Morning Report: Forbearances tick up

Vital Statistics:

S&P futures3890-9.3
Oil (WTI)60.730.14
10 year government bond yield 1.44%
30 year fixed rate mortgage 3.15%

Stocks are lower this morning on no real news. Bonds and MBS are down small.

The number of loans in forbearance ticked up slightly last week, according to the MBA. 2.6 million homeowners (or 5.23% of mortgages) are in forbearance plans right now. “A small increase in new forbearance requests, coupled with exits decreasing to match a survey low, led to the overall share of loans in forbearance increasing for the first time in five weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The largest rise in the forbearance share was for portfolio and PLS loans, due to increases for both Ginnie Mae buyouts and other portfolio/PLS loans.”

Home prices rose 0.9% MOM and 10% YOY in January, according to CoreLogic. First-time homebuyers are being particularly affected by this, as there is a dearth of entry-level homes on the market, and rapid price appreciation is negating the positive effect of low interest rates.

The Fed meets this month, and will almost surely discuss the rapid increase in interest rates at the long end of the curve. One policy prescription could be a re-introduction of Operation Twist, where the Fed sells short-dated paper and buys long-term bonds as a way to flatten the yield curve. This would have the effect of pushing down long-term rates.

Morning Report: Bond markets settle down

Vital Statistics:

S&P futures385546.3
Oil (WTI)61.530.14
10 year government bond yield 1.42%
30 year fixed rate mortgage 3.22%

Stocks are higher this morning after central banks assure markets that they will remain supportive of the markets for a long time.

The bond markets are beginning to price in a rate hike in 2022 and a couple more in 2023. That was part of the reason for the huge sell-off in bonds last week. The Fed’s December dot plot showed only one member projecting a rate hike in 2022 and only a few projecting increases in 2023.

Remember, the FOMC is a voting body, and according to that graph, we would see no hikes through 2023. The Fed will run a new dot plot at the March 16-17 meeting, which will also introduce a forecast for 2024. That will be a reality check for the bond market, and I would be surprised if the Fed started forecasting rate hikes in 2023. Simply put, the data doesn’t support it.

The upcoming week will be dominated by the jobs report on Friday. We will also have quite a bit of Fed-Speak.

Rocket was up 10% on Friday after earnings. This is surprising given how the market has had a “meh” reaction to everyone else’s numbers. I think a couple things were going on here. First, the company announced a $1.11 special dividend that will get paid in March. The company doesn’t pay a quarterly dividend or anything yet.

The second thing was that Rocket forecast Q1 origination volume of about $100B. This is only a small drop from the fourth quarter, and is almost double Q1 of 2020. This is despite the huge jump in rates. I think that is what got investor’s attention.

Rocket’s CFO claimed on the earnings call that the Fed is buying 95% of all new conforming production. I found that stat surprising.

Construction spending rose 1.7% MOM and 5.8% YOY in January. Residential construction was up 2.5% MOM and 21% YOY. This was better than expectations.

Manufacturing improved in February, according to the ISM. The big takeaway from the report is that the supply chain is depleted and commodity prices are up. Part of this is COVID-19 related, while some is due to the Texas ice storm. Either way, commodity price inflation seems to be driven by technical factors and inventory depletion is similar. During COVID, businesses basically lived off of their inventory in place, which wasn’t being replenished as quickly as normal.

The inventory depletion will take years to correct, at least according to logistics REIT Prologis. This will probably accelerate growth in the second half of 2021 as manufacturing activity will satisfy that pent-up demand. Will that be inflationary? I doubt it. There is an old saying in commodities markets: “The cure for high prices is high prices.” In other words, high prices encourage more production, which lowers prices again.

IMO we are not going to see inflation unless we get wage inflation. Friday’s jobs report may indeed show inflation, but that will be due to lower-wage workers in the restaurants and retail losing their jobs as these businesses close. The loss of the lower tier workers will push up the average. Once these businesses re-open we will see a reversal. The Fed has been trying to create inflation for year, and was unable to do it in 2019 when the economy was picture-perfect and unemployment was in the mid 3s. I don’t see it happening during a pandemic-driven economic slowdown.

Morning Report: More on unemployment

Vital Statistics:

S&P futures384214.3
Oil (WTI)62.33-1.14
10 year government bond yield 1.47%
30 year fixed rate mortgage 3.23%

Stocks are higher this morning after yesterday’s wild ride in the bond market. Bonds and MBS are up.

