Zillow Market Pulse: November 9, 2020

November 9, 2020

Promising results from an early coronavirus vaccine trial sent markets soaring. Treasury yields spiked to their highest levels in months and mortgage rates rose significantly. The Federal Reserve called for more fiscal support in the face of surging virus cases, and hinted at more market easing initiatives.

Encouraging vaccine news stokes financial market optimism

• Pfizer published preliminary data showing its coronavirus vaccine is 90% effective.
•  Economic growth in sectors most affected by the virus stayed flat.

The virus continues to influence Federal Reserve actions

• Last week, the Federal Reserve kept key, benchmark interest rates unchanged.
• Fed Chair Jerome Powell pointed out the need for more government stimulus amid rising cases and the waning benefits of earlier relief packages.

Mortgage rates spike on vaccine news

• Increased optimism pushed the yield on the 10-year U.S. Treasury to its highest level since March.
• Mortgage rates rose strongly as a result, erasing almost all of last week's declines.

So what? 

The fate of the economy's recovery depends largely on the evolving path of the pandemic, and our ability to handle it — and markets soared today on promising, if early, signs of progress towards an eventual vaccine. Economic activity has improved from springtime lows, aided initially by unprecedented government support that has since expired. But high-frequency indicators suggest that the virus has and will continue to constrain activity and optimism. In the week ending October 25, levels of consumer spending were 3.9% below January, and the pace of improvement has stalled since early September. Even as some parts of the economy show real signs of progress, there are clearly portions that cannot recover until the virus has been corralled: Entertainment spending is down 54.8% from January; spending at restaurants and hotels is down 29.1%. At the end of September, the number of small businesses in the leisure and hospitality sector was 36.9% less than at the beginning of the year. So even as much of the world remains firmly in the grips of a devastating uptick in cases over the last several weeks, today's news was a shot in the arm for hopes of an eventual return to normalcy.

The worsening virus surge was a key theme in statements made at the most-recent meeting of the Federal Reserve's Federal Open Market Committee. Fed Chair Jerome Powell emphasized the fragility of U.S. households' budgets and the risks to the economic recovery posed by the coronavirus' accelerating spread, particularly if no additional fiscal support is passed in Congress. As expected, the Fed kept key interest rates near zero, and Powell hinted that the central bank could adjust or increase its pace of asset purchases should the economy's recovery continue to slow. An uptick in asset purchases would likely place more downward pressure on bond yields, and thus mortgage rates.

Today's encouraging vaccine news and more certainty surrounding the outcome of U.S. elections combined to push bond yields strongly upward, and mortgage rates followed suit. The yield on the 10-year Treasury bond briefly touched its highest level since March, before retreating slightly near the end of the trading session. The yield curve of U.S. government bonds grew to its steepest shape since February 2018, an indication of quickly-growing optimism and appetite for risk in financial markets. Mortgage rates didn't move by quite as much, but did rise and essentially erase all of the declines (or improvements) made last week in the immediate wake of the election. Even so, mortgage rates in general remain very low, and the recent weakening of their long standing relationship with Treasury yields suggests that any upward movements will be muted compared to those of Treasury yields. But today's market behavior was a reminder that mortgage markets are certainly not immune to coronavirus-related developments.

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