The markets continued to correct this week, especially the frothy momentum names like Tesla and Apple. No real news triggered the latest correction – more of a case that sentiment had turned too bullish. Maybe there’s also a seasonality thing going on. As you can see below, Septembers have historically been lousy months.
Oh, and there’s the uncertainty around the election of course. At least historically it’s not usual for the markets to churn before an election.
But why should 2020 be like any other year?
It was a quiet week on the economic release front. Last Friday we got the monthly payrolls number that was solid. Job growth surprised to the upside and the unemployment rate fell to 8.4%, as you can see below.
Not great, but moving in the right direction. Consumers in general remain in decent shape and are proving a tailwind for the economy despite high unemployment. If you count benefit payments, disposable income has been running above trend while spending is tacking lower than it was before COVID.
This obviously means that savings rates have shot higher – there is now about $1.2tn of excess consumer savings sitting around.
If we ever get a viable vaccine you have to think that consumers are going to go on a spending binge at some point in 2021.
And this is before homeowners get another bite at the refinance bubble. 30-year mortgage rates hit new lows this week (2.86%), as you can see below.
And even if Treasury rates don’t fall any further from here, there is still scope for materially lower mortgage rates. The top panel of the chart below shows mortgage rates (white line) versus the yield on the 10-year Treasury (orange line). The bottom panel shows the spread between the two going back to 2002.
Spreads hit all time highs this spring as lenders were overwhelmed with refinancing activity. Lenders were also reluctant to fund jumbo mortgages given the number of borrowers stopping payments. However, this spread has started to tighten recently. If we get back to levels seen between 2013 and 2018, you could see mortgage rates fall another 0.4% to 0.8% without any change in the interest rate backdrop. Of course, Treasury yields could rise to bring this spread down, and maybe we see that post-vaccine. But it is a struggle to envision that scenario before the economy reopens in a major way. Will be interesting to watch.
Charts We Found Interesting
1. The U.S. is conducting anywhere from 600K to 900K COVID tests per day. At the peak we were seeing almost 70K positive tests a day (7-day average). We are now below 40K.
2. More data on the resilience of the consumer comes from Chase. Their tracking of spending patterns shows that expenditures in four out of five categories are back above where they were pre-COVID. The $64tn question is what happens when unemployment benefits completely run out.
3. While there is still another three weeks to go, the early estimates for 3rd quarter GDP growth are tracking between +21% and +31%.
4. As we asked earlier, why should 2020 be like any other year (COVID, wildfires, etc)? This applies to the market this year as well – both the bull and the bear market.
5. Good chart or bad chart? At first glance I thought this was a slick chart. Immediately thought that China is simply resuming their age-old role in the world. But the more I thought about it the more things started to bother me. You mean to tell me the rise and fall (especially the fall) of the Roman empire doesn’t register? How about the Muslim caliphates from what, mid-600’s to the 1200’s? You mean to tell me the Mongol conquest of China had no impact? And more fundamentally, how do you get global GDP data on the world in the year 100? Ummmmm, I’m thinking bad chart!!
6. I like this one much more. Africa is big. Really big.
7. Who would really be surprised to wake up to this next week?
Have a good weekend.
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