Yesterday was an absolutely incredible day in the bond market with the 10 year yield hitting 1.61% at one point. While there are some technical issues for the move, the punch line is that we are seeing a similar phenomenon to the 2016 Donald Trump “reflation trade” where bonds sold off and stocks rallied in response to his election. This time though, the sell-off is global. We have seen yields rise in the UK, Japan, Germany, and Australia.

Personal incomes rose 10% in January due to stimulus payments. Personal consumption rose 2.4%, while the personal consumption expenditure index (PCE – the Fed’s preferred measure of inflation) rose 0.3% MOM and 1.5% YOY. Two things jump out at me regarding this report: First, people are saving their stimulus payments, not spending them (10% increase in income versus 2.4% increase in spending). Second, inflation is still below the Fed’s target. So, while the bond market thinks the Great Reflation is happening, so far we aren’t seeing it in the data.

Just for fun, I decided to create a graph showing initial jobless claims by week in 2009 (the depth of the Great Recession) versus last year. I think this puts the shock into perspective:

While that chart does look dismal, the chart of continuing claims (meaning the cumulative number of people claiming benefits has been falling pretty steadily. Continuing claims are now about where they were in early 2010

Don’t forget, the recovery during the Great Recession was during the aftermath of a residential real estate bubble, which are the Hurricane Katrinas of economies. This time around, real estate prices are rising smartly, which is adding to people’s wealth, not subtracting from it.

Rocket announced earnings this morning, and the stock is up 10%. (See, all is not bleak for mortgage originators). For the year, volumes rose 121% to 320 billion. GAAP earnings per share came in at $1.76.

Morning Report: Some perspective on job losses

Vital Statistics:

S&P futures3905-17.3
Oil (WTI)62.88-0.34
10 year government bond yield 1.45%
30 year fixed rate mortgage 3.12%

Stocks are lower this morning as global sovereign yields continue to sell off. Bonds and MBS are down big again.

In terms of sovereign yields, we are seeing the German Bund up to -25 basis points, and the Japanese Government Bond yields 15 basis points. The quick rise in European bonds has the European Central Bank worried about hobbling any recovery before it gets off the ground. Jerome Powell is more sanguine, saying the rise in yields is a sign of confidence in the economy.

The second estimate for fourth quarter GDP came in at 4.1%, which was unchanged from the first estimate. Personal consumption expenditures were revised downward from 2.5% to 2.4%. Durable Goods orders rose 3.4%, which capital goods expenditures rose 0.5%.

Initial Jobless claims fell to 730k last week. You can see just how elevated they are compared to pre-COVID, when 200k was the usual print. To put these numbers into perspective, the worst weekly reading during the Great Recession was 665k, and the average for most of 2009 was around 575k or so. The average weekly number over the past year has been 1.5 million. IMO the stock and bond markets are in denial over just how bad the carnage has been.

The CFPB is reconsidering new rules for non-QM loans. Here is the letter written yesterday.

Pending Home Sales fell 2.8% in January, according to NAR. “Pending home sales fell in January because there are simply not enough homes to match the demand on the market,” said Lawrence Yun, NAR’s chief economist. “That said, there has been an increase in permits and requests to build new homes.”

Morning Report: The markets are beginning to handicap rate hikes

Vital Statistics:

S&P futures3861-12.3
Oil (WTI)62.390.74
10 year government bond yield 1.43%
30 year fixed rate mortgage 3.09%

Stocks are lower this morning as Jerome Powell continues his Humphrey-Hawkins testimony. Bonds are still getting slammed.

Jerome Powell said that the Fed will be accommodative for the foreseeable future. “Monetary policy is accommodative and it continues to need to be accommodative … Expect us to move carefully, patiently, and with a lot of advance warning before any changes.” In other words, he said the same stuff he has been saying.

The problem is that the markets aren’t buying it. The yield on the 10 year bond continues to accelerate to the upside, and the Fed Funds futures were pricing in a 10% chance of a hike at the April meeting at one point yesterday. They were pricing in a 15% chance of a hike by the December meeting. This is after predicting no changes through 2023. Note the market is handicapping a non-zero chance of 50 bps by December.

