Morning Report: 10 trades below 3% of dovish FOMC minutes

Vital Statistic:

Last Change
S&P futures 2726 -4
Eurostoxx index 392.54 -0.07
Oil (WTI) 71 -0.84
10 Year Government Bond Yield 2.98%
30 Year fixed rate mortgage 4.61%

Stocks are lower after Trump threatened more tariffs on autos. Bonds and MBS are up on the dovish FOMC minutes.

Initial Jobless Claims ticked up to 234,000 last week.

Existing home sales fell 2.5% in April, according to NAR. Sales fell to an annualized pace of 5.46 million, down from 5.6 million in March, which was also the Street estimate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Other tidbits from the report: the median home price increased 5.3% to $257,900, inventory of 1.8 million homes represents a 4 month supply, days on market fell to 26 days, and the first time homebuyer was 33% of all transactions.

US house prices rose 1.7% in the first quarter, according to the FHFA House Price Index. On a YOY basis, they were up almost 7%. The West Coast continued to lead the pack with high single-digit growth rates, and the Middle Atlantic showed an acceleration of growth. Over the past 5 years, the Middle Atlantic (NY, NJ, PA) has been the slowest appreciating region, growing just over half the rate of the West Coast.

FHFA regional

The FOMC minutes were a bit more dovish than expected – the Fed Funds futures are now handicapping a 37% chance of 4 hikes this year, down from the mid 40% yesterday. The FOMC is worried about a trade war with China depressing economic activity. On inflation, they emphasized the symmetry of the inflation goal. “Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis.” Overall, nothing was all that new, just a re-affirmation of symmetry, meaning that the 2% target is not a ceiling.

Dallas Fed Head Robert Kaplan thinks the Fed has about 4 more hikes to go before it is at a “neutral” stance. He also discussed his views of inflation above 2%: “I want to run around 2, and if we got a little bit above it and I thought it would be short-term and not long-term, I could tolerate it”

As anyone who attended the Secondary Conference could tell you, mortgage banking is going through a rough stretch right now. Digitalization of mortgage banking has compressed margins and volumes are down. Even people that want to move are finding a dearth of inventory. What could be the catalyst to turn things around? Buy-side firms ringing the register on the REO-to-rental trade. That would bring back enough purchase activity to allow some of the smaller firms to retrench and get their costs under control. Wishing for falling rates is probably a long shot, although if the 10 year finds a level here, we could see rates come in a little, but probably not enough to bring back refis.

Refi activity is going to be concentrated in two areas: cash out to refinance credit card debt, etc, and FHA refis into conforming once the homeowner has enough equity to get under the 80% LTV threshold and avoid having to pay PMI.

While the mortgage business is going through a rough patch, quarterly profits for banks are spiking (tax reform has some effects here). The banking sector largely sat out the M&A boom that has been common throughout other industries. The US market is still about the least concentrated banking market on the planet. Is it time for some M&A? 

Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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