Morning Report: James Bullard floats the idea of no December hike

Vital Statistics:


Last Change
S&P futures 2628 -8
Eurostoxx index 343.16 -2.31
Oil (WTI) 51.87 -0.74
10 year government bond yield 2.85%
30 year fixed rate mortgage 4.72%


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


St. Louis Fed President James Bullard surprised markets on Friday by suggesting that the Fed could take a break at the December FOMC meeting. He argued that interest rates were already somewhat restrictive (at least that is what the yield curve is telling us), and the neutral Fed Funds rate is around 2%. (the current target rate is between 2% and 2.25%). He also noted that while unemployment is around 3.7%, the relationship between inflation and unemployment (aka the Phillips Curve) has been breaking down for decades, to where the statistical relationship is close to zero. The Fed Funds futures are handicapping an 80% chance of a hike, but the reaction from the market if they don’t hike may end up being worse than the reaction if they do.


The Fed Funds futures have been forecasting a hike in December, and then one more in 2019. So regardless of the timing, this tightening cycle is pretty much over.


The Fannie Mae Home Purchase Sentiment Index rose slightly in November, driven by increasing incomes. There has been a push-pull effect happening in the index, as increasing personal financials are being offset by deteriorating housing affordability. “The HPSI has moved within a tight range over the past five months, as positive sentiment regarding the overall economy continued to offset cooling housing sentiment,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Consumers’ perceptions of growth in their household income reached a survey high this month, helping to absorb some of the impact of increasing mortgage rates on housing market activity. Meanwhile, the net share of consumers expecting home prices to increase over the next 12 months continues to moderate, dropping by 13 percentage points since this time last year.”


Roughly 46,000 homes were flipped in the third quarter, which is the lowest number in 3 1/2 years. The number of sub-3 year mortgages (used for the fix and flip crowd) dropped 11% last quarter. A combination of rich home prices and higher financing costs have made it tougher to earn a decent return in the business. At some point, the investors who did well in the REO-to-rental trade will probably look to ring the register and move on to better opportunities.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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