The markets are a forward-looking mechanism, and if you want to get an idea of how they are seeing the future, take a look at the S&P 500 retail ETF, which has almost doubled over the past year, despite all of the retail closures in 2020. Not only that, it is double where it has traded pre-COVID. This is a huge bet on an economic recovery. Not sure I agree with this conclusion, but the market is betting that stimulus dollars are going to be spent, not saved. The only way this happens is if you see a massive increase in hiring, along with an acceleration in wage growth.

The increase in rates has taken a bite out of mortgage applications. The MBA reported that applications fell 11.4% last week as purchases fell 11% and refis fell 12%. The Texas ice storm was partially responsible. “Mortgage rates have increased in six of the last eight weeks, with the benchmark 30-year fixed rate last week climbing above 3 percent to its highest level since September 2020,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Additionally, the severe winter weather in Texas affected many households and lenders, causing more than a 40 percent drop in both purchase and refinance applications in the state last week.”

New home sales rose 4% MOM and 19% YOY, according to the Census Bureau. There are 307,000 new homes for sale, which represents about a four month supply at the current sales pace.

New York City’s harsh rules on foreclosures and squatters is sending the City back to the days of the 1970s and 1980s. Note the bubbly Millennial Marxist who is completely sanguine on how this affects landlords. This is certainly not going to be good for apartment prices in the City. Note that things are just as bad in Seattle, with a deluge of new apartment construction colliding with a collapse in demand. I guess the cities are going to have to re-learn the lessons of 40 years ago.

Morning Report: Home Prices Rise

Vital Statistics:

S&P futures3847-25.3
Oil (WTI)61.52-0.24
10 year government bond yield 1.38%
30 year fixed rate mortgage 3.05%

Stocks are lower this morning as bonds continue to sell off.

The global reflation trade seems to be the story these days, with bonds selling off and commodities rising. The important thing to stress is that it isn’t just a US phenomenon: rates are rising overseas as well. The German Bund is now trading at -29 basis points. This is the highest yield since June of 2020, and is really pushing towards pre-COVID levels.

Is the global economy really back to pre-COVID levels? Emphatically not. While the worst is probably over, there has been a lot of economic damage done. Commodity price driven inflation generally isn’t lasting, and IMO you don’t get inflation without wage hikes. Wages have been rising in the US, however that is a function of lower-compensated workers losing their jobs, which pushes up the average hourly wage. It is a technical increase due to unusual economic circumstances and not a signal that we are on the brink of an overall increase in worker compensation.

Jerome Powell heads to the Hill today for his semiannual Humphrey-Hawkins testimony. I suspect he will stress how fragile the economic recovery is and press Congress for more fiscal stimulus.

Tight inventory is pushing up housing prices. The Case-Shiller Home Price Index rose 1.3% MOM and is up over 10% YOY. The FHFA House Price Index rose 1.1% MOM and is up 11.4% YOY.

Loans in forbearance fell to 5.27% last week, according to the MBA. “The share of loans in forbearance has declined for three weeks in a row, with portfolio and PLS loans decreasing the most this week,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “This decline was due to a sharp increase in borrower exits, particularly for IMB servicers. Requests for new forbearances dropped to 6 basis points, matching a survey low.”

The Street is skeptical of the current refi boom’s durability, as seen by lackluster IPO activity. Five mortgage vendors have postponed or canceled plans to go public as investors are reluctant to award anything higher than a mid single-digit P/E ratio. Amerihome was slated to go public for $1.3 billion, and ended up selling to Western Alliance for a number well south of that. The MBA is forecasting that refinances fall 50% in 2021 compared to 2020.

Janet Yellen said that Biden wants to raise corporate taxes and increase the taxes on capital gains. That said, it sounds like a wealth tax might be a bridge too far.

Morning Report: The Fed is concerned about the economy

Vital Statistics:

S&P futures3876-26.3
Oil (WTI)60.321.04
10 year government bond yield 1.35%
30 year fixed rate mortgage 3.00%

Stocks are lower this morning on no real news. Bonds and MBS are down.

The upcoming week will have quite a bit of data, with the second estimate for fourth quarter GDP and housing prices. Jerome Powell will head to the Hill for Humphrey-Hawkins testimony on Tuesday and Wednesday. We will also get personal incomes and spending.

The CFPB is going on a hiring spree to ramp up enforcement. The CFPB has mentioned servicers as being an area of interest.

