Monday Musings: August 17, 2020

Aug 17, 2020

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Public Trust Credit Team
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The economy shows some signs of recovery, but consumer confidence and the labor market continue to show weakness

Recent improvements in the economic data signal that the economy may be starting to recover. Major manufacturing and non-manufacturing PMIs have all moved into expansionary territory, and business conditions have moved up significantly from April lows. While the business climate appears to be improving, weakness in the employment market is widespread across the economic indicators. For instance, the services and manufacturing PMIs still show some weakness with employment being the only component that remains contractionary, and participant comments allude to employment taking some time to come back. The U.S. unemployment rate has fallen to 10.2%, but it is estimated that the country would need to add 12.9 million jobs to reach the February, pre-pandemic level. This is also reflected in the University of Michigan Consumer Sentiment index that retreated back to near April lows, the lowest recorded in nine years. Fortunately, last week was the first week initial jobless claims fell below one million, showing the employment market might be making a comeback. With the Senate on recess until September, a large fiscal stimulus is unlikely to pass Congress anytime soon, but economic indicators look overall better than their Q2 troughs.

Delinquency rates for mortgage loans spike in the second quarter

The COVID-19 pandemic has left million jobless, severely impacting homeowners’ ability to pay their mortgage bills on time. According to the Mortgage Bankers Association’s (MBA) national delinquency survey, the delinquency rate for mortgage loans on one-to-four unit properties increased to 8.22% of all loans outstanding at the end of the second quarter. The delinquency rate increased by approximately four percentage points versus the prior quarter, marking the largest quarterly rise since the MBA began conducting the survey. For Federal Housing Administration (FHA) mortgages (a government-backed mortgage typically granted to lower income Americans), delinquencies rose by 9.7% quarter-over-quarter to 16%, the highest share of delinquent FHA loans in over four decades. New Jersey reported the highest increase in delinquencies, with 20% of outstanding FHA loans now at least 30 days past due, followed by Nevada, New York, Florida, and Hawaii. Federal forbearance programs will protect most borrowers from foreclosure for now, but the trend of elevated mortgage delinquencies is likely to continue into the third quarter.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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