Morning Report: 2019 housing forecasts are similar to 2018

Vital Statistics:

 

Last Change
S&P futures 2901.75 -8.75
Eurostoxx index 390.46 0.87
Oil (WTI) 65.29 1.29
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.27%

 

Stocks are lower this morning as investors return from the long weekend. Bonds and MBS are flat.

 

There isn’t much in the way of market-moving data this week, although we will get some housing data with existing home sales, the FHFA House Price Index, and New Home Sales.

 

President Trump plans on ending the practice of allowing waivers for countries that import oil from Iran. Oil is up over a buck this morning on the news. China, India, and Turkey are Iran’s biggest customers.

 

The economy looks like it exited the first quarter with a pickup in growth, according to the Chicago Fed National Activity Index. The first quarter has been weak for the past several years, and it looks like that pattern repeated this year. Employment-related indicators drove the improvement in the index.

 

Fannie Mae is forecasting 2.2% GDP for 2019. On one hand, Fannie Mae expects to see growth impacted by the fading effects of the 2018 tax cuts and slowing corporate capital expenditures. On the other hand, they are forecasting a pickup in housing. Falling interest rates have been a pleasant surprise, and refinance activity is expected to be a bit higher than previously forecast. That said, prepayment burnout is pretty high at this point, and home price appreciation is probably going to drive refi activity more than interest rates.

 

“On housing, the recent dip in mortgage rates to their lowest level in over a year – combined with wage gains and home price deceleration – supports our contention that home sales will stabilize in 2019,” Duncan continued. “The greatest impediment to both sales and affordability continues to be on the supply side, as new inventory, particularly among existing homes, is being met quickly by strong demand – as evidenced by the already thin months’ supply hitting a new one-year low.”

 

Grant Thornton believes that a shortage of entry-level homes will be a constraint on the housing industry this year. “The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor – immigrants – that once made new housing affordable has all but disappeared.” They expect the median home price to rise 3.5% this year, compared to 4.8% in 2018. Existing home sales are expected to be unchanged at 5.9 million.

Morning Report: Jamie Dimon throws cold water on mortgage banking

Vital Statistics:

 

Last Change
S&P futures 2898.75 -1.5
Eurostoxx index 390.41 0.82
Oil (WTI) 63.91 0.15
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.32%

 

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

 

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

 

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

 

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

 

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

 

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

 

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

 

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

Morning Report: Rebound in refinances this year

Vital Statistics:

 

Last Change
S&P futures 2917.25 5.85
Eurostoxx index 388.92 -0.35
Oil (WTI) 64.39 0.34
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.32%

 

Stocks are higher this morning as bank earnings continue to come in. Bonds and MBS are down on stronger-than-expected data out of China.

 

Mortgage Applications fell 3.5% last week as purchases rose 1% and refis fell 8%. “Mortgage applications decreased over the week, driven by a decline in refinances,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With mortgage rates up for the second week in a row, it’s no surprise that refinancings slid 8 percent and average loan sizes dropped back closer to normal levels.” The average mortgage rate rose 4 basis points to 4.44%. The refinance index has rebounded smartly over the past several months, but we are nowhere near the levels of the 2015 refi boom, let alone the 2011-2012 boom.

 

refi index

 

Builder optimism inched up as the the NAHB / Wells Fargo Housing Market index rose 1 point to 63. As has been the case throughout the recovery, the West led the pack, with the Midwest and Northeast picking up the rear. “Builders report solid demand for new single-family homes but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots,” said NAHB Chairman Greg Ugalde.

 

Industrial Production slipped 0.1% in March, while manufacturing production was flat. Capacity Utilization dropped .2% to 68.8%. This was generally a disappointing report, however orders for business equipment and capital expenditures bounced back after a deep decline in February. Over the past several years, the first quarter has been weak, and it looks like this year is more of the same.

 

New FHFA Chairman Mark Calabria said he takes the role with a “great sense of urgency” with regard to reforming Fannie Mae and Freddie Mac. He was confirmed as FHFA Chairman last week on a straight party line vote. “The mortgage market was at the center of the last crisis, as it has been for many past financial crises,” Federal Housing Finance Agency Director Mark Calabria said Monday in his first official remarks as head of the agency. “I believe the foundations of our current mortgage finance system remain vulnerable.”

Morning Report: Bank earnings come in

Vital Statistics:

 

Last Change
S&P futures 2915 6.25
Eurostoxx index 388.92 0.82
Oil (WTI) 63.31 -0.09
10 year government bond yield 2.57%
30 year fixed rate mortgage 4.23%

 

Stocks are higher as bank earnings come in. Bonds and MBS are down.

