback as well.

Right now, the immediate concern for the markets is the state of airlines and the energy patch. Oil below $30 a barrel is a problem for almost all of the shale producers. Airline bankruptcies have been a fact of life forever, and many will hit the wall if this drags on. In the meantime the labor market is entering this crisis as strong as it has ever been. Remote working is about to face its biggest test, and if productivity doesn’t take a hit, it could become more mainstream. Certainly for employers it saves money for office space, while improving quality of life for employees. Less commuting is also better for the planet.

Coronavirus is going to put a damper on the Spring Selling Season for real estate. Have to imagine traffic is going to fall, although inventory is so tight we probably won’t see much of an impact on prices. Also, this should be an issue for the builders, so supply is going to remain constrained. Refis will continue to drive the business. FWIW, Redfin took the temperature of the average consumer on how it will impact housing. Roughly 40% think it will be bad, while 50% see no effect. The drop in stock prices isn’t going to help the animal spirits in the real estate market, but I find it hard to imagine any sort of decline in prices, aside from the overheated markets on the West Coast.

We do have quite a bit of data this week. The FOMC meeting on Tuesday and Wednesday will be more about the press conference than anything, with particular emphasis on whether credit spreads are widening and if we are seeing indications of financial stress in the system. Aside from the FOMC meeting, we will get housing starts, home prices, industrial production and existing home sales. Of course none of this will matter to the bond market, which will be driven by headlines.

What does this mean for mortgage rates? The re-introduction of QE will certainly help things, especially if it encourages trading in the lower note rates. Mortgage rates may take a while to adjust. I also suspect that the big money center banks, which drive jumbo pricing are about to increase margins to free up capital to lend to small and medium sized enterprises which are facing cash crunches.

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