Stocks are lower after an earnings miss from Alphabet (Google). Bonds and MBS are up small. The European Central Bank maintained rates at current levels. ECB President Christine Lagarde will step down in February.
As expected, the Fed maintained the Fed Funds rate at current levels. There were two dissenters – Cook and Hammack who wanted to raise by 25 basis points. “Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability.”
During the press conference Kevin Warsh said that starting next year, one of the Fed meetings will not discuss monetary policy but will focus on other strategic issues. Beginning in 2028, there will be two meetings that won’t concern policy.
The comments about the economy and the labor market are interesting with the backdrop of Microsoft offering buyouts to 27% of its workforce. Lots of people are employed in data center construction, but the pace of construction there probably isn’t sustainable given political opposition and the increasing cost of financing them.
The takeaway from the meeting is that a December hike is pretty much a lock, and the Fed Funds futures see a 86% chance they raise rates at the end of the year.
Trump was obviously mad that the Fed didn’t cut rates, but Treasury Secretary Scott Bessent expressed confidence in Kevin Warsh: “I think Chair Warsh is off to a great start,” Bessent said. “As I often say, I have great confidence in him.” When asked if a December rate hike would be a policy mistake, he said “That’s not necessarily so.”
At this point, the markets are ignoring Trump and viewing it all as a sideshow. Reminds me of the legendary Earl Weaver and Bill Haller in 1980.
Baltimore Oriole’s Earl Weaver argues with Umpire Bill Haller in 1980.
Personal incomes rose 0.2% MOM and personal outlays rose 0.5%. The incomes number was a touch light. The all-important PCE Price Index rose 0.5% MOM and 3.6% YOY, while the core rate rose 0.3% MOM and 3.1% YOY. Inflation ticked up in September versus August:
Home prices rose 0.3% MOM and 2.4% YOY according to the FHFA House Price Index. The next FHFA Home Price Index report will set the conforming loan limits for next year, though a few lenders have already put out estimates. You can see the divergence between the different regions below. The Midwest is where the action is, while the West Coast is struggling.
Note the Middle Atlantic contains the New York City MSA which also hot these days.
Consumer confidence rebounded from very low levels in October according to the Conference Board. The index rose 7.5 points to 91.7. “Consumer confidence advanced in October, driven primarily by improved perceptions of current and expected business conditions,” said Fergus McCormick, Senior Economist, Global Indicators, The Conference Board. “The recovery was in line with retail gasoline prices easing from September to October. Yet, despite the increase in October, consumer confidence remained on the long-term downward trend that’s persisted over the past few years. Consumers planned less spending on services and durable goods over the next six months. This likely reflected higher price levels and persistent inflation, which eroded consumers’ purchasing power.”
Consumers continue to be frustrated with rising costs, especially energy. Given that heating oil and diesel are essentially the same thing, I expect consumers in the Northeast will be particularly surly this year.
______________________________
During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.
A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration, which refers to a loan’s expected life and its interest rate sensitivity.
During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an attractive bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit hard.
Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):
Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices
The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.
Below I looked at how the Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7 year, the 7.5 had a 5 year, and the 8 had a combo of 5s and 2s.
The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points.
If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas or Geoff Sharp at Eris Futures.
__________________________________
The single family rental market is humming along, according to earnings from single family REIT Invitation Homes. Total revenues rose 6.3% while rents rose 3%. The occupancy rate was 96.4%. Due to the new institutional investor limits on single family homes, Invitation is selling parts of its portfolio and buying back stock with the proceeds.