 

Earnings season has begun, and the banks are all reporting.

 

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

 

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

 

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

 

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

 

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

 

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

 

fed funds futures

 

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: The Fed begins to catch up with the markets

Vital Statistics:

 

Last Change
S&P futures 2898.25 3.5
Eurostoxx index 387.47 0.4
Oil (WTI) 64.02 -0.59
10 year government bond yield 2.49%
30 year fixed rate mortgage 4.14%

 

Stocks are higher after the UK and the EU agreed to kick the can down the road on Brexit. Bonds and MBS are flat.

 

The FOMC minutes didn’t reveal much new information. They did move closer to what the markets have been saying all along: that the Fed is done with rate hikes: “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.” That said, the Fed Funds futures are handicapping a more than 50% chance for a rate cut this year, so there still is a disconnect. The FOMC also seemed eager to end the balance sheet reduction exercise, concerned that allowing it to fall further risks pushing up the overnight borrowing rate by creating a reserves shortage.

 

The CEOs of the biggest banks appeared before the House yesterday and it was basically a political posturing event. Democrats complained about diversity, deregualation and student loans. Republicans talked about Brexit and politically targeting industries by cutting them off (firearms). Aside from creating clips for donor emails, the whole dog and pony show was contained nothing of use for investors and professionals.

 

The Producer Price index increased 0.3% in March, which is up 2.9% YOY. Declining energy prices were offset by increasing final demand inflation.

 

Initial Jobless Claims were again below 200,000, falling to 196,000. These are extraordinary numbers, the like we haven’t seen in half a century.

 

 

Morning Report: Job openings fall

Vital Statistics:

 

Last Change
S&P futures 2890.5 8
Eurostoxx index 386.66 0.98
Oil (WTI) 64.39 0.06
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.16%

 

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

 

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

 

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

 

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

 

JOLTs

 

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

 

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.”  Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

 

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.

Morning Report: The Fed’s balance sheet will probably never return to pre-crisis levels.

Vital Statistics:

 

Last Change
S&P futures 2896 -2.5
Eurostoxx index 388.12 0.58
Oil (WTI) 64.46 0.06
10 year government bond yield 2.52%
30 year fixed rate mortgage 4.16%

 

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

 

Factory Orders fell 0.5% in February, while January was revised downward to no change. Core Capital Goods Orders (which is a proxy for business capital expenditures) fell 0.1% after unusually strong readings in January and December.

 

Small Business Optimism increased in March, according to the NFIB Small Business Optimism Survey. Hiring indicators improved (companies added .5 workers on average), the earnings outlook brightened, and capital expenditures were steady. The only negative was an inventory build.

 

House flipping is back to pre-crisis levels. Profit margins are much higher however, which should provide a bit of a cushion if home price appreciation tails off. The type of property is generally older – a fix and flip – which is dominated by professionals, not neophytes. Those were the type who would purchase rights to buy a new construction condo and then hope to sell the right at a profit.

 

Margin compression and lower volumes has meant job losses in the nonbank mortgage sector. Nonbank lenders employed 320,000 people in February, which is a drop of about 20,000 jobs from August.

 

30+ day delinquencies fell to 4% in January, which is a drop from 4.9% in January of 2018. The foreclosures rate fell to 0.4% from 0.6%. Delinquency rates fell across the entire spectrum of buckets, and are at the lowest levels in 20 years. Interestingly, DQ rates for student loans and auto loans are up.

 

Good explainer on quantitative easing and why the Fed doesn’t want to return to pre-crisis levels for its balance sheet. Changes in the way banks manage their reserves, along with rising global demand for dollars has made a larger Fed balance sheet a necessity. The mechanics of rate setting involve setting the interest they pay on bank reserves, and in order to do that, they need a large level of reserves in the banking system. These reserves are the Fed’s liabilitites, and if the liabilities need to increase, the assets will have to move up in lockstep. Hence the need to maintain a bigger balance sheet.

 

Note that the equity value of the Fed’s balance sheet is largely unchanged, which means the Fed is vulnerable to a fast uptick in interest rates. This is because rising interest rates will negatively affect the value of its bond portfolio (bond values fall as rates rise). The Fed has about $3.9 billion in assets, supported by $39 billion in equity. In other words, a 1% drop in their asset portfolio would wipe out their equity. While that is a distinct possibility for their long-term bond holdings, it is highly unlikely for their short term bond holdings. That said, the Fed does operate with a 100:1 leverage ratio and historically that level has been deadly for institutions that don’t own a printing press.

 

Federal Reserve Assets