Morning Report: MBS tapering probably begins this year

Vital Statistics:

S&P futures4,368-26.2
Oil (WTI)63.42-2.05
10 year government bond yield 1.25%
30 year fixed rate mortgage 3.05%

Stocks are lower this morning after the FOMC minutes showed the central bank could begin curtailing bond purchases this year. Bonds and MBS are up small.

The minutes of the July FOMC meeting had a long discussion on tapering. Overall, it looks like the consensus is that the Fed will start reducing asset purchases late this year or early next year.

Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy.

Initial Jobless Claims fell to 348,000 last week. Give the labor shortage we are experiencing it is surprising to see numbers this high. We have record job openings, and are seeing wages increase. On the other hand, the labor force participation rate isn’t really recovering. The Fed seems to believe that this is a COVID-19 driven phenomenon which will go away with time.

The Conference Board’s Index of Leading Economic Indicators rose a strong 0.9% in July. “The U.S. LEI registered another large gain in July, with all components contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The Leading Index’s overall upward trend, which started with the end of the pandemic-induced recession in April 2020, is consistent with strong economic growth in the second half of the year. While the Delta variant and/or rising inflation fears could create headwinds for the US economy in the near term, we expect real GDP growth for 2021 to reach 6.0 percent year-over-year, before easing to a still robust 4.0 percent growth rate for 2022.”

Delinquencies fell to 5.47% in the second quarter, according to the MBA. “Much of the second-quarter improvement can be traced to later-stage delinquent loans – those 90 days or past due, but not in foreclosure,” Walsh said. “The 90-day delinquency rate dropped by 72 basis points, which is another record decline in the survey. It appears that borrowers in later stages of delinquency are recovering due to several factors, including improved employment and other economic conditions, the availability of home retention workout options after forbearance, and a strong housing market that is bringing additional alternatives to distressed homeowners.”

The median home price rose 20% in July, according to Redfin. Time on market was 15 days, which is a touch higher than June, but is still well below historical averages. “Home prices are still soaring at an astonishing rate,” said Redfin Chief Economist Daryl Fairweather. “Now that we’re a year out from the post-lockdown rebound, we can no longer explain away the enormous price growth by pointing to the pandemic’s earliest impacts on the housing market. While this ongoing trend continues to fuel an already severe affordability crisis, the market is becoming somewhat less competitive for homebuyers. Demand has softened enough that homes aren’t flying off the market quite as fast or for as much above list price as they were in the spring. Mortgage rates are remaining about as low as they’ve ever been, so buyers who lose out in a bidding war don’t have to fear that they’ve missed their window to buy. As more homes are being listed, it may be worth waiting for the right home at the right price.”


Author: Brent Nyitray

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

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