Morning Report: Oil goes negative

Vital Statistics:

 

Last Change
S&P futures 2751 -50.1
Oil (WTI) 14.23 -7.29
10 year government bond yield 0.55%
30 year fixed rate mortgage 3.38%

 

Stocks are lower as oil continues to weaken. Bonds and MBS are up.

 

The front month oil contract went negative yesterday, which was probably a first. I think at one point it traded at -$40 a barrel. Why? Nowhere to put it. Storage is pretty much full, and any incremental capacity out there is expensive. The May contract still trades, but June is really the active one.

 

Forbearance requests are now up to 6% of all mortgages.  8.26% of Ginnie loans are in forbearance and 4.6% of Fannie / Freddie loans are in forbearance. “With over 22 million Americans filing for unemployment over the past month, homeowners are contacting their mortgage servicers seeking relief, leading to a sharp increase in the share of loans in forbearance across all loan types,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “Mortgage servicers continue to receive a very high level of forbearance requests, but volumes were down somewhat compared to the prior week.”

 

Most economists think the eventual recovery will be U-shaped, in other words and extended downturn before things get back to normal. The other predictions are a V-shaped recovery or a W-shaped one. Obviously it depends on how long the lockdown lasts, and whether people get back to work wearing gloves and masks. Interestingly this has begun to fall down partisan lines, with red-staters wanting to get back to work, and blue-staters hectoring them about it. Note that Texas supposedly opens this week, and Georgia and Tennessee are looking to re-open May 1.

 

Retailers are looking for bailout as well. While many small retailers will be able to access the Main Street Program, many larger ones like Macy’s or Needless Markup cannot. The government’s fear is that it would be propping up companies that have larger problems than just the COVID-19 virus and were probably heading for bankruptcy to begin with.

 

The Senate may be close to a deal for further funding of small business. Apparently one of the issues with the previous deal was that larger companies with existing relationships with the banks got there first, before the the smaller businesses did. This would set aside something like $125 billion for the smaller guys with no relationships. “We insisted that a chunk of the money be separate from the competition with the bigger companies, you know the ones that have two, three, 400 people and a relationship with the banks, and we got $125 billion that will go exclusively to the unbanked,” [Chuck Schumer] said. “To the minorities, to the rural areas and to all of those little mom and pop stores that don’t have a good banking connection and need the help.”

Morning Report: Oil stumbles badly, rates fall

Vital Statistics:

 

Last Change
S&P futures 2724 3
Eurostoxx index 362.85 -1.64
Oil (WTI) 55.92 0.23
10 year government bond yield 3.13%
30 year fixed rate mortgage 4.97%

 

Stocks are flattish this morning on no real news. Bonds and MBS are up.

 

Mortgage applications fell 3.2% last week as purchases fell 2.3% and refis fell 4.3%.  It has been a long, cold winter for the origination business over the past 6 quarters or so. You can look at the chart of the MBA mortgage application index to get an idea of just how tough it is out there right now.

 

MBA mortgage applications

 

Home prices rose 0.4% MOM and 5.6% YOY in September, according to the CoreLogic home price index. Prices rose the least in the hottest markets, as affordability issues bite. CoreLogic did a study of Millennial attitudes, and less than half think they would qualify for a mortgage, which is interesting given that FHA and GSE low down payment programs are targeted towards the first time homebuyer and are very forgiving in terms of FICO and downpayments. The industry can benefit from doing some education here.

 

30 day delinquencies fell 0.6 percentage points to 4% in August. The foreclosure rate fell 0.1% to 0.5%.  DQs are at the lowest level in 12 years. CoreLogic estimates that 1/3 of all MSAs are overvalued. Unfortunately, not all MSAs are created equal – there are a lot more people in the overvalued MSAs like San Francisco and Washington DC than there are in the some of the undervalued MSAs in the Midwest and Northeast. The overvalued MSAs will be most vulnerable to economic shocks.

 

Oil has been in a downward spiral, hitting the lowest levels in a year on fears of oversupply. It sounds like the hedge funds, CTAs and speccies have been long and wrong and are now capitulating. Note that commodity prices are often the canary in the coal mine with respect to global growth, and other cyclical commodities like lumber and copper are following suit.

 

Goldman sees unemployment falling to 3% within the next 18 months or so.  Goldman also sees another 125 basis points in Fed hikes during this cycle.