The Fed is worried about the state of small businesses. “Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.” Commercial Real Estate is one area of particular concern, especially urban office buildings and apartments.

The Fed noted that “Momentum slowed substantially in the late fall and early winter, however, as spending on many services contracted again amid a worsening of the pandemic. All told, GDP is currently estimated to have declined 2.5 percent over the four quarters of last year and payroll employment in January was almost 10 million jobs below pre-pandemic levels, while the unemployment rate remained elevated at 6.3 percent and the labor force participation rate was severely depressed.”

The note on spending is important. It seems that many people are using the stimulus payment to pay off credit card debt or other liabilities. Economically, there is a difference between saving and spending, and spending is what the Fed wants to see. If people are simply paying off debt instead, that is considered saving, and it has a much smaller effect on the economy. I suspect that will become a bigger headache for the central bank, and we have seen this movie before in Japan. An aging population, combined with low inflation means sluggish economic activity. Japan has wrestled with this state of affairs for decades.

The stimulus bill includes language to raise the minimum wage to $15. While that will make it through the House, the Senate is going to be a tough ride, with all Republicans and a couple Democrats opposing the hike. Given a 50-50 Senate, Democrats cannot afford any defections.

Morning Report: Some perspective on rising mortgage rates

Vital Statistics:

S&P futures392920.3
Oil (WTI)59.61-0.84
10 year government bond yield 1.33%
30 year fixed rate mortgage 2.98%

Stocks are higher this morning as bonds continue to sell off. Bonds and MBS are down a few ticks.

Loan Depot reported earnings yesterday. Origination volume increased in the fourth quarter to $37 billion, however gain on sale margins came in hard, falling form 4.98% to 3.38%. Granted the third quarter of 2020 was probably an industry-wide high water mark for margins and there is some seasonality playing out. But as rates rise, I suspect we will see more competitive behavior from originators which will compress margins going forward. Granted, the fourth and first quarters are always the seasonally slow period.

You can see how much the average 30 year fixed rate conforming loan fell during the fourth quarter: Chart from Optimal Blue

Mortgage rates fell dramatically in December so we are really just back where we were last fall, when Black Knight estimated that 32.4 million borrowers could save 75 basis points on their mortgage rate by refinancing. Assuming an average mortgage amount of $300k, that works out to $10 trillion of potential refi volume. The MBA’s origination numbers often include some double-counting (both the lender and the aggregator count the same loan in their volume numbers), so the MBA’s estimated volume numbers are really a bit high. In October, the MBA was forecasting that 2020 would come in around $3.2 trillion. It will take years to chew through $10 trillion of potential loans Punch line: despite the recent increase in mortgage rates, there is still plenty of business to be done. The sky is not falling, at least not yet.

I am somewhat skeptical of the big inflation scare that seems to be gripping markets. The Fed was unable to get inflation up in 2019, when the economy was picture-perfect and unemployment was sitting around 3.5%. I have a hard time imagining they will be able to do it with a higher unemployment rate and a lower labor force participation rate.

Existing Home Sales rose 0.6% to a seasonally-adjusted annual rate of 6.7 million in January, according to NAR. This is up 23.7% compared to a year ago. The median home price rose 14% compared to a year ago to $303,900. “Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market,” said Lawrence Yun, NAR’s chief economist. “Sales easily could have been even 20% higher if there had been more inventory and more choices.”

Housing inventory fell to 1.04 million units, which works out to be 1.9 month’s worth of supply at the current sales pace. This is the lowest number since NAR started tracking that stat in 1982. Properties remained on market for 21 days.

Morning Report: Global bond sell-off continues

Vital Statistics:

S&P futures3898-29.3
Oil (WTI)61.660.44
10 year government bond yield 1.31%
30 year fixed rate mortgage 2.97%

Stocks are lower this morning as commodity prices continue to increase. Bonds and MBS are down again.

Oil is flying this morning due to the Texas ice storm, which has taken something like 40% of all production off line.

The global bond sell-off continues, with the German Bund yield up 3 basis points to negative 35 bps. The UK Gilt is up 6 bps. This sell-off in sovereign debt is a global phenomenon and a global growth and commodities story. Global central banks have been on a mission to create inflation for a couple of decades and they haven’t been successful, so I am somewhat skeptical of this story. I think part of it is wishful thinking.

