Morning Report: Trump calls China a currency manipulator

Vital Statistics:

Stocks are higher after China stopped the devaluation of the yuan and fixed it at a higher than expected rate. Bonds and MBS are flat.

Treasury officially called China a “currency manipulator” yesterday for the first time since 1994. This is a specific term used when the country in question intervenes in the currency markets and has a large trade surpluses. That said, it is also largely symbolic in that it doesn’t have any real consequences. It brings the IMF into the loop and that is about it. In essence it is a political move.

The 10 year bond was up something like 24 ticks yesterday, but we did not see much movement in MBS, particularly up in the rate stack. If you were looking for big improvements in the 4%+ note rate range, you were disappointed. As a general rule, MBS will lag the moves in Treasuries, especially large ones. If the 10 year seems to find a level around these prices, then eventually mortgage rates will follow. But it generally seems like mortgage rates take a “wait and see” posture after big moves. If we get some sort of trade detente with China, it is likely we will give back a big chunk of this rally and mortgages seem to be wary of this.

Home prices rose 0.4% MOM and 3.4% YOY according to CoreLogic. This is despite lower rates from a year ago. Prices are rising at the lower price points and languishing at the higher price points. That said, incomes are rising and that should push prices higher, especially combined with lower rates.

Grandpa, tell me again about when people paid to lend money? We know all about negative yields in the sovereign debt markets, with investors paying over 50 basis points per year for the privilege of lending to the German government. We have seen some corporate bonds trade at negative yields, so why not mortgages, too? Jyske Bank in Denmark is offering 10 year mortgage bonds with a negative coupon. Nordea Bank may be following suit as well, by offering 30 year mortgage bonds with negative coupons. Denmark’s government bond yields -50 basis points already, and some banks in Denmark are offering 30 year mortgages with rates as low as 50 basis points. Home prices are up 24% over the past 2 years in Denmark.

You have to wonder what the Fed is thinking here – no matter what they do, it seems long term rates globally are being drawn into a vortex of negative rates. Mohammed-El Arian talked about this at the MBA secondary conference in May – the 10 year yield is going to be pulled down by global rates no matter what the Fed does. The US has to feel like the Rodney Dangerfield of government bonds: of the major players, only Greece, Russia, Mexico, Brazil, Indonesia, China, and India have higher yields.

The service economy cooled in July, according to the ISM non-manufacturing PMI. It fell from 55.1 to 53.7, which means the sector grew, just at a slower rate than June. That said, this is the lowest reading since August of 2016, which is a concern. The report usually has some anecdotes and I thought this was interesting: “Tariffs continue to push costs higher, and customers are looking for more discounts due to mortgage-rate fluctuations.” (Construction). We have a housing shortage and builders are experiencing softening prices?

Black Knight Financial Services said that July home affordability is at an 18 month high. Falling interest rates have translated into a 15% increase in buying power. The share of median income needed to make principal and interest payments on the average home fell from 23.3% to 21.3% in November 2018. In the early 80s, when mortgage rates were double digit, this percentage was closer to 40%.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical View all posts by Brent Nyitray