Morning Report: Forbearance numbers fall

Vital Statistics:

S&P futures349726.6
Oil (WTI)40.00-0.99
10 year government bond yield 0.78%
30 year fixed rate mortgage 2.88%

Stocks are higher this morning on stimulus hopes. The bond market is closed for the Columbus Day holiday.

The upcoming week won’t have much in the way of market-moving data, although we will get retail sales, inflation data, and manufacturing output. Third quarter earnings season begins this week as the big banks all report numbers. The area of concern will be loan performance, especially for small businesses, along with exposure to airlines and hotels. The banks took huge provisions up front, so any increase in projected losses will be an area of concern.

It looks like the bid / ask spread for the stimulus bill is $2 trillion / $2.2 trillion. The big sticking point of the bill largely concerns aid to (deep blue) states and local governments. I am so old that I remember when a difference of $200 billion in a bill would have been insurmountable, but nowadays a 12-digit number feels like a rounding error.

Affordable Housing advocates are urging lawmakers to include substantial aid for renters facing eviction. The Center for Disease Control, which is not known for weighing in on real estate issues, put out a moratorium on evictions until the end of the year. The protections are not automatic however, and a tenant needs to “declare that their 2020 income will fall below the threshold set out in the order; that they’ve sought all potential sources of federal housing aid; and that they cannot afford to pay the rent due to a pandemic-related job loss or expense despite their best efforts to do so.” Since many tenants are unaware of the order in the first place, they aren’t taking that step.

The number of borrowers in forbearance fell by 649,000 last week as the initial six-month plans expire. The national forbearance rate now stands at 5.6%.

Boston Fed President Eric Rosengren said that the previous years of rock-bottom interest rates has made this crisis worse. He blames it on excessive risk-taking.

“Clearly a deadly pandemic was bound to badly impact the economy,” Rosengren said. “However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult.”

He blames regulators for failing to see the increase in risk-taking. FWIW, the Fed made its own bed here. While it does have to follow the statutory dual mandate, the Fed has chosen to interpret the mandate to minimize unemployment while controlling inflation to mean “keep the pedal to the metal as long as the economy is below full employment.” Now that the economy is used to 0% interest rates, it really doesn’t have a lot of tools left to improve the economy. Building the balance sheet doesn’t have the effect that lowering rates does.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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