Housing starts took a step back in January, however building permits rose smartly to 1.88 million. This is 10% higher than December and 23% higher than last January. Housing starts hit 1.6 million, which was down 6% MOM and 2% YOY. Housing will be a big driver of the economy going forward.

The FOMC minutes gave some perspective on how they are seeing the economy.

The U.S. economic projection prepared by the staff for the January FOMC meeting implied a considerably stronger outlook for activity in 2021 relative to the December forecast. Although incoming data had been weaker than expected, the staff’s January projection incorporated the effects of the stimulus in the recently enacted Consolidated Appropriations Act, 2021 (CAA), together with an assumption that an additional sizable tranche of fiscal support would be put into place in coming months. Taken together, these stimulus measures were expected to partly offset the substantial drag on aggregate demand that would result from the unwinding of the fiscal stimulus enacted in the spring of 2020.

The Fed is putting a lot of stock in the power of stimulus spending, which may or may not have the desired effect. If people save the money (which could mean anything from sticking it in the bank to paying off credit card debt), the impact will be muted.

The Fed also noted that it made mistakes during the 2013 “taper tantrum” and this time around, they will be slow, deliberate and transparent in how they remove accommodation. I still believe that the Fed understands the easiest way to put money in people’s pockets is to allow them to refinance their mortgage at lower rates. This means they will try and keep mortgage rates low despite the movement in the 10-year.

As an aside, I was listening to Annaly Capital’s earnings conference call, and they made the point that a lot of the incremental demand for MBS is coming from banks, which are flush with deposits but are reluctant to make loans quite yet. Apparently loan to deposit ratios are at 40 year lows. Since that money has to go somewhere, it is finding a home in the resi MBS market. If the economy does have a healthy rebound in the second half of the year, that phenomenon will likely unwind, which will increase MBS supply and push mortgage rates higher.

Initial Jobless Claims rose to 861k last week, which was higher than expected. All of this talk about a second half rebound is a moot point if we continue to push a million initial claims a week. The recovery starts with hiring, and small business has been crushed over the past year.

Morning Report: Global bond sell-off

Vital Statistics:

S&P futures3899-27.3
Oil (WTI)59.66-0.44
10 year government bond yield 1.29%
30 year fixed rate mortgage 2.93%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The increase in US bond yields yesterday was driven by a few strategists saying that inflation could return in the back half of 2021, and we should see a rapid rebound due to stimulus payments. There is a global story being told as well, with expectations of a recovery as people get vaccinated. We have seen the German Bund (which is the German 10 year bond) increase in yield from -55 basis points to -35 basis points. The Japanese 10 year is also around 10 basis points. In other words, the bond sell-off in the US is being driven by global forces as well as US ones. Regardless, we are seeing mortgage rates push up, with the average 30 year mortgage rate rising 5 basis points yesterday.

The Fed has stressed that it wants to maintain an average of 2% on inflation. This means that it is prepared to let inflation run above 2% for a while in order to bring up the average. The Fed will almost certainly maintain the current policy through this year and probably well into next year. The Fed Funds futures contracts did begin to start handicapping a rate increase in late 2023, but the overall policy stance should be set for the foreseeable future.

Mortgage Applications fell by 5.1% last week as purchases fell 6% and refis fell 5%. “Expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher. Since hitting a survey low in December, the 30-year fixed rate has slowly risen, and last week climbed to its highest level since November,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in rates has slightly dampened refinance activity, with MBA’s index falling for the second week in a row, and the overall share dipping below 70 percent for the first time since last October.”

The Producer Price Index (a measure of wholesale inflation) came in hotter than expectations. The index rose 1.3% MOM and 1.7% YOY. Ex- food and energy and trade services it rose 1.2% MOM and 2% YOY.

Retail sales were strong in January, with the headline number rising 5.3% overall. The control group which excludes autos, gas and building supplies rose 6.1%.

Industrial Production rose 0.9% in January, while manufacturing production rose 1%. Capacity Utilization rose to 75.6%.

Western Alliance Bank just agreed to buy Amerihome for $1 billion in cash. This price is about 1.4 times book value. Western Alliance recently bought Galton Funding as well, and has always been a big name in warehouse lending. The deal is expected to be 30% accretive to EPS and add 500 basis points to ROE.