Morning Report: Third quarter GDP comes in stronger than expected

Vital Statistics:

Stocks are flat as we await the FOMC decisions and earnings from Facebook and Apple after the bell. Bonds and MBS are flat.

The FOMC decision is set for 2:00 pm. The big tariff-related slowdown that has been widely predicted doesn’t seem to be materializing. This means that the language of the FOMC statement and the press conference will take on more weight and we could see some volatility in the bond market as everyone reassesses the lay of the land. Be careful locking around then.

The advance estimate of third quarter GDP came in better than expected, at 1.9%, versus street expectations of 1.6%. Personal consumption expenditures drove the increase, rising 2.9%, while investment fell 1.5%. Residential fixed investment broke a 6 quarter losing streak, increasing 5.1% in the quarter. Inflation remains under control, with the headline PCE number rising 1.5%, and the core rising 2.2%.

ADP estimated that payrolls increased by 125,000 in October, which was above expectations. September’s estimate was revised downward however to below 100k. Note the 125,000 number is well above the Street estimate for Friday’s jobs report, which is forecasting an increase of only 85,000.

Mortgage applications increased by 0.6% in the latest MBA survey. Purchases increased 2% and refis fell 1%. “The 10-year Treasury rate rose slightly last week, as markets expected more progress toward a trade deal between the U.S. and China,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates increased for the second straight week as a result, with the 30-year fixed rate climbing to 4.05 percent–the highest level since the end of July. Mortgage applications were mostly unchanged, with purchase activity rising 2 percent and refinances decreasing less than 1 percent. Purchase applications continued to run at a stronger pace than last year, finishing a robust 10 percent higher than a year ago. Considering how much lower rates are compared to the end of 2018, purchase applications should continue showing solid year-over-year gains.”

The MBA forecasts that 2019 will be the best year for origination since 2007, at $2.06 trillion, although they expect 2020 to slip to $1.89 trillion. Although they forecast rates will remain low, they anticipate that refis will dry up in the second half and the margin pressure that bedeviled lenders in 2018 will reappear.

Pending home sales rose 1.5% in September, according to NAR. “Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates,” he [NAR Chief Economist Lawrence Yun] said. “Furthermore, we’ve seen increased foot traffic as more buyers are evidently eager searching to become homeowners.” The foot traffic comment is interesting since we should be seeing a drop-off heading into the seasonally slow period.

The homeownership rate ticked up to 64.8% in the third quarter. This is an increase of 70 basis points from the second quarter and an increase of 40 bps from a year ago.

Author: Brent Nyitray

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