Equity futures are falling in early Friday trading as volatility returned to the market. Earnings continue to be strong, but this week’s headlines are all about the “short squeeze” on companies like GameStop and AMC. Meanwhile, interest rates have come off their recent highs and have moderated a bit to settle into a trading range. We’re also closely watching the 10-year Treasury note which is currently trading at 1.07% after trading at a near-term high of 1.15%. We haven’t seen the 10-year note at that level since March 2020, the beginning of the pandemic. Mortgage rates also continue to hover near record lows and we’ll dive into that here shortly.
The Dow rebounded quickly Thursday, gaining 600 points as broker restrictions were put in place to limit transactions for the heavily shorted stocks. For some investors, this was a signal of overheated valuation with potential for a bubble to be formed. Federal Reserve Chairman Jerome Powell didn’t echo that sentiment, and instead expressed his feeling that “financial stability vulnerabilities are all moderate.”
The Fed wrapped up its January meeting this week leaving interest rates at zero and reinforcing its commitment to buying at least $120 billion worth of bonds each month. One thing the committee did change was adding “progress of vaccinations” to its list of things to watch that could affect the path of the economy.
Powell did say he thinks that the surge in home prices is temporary, due to people working from home and the immediate increase in demand for more space.
The initial Q4 gross domestic product reading released by the Commerce Department showed a gain of 4.0%, slightly below the 4.3% expectation. Overall, 2020 GDP declined by 3.5% from 2019 and by 2.5% for Q4 alone. Right now, the expectation is that growth will be slow to start 2021 at an annualized pace below 1%. However, depending on how quickly businesses can reopen and the progress of the vaccine rollout, there is optimism for strong recovery in the second half of this year.
The Bureau of Economic Analysis released its personal income and expenditures data Friday morning, showing income rose by 0.6% in December 2020 while spending declined by 0.2% month over month. The PCE price index, which is a measuring point for inflation, increased by 0.4% in December with the real PCE, excluding food and energy, increased by 0.3%.
YELLEN CONFIRMED
Another important economic factor was cemented this week as Janet Yellen was sworn in as the first female Secretary of the Treasury. The former Fed chair shares many of the same sentiments about inflation as current chair Powell in that neither of them seems overly concerned about short-term inflation. Yellen said as much in her confirmation hearing when she expressed the government should take advantage of the Fed’s position and inject more stimulus dollars into the economy. As we stated earlier, the fear on the street is that the continued injection of money with rates around zero will create an asset bubble.
HOME PRICES CONTINUE HOT STREAK
Already high home prices are surging even higher according to the latest S&P CoreLogic Case-Shiller Home Price Index. Nationally, home prices shot up 9.5% annually in November. That wasn’t an anomaly, either. October’s annual home price gain went up by 8.4%. Buyer demand combined with limited supply continues to drive home prices higher especially in suburban areas. Low mortgage rates have supported the increase in prices, too, as they’ve helped keep a sort of balance to affordability.
The latest Freddie Mac 30-year fixed-rate average shows rates moving back down, sitting at 2.73%. Freddie Mac’s Chief Economist Sam Khater noted in this week’s release that the lack of supply is going to be an issue for the foreseeable future as the low rates put upward pressure on demand.
The Mortgage Bankers Association supports the higher home price data, showing that the average purchase loan amount hit a record high of $395,200 in its latest survey. The MBA’s report shows that both purchase and refinance applications have slowed over the last couple of weeks due to slight increases in interest rates. However, annually purchases and refinances are up 16% and 83%, respectively.
