Morning Report: Two Fed nominees head to the Hill.

Vital Statistics:

 

Last Change
S&P futures 3362 -17.25
Oil (WTI) 51.26 0.05
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning on coronavirus fears. Bonds and MBS are up small.

 

Consumer prices rose 0.1% MOM and 2.5% YOY in January, according to the CPI. Ex-food and energy, they rose 0.2% MOM and 2.3% YOY. The Fed doesn’t really pay too close of attention to the CPI, preferring the Personal Consumption Expenditures data. Regardless, inflation is not at a level to trigger any sort of rate hike.

 

Initial Jobless Claims came in at 205,000. The labor market continues to roll along.

 

The percentage of homes that sold above list price fell to a 3 year low in 2019, according to Zillow. On average, 19.5% of homes sold above list in 2019, while 21.5% did in 2018. This seems counter-intuitive given the supply / demand imbalance overall – NAR has existing home supply at roughly 3 months’ worth, well below 6.5 months, which is considered a balanced market. So what is going on? The real estate market is seasonal, and many people try and move during the summer months, which means home prices are negotiated in the late winter / spring. Early 2019 was marked by a continuing Fed tightening regime – we had multiple rate hikes in 2018 as the Fed wanted to get off the zero bound. This raised mortgage rates, which crimped affordability. The Fed only started easing in July, by which time the lion’s share of transactions are over. By the time mortgage rates fell meaningfully, 2019 was already in the books. 2020 should be a lot better, and judging by some of the comments from the builders, the spring selling season started early this year.

 

Jerome Powell’s Humprey-Hawkins testimony was largely uneventful, and today two of Trump’s Fed nominees head to the Senate for testimony. One of the nominees – Christopher Waller – is uncontroversial and should have no issues. The other one – Judy Shelton – has raised some eyebrows. Shelton has been critical of the Fed’s large balance sheet and its policy of paying interest on reserves. The policy of paying interest on excess reserves restricts credit needlessly, as she characterizes it as “paying banks to do nothing.” She is quite dovish and there are questions over whether she supports the gold standard, which is akin to pitching the idea of bloodletting to the AMA.

 

While we generally take for granted the idea that the Fed will maintain a larger balance sheet, this chart really puts into perspective how much things have changed. Pre-crisis the Fed had roughly $800 billion in assets. Now it is around $4.3 trillion. Has equity gone up 5x? um, no.

 

Fed assets

 

Credit rating agency Fitch is cautioning the CFPB from removing debt-to-income as a measure of a borrower’s ability to pay. The CFPB is considering using a measure like the difference between the borrower’s rate and the normal “market” rate, however Fitch thinks it is incomplete:

“Spread to APOR is a good measure of default risk. However, many factors can affect the price of a loan, some of which may have little to do with the borrower’s repayment capacity; these include liquidity, market movements, or attributes that present a low risk of loss to the lender, for example, a low loan-to-value. Aggressive lending programs could result in borrowers having a low APR but a high DTI and LTV where they cannot afford the loan but the risk of loss to the lender is low.”

 

Author: Brent Nyitray

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

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