Week of December 7th, 2020 in Review

The rise in COVID cases and decline in Paycheck Protection Program money is having a worsening impact on businesses and workers around the country as jobless claims trended in the wrong direction in the latest report. The number of people filing for unemployment benefits for the first time increased. The number of people continuing to receive benefits also rose.

Consumer inflation remained tame in November, per the latest Consumer Price Index report. Headline inflation was up 0.2% in November while the year-over-year reading remained unchanged at 1.2%. Core inflation, which strips out volatile food and energy prices, was also up 0.2% monthly while the annual reading was unchanged at 1.6%. More below about why tame inflation matters to Mortgage Bonds and home loan rates.

The latest National Federation of Independent Business Small Business Optimism Index dropped 2.6 points in November to 101.4, a three-month low. Within the report, those seeing higher selling prices rose 3 points to the highest level since May 2018, which is just 1 point from matching the highest since 2008. This data speaks to businesses not having enough people to help their supply meet demand, which is a sign that temporary inflation could be on the horizon.

Initial Jobless Claims Rise in Latest Week

Another 853,000 people filed for unemployment benefits for the first time during the week ending December 5, which is an increase of 137,000 claims from the prior week. Continuing Claims, which measure people who continue to receive benefits, also increased by 230,000 to 5.575 million.

In addition, remember that when regular benefits expire, people can file for Pandemic Emergency Unemployment Compensation (PEUC), which extends their benefits for another 13 weeks. The number of Pandemic Unemployment Assistance claims did decline by 313,000, but unfortunately for all the wrong reasons as benefits are expiring.

Keeping an Eye on Inflation

The latest Consumer Price Index (CPI) showed that inflation at the consumer level was tame in November, up 0.2% from October. The year over year reading remained unchanged at 1.2%. Core CPI, which strips out volatile food and energy prices, was up 0.2% on a monthly basis while the year over year reading was unchanged at 1.6%.

Inflation was also tame at the wholesale level, as November's Producer Price Index showed that headline inflation increased by 0.1%, which was in line with market expectations.

While these numbers are still relatively low, the year over year readings could continue to move higher as demand outpaces supply for goods and services. Those higher producer costs could translate to higher consumer costs and inflation.

Remember that inflation erodes the buying power of a Bond's fixed coupon over time. Meaning that rising inflation can cause Bonds to worsen or move lower. Home loan rates are inversely tied to Mortgage Bonds, so when Bonds worsen, home loan rates can rise. Though many factors influence the markets, tame inflation can benefit Mortgage Bonds and help home loan rates remain low.

The “Affordability” Myth

You may have heard some recent reports in the media about problems with home affordability. However, the "problem" being reported is a myth. Homes remain affordable today and in some cases are even more affordable today than they were a year ago.

What causes this confusion? Many mistakenly look at the significant move higher in the median home price, which is currently up 15% versus last year. But the median home price does not measure appreciation. Instead, it marks the middle price point of recent home sales.

Home prices have appreciated in the last year, but only 7% per the latest reports. Meanwhile, rates have fallen in this same period. This means that for many people, the monthly principal and interest payment to buy a home today could be lower than last year.

The bottom line is that there is reason to feel positive about the housing market with great opportunities for people hoping to buy a home next year!

What to Look for This Week

On Tuesday, we'll get an update on manufacturing in the New York region with December's Empire State Index, followed by the Philadelphia Fed Index on Thursday.

In addition, the Fed's two-day meeting begins Tuesday with their Monetary Policy Statement being released Wednesday. November Retail Sales will also be reported on Wednesday, which will reveal how retailers fared given the uptick in COVID cases. And on Thursday, the latest jobless claims figures remain critical to monitor.

Technical Picture

The Fed continues to provide stability to the markets thanks to its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds continue to ride the 25-day Moving Average, which has provided solid support in recent days. Bonds have room to move higher until reaching resistance at 103.953 and if Stocks continue to sell off, we could see Bonds move higher in this range.