Morning Report: The economy grew below trend in September

Vital Statistics:

 LastChange
S&P futures4,5448.2
Oil (WTI)85.110.89
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.33%

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

The upcoming week has a lot of important economic data. We will get new home sales and the FHFA House Price index on Tuesday, the advance estimate of third quarter GDP on Thursday, and personal incomes / outlays on Friday.

The FHFA House Price Index will cover August, and the new FHFA limits will be based on the third quarter numbers. We are seeing a lot of lenders start to accept loans based on the expected new limits. Given the pace of home price increases, the new limit will be around $650k or so.

The Street is looking for GDP growth to come in around 2.7%. This is a deceleration from the first half of the year, and it definitely looks like shortages are beginning to show up in the numbers. The Chicago Fed National Activity went negative last month, which indicates the US economy is grew below trend in September. This index is a meta-index of about 85 indicators, so it is a pretty broad based look at the economy.

Jerome Powell pretty much confirmed that tapering will begin this year: “I do think it is time to taper,” Mr. Powell said Friday. “I don’t think it is time to raise rates.” He went on further to discuss the economy: “We think we can be patient and allow the labor market to heal,” he said. But at the same time, “no one should doubt that we will use our tools to guide inflation back down to 2%” if it looked like more persistent inflationary pressures were taking root, Mr. Powell added.

Despite the repeal of limits on non-owner occupied properties, the private label market is still going strong. IMO, this was the ultimate rationale for the limits in the first place. The private label market disappeared in the aftermath of the 2008 financial crisis, which meant that something like 90% of all mortgage production was backed by the taxpayer. Mick Mulvaney ended up forcing the issue by creating a need for it.

One thing to keep in mind: while there is probably a contingent of the far left that likes the fact that the taxpayer backs the vast majority of mortgages, most housing professionals are uncomfortable with it. What happens if the the government says “yes, the FHFA House Price Index is up 20% YOY, but we don’t want to be subsidizing every loan below $650k.” If the limits get raised by something below 14%, then a lot of these wholesalers who are betting on the FHFA price index might find themselves caught short.

Author: Brent Nyitray

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

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