Brent Nyitray

Morning Report: Home sizes decrease

Vital Statistics:

	Last	Change
S&P futures	2664	-6
Eurostoxx index	357.22	-1.11
Oil (WTI)	51.69	0.06
10 year government bond yield		3.06%
30 year fixed rate mortgage		4.89%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

We have a lot of Fed-speak today, with 4 different speeches. As we approach the December Fed meeting, the markets will hang on every word, looking for clues about 2019. The Fed funds futures are increasing their probability of a December hike, which is up to 80% compared to 66% a month ago.

Economic growth accelerated a touch in October, according to the Chicago Fed National Activity Index. The CFNAI is a meta-index of some 85 different statistics, and in October employment-related numbers (things like unemployment and initial jobless claims) were the drivers. Production-related statistics slowed a touch, but overall the economy is growing above trend.

Median home sizes are falling, as more and more builders focus on building starter homes. Home sizes rose during the housing bust as the luxury end of the market was about the only segment that was working. This trend was exacerbated by debt levels and employment uncertainty for the first time homebuyer. In addition, the Millennial generation tended to favor urban areas, and builders focused on apartment building. Now, we are seeing a glut of properties at the high end, and strong demand for starter homes as the first time homebuyer moves to the suburbs. Note that the latest existing home sales data had the first time homebuyer share at 31%. Historically, that number has been closer to 40%.

Signs of things to come? The Dallas home market is cooling off, as affordability issues bite. The Dallas market is a little different than the typical US housing market – Texas has some limitations on cash-out refinances that meant it largely avoided the big boom / bust of the real estate bubble. Prices are 50% higher than they were in 2007, which is similar to MSAs like San Francisco. On the other hand, Dallas homebuyers are more likely to finance their purchases than the typical foreign cash buyer on the West Coast. Builders have a glut of inventory and are cutting prices / adding features to move properties.

Morning Report: Existing home sales rise

Vital Statistics:

	Last	Change
S&P futures	2660	31.25
Eurostoxx index	357.65	3.68
Oil (WTI)	50.97	0.55
10 year government bond yield		3.06%
30 year fixed rate mortgage		4.89%

Stocks are higher as investors return from the Thanksgiving holiday. Bonds and MBS are down.

Oil continues to plunge, falling 8% on Friday. Saudi Arabia continues to pump over 11MM barrels a day and there are worries of a supply glut. Oil has fallen about 33% since early October. Natural gas has given back some of its gains, but is still elevated on concerns of a cold winter in the South.

Existing home sales broke its six month losing streak, rising 1.4% in October, according to NAR. Sales rose 1.4% MOM to an annualized pace of 5.22 million. This is down over 5% YOY. The median home price was $255,100, up 3.8% YOY. The inventory situation continues to improve, but remains tight. There were 1.88 million homes for sale at the end of the month, which represents a 4.3 month supply. There were only 3.9 month’s worth of homes a year ago.

The median home price to median income ratio now stands at 4.15x, an improvement from 4.4x, where it ended 2017. It is still above the historical range of 3.1 – 3.5 times, but below the peak levels of 4.8x. Note this ratio ignores the effect of interest rates, which affects affordability, but it does give a quick synopsis of home pricing.

In other economic news, Mortgage applications were flat two weeks ago, with purchases rising 3% and refis falling 5%. Durable Goods orders fell 4.4% on weaker aircraft orders, and the Index of Leading Economic Indicators slowed in October. It is looking like the economy is moderating from its torrid mid-year pace.

Rising home prices means rising home equity, and over 80% of the refis last year were cash-outs. This is back towards bubble levels. This makes sense, because rate / term refis generally don’t make sense with rates at these levels. Cash-out refis are especially attractive if the borrower has credit card debt with rates in the teens.

Morning Report: Homebuilder sentiment sinks

Vital Statistics:

	Last	Change
S&P futures	2674	-22
Eurostoxx index	353.27	-1.53
Oil (WTI)	57.07	-0.13
10 year government bond yield		3.06%
30 year fixed rate mortgage		4.89%

Stocks are lower as yesterday’s sell-off continues through the global markets. Bonds and MBS are up.

Yesterday, the bond market rallied (rates fell) while we saw almost no movement in TBAs. What is going on? In technical terms, the basis increased. The basis is the difference in yields between the mortgage backed security and the risk free rate (measured by Treasuries). What drives the basis? Probably the biggest driver is interest rate volatility, which has been increasing. Mortgage Backed Securities are a bit different than normal bonds – they have negative convexity, which means they pay a little more than Treasuries with the same credit risk (i.e. none) but they have higher interest rate risk instead. MBS hate, hate, hate volatility in the bond markets, which is why you will sometimes see the 10 year yield down 3 or 4 basis points, excitedly run a scenario expecting to see an improvement, and get bupkis.

The issues in the market are beginning to affect the Fed Funds futures, which are now predicting a 68% chance of a hike in December. That estimate was closer to 80% a month ago.

Goldman believes growth will slow to the low 2% range for the first half of next year, and then drop to the high 1% range for second half. Their belief is that the Fed will succeed in slowing the economy, without sending it into a recession. The fiscal stimulus from tax cuts will be fading as well. FWIW, the experts and strategists consistently overestimated what growth would be in during the Obama administration and are consistently wrong to the downside since Trump became elected. If Goldman is right, expect the yield curve to flatten.

Homebuilder sentiment weakened in October, according to the NAHB / Wells Fargo housing sentiment index. Labor shortages and declining traffic are the culprits. The index fell from 68 to 60, which was the biggest drop in years. While an index level over 50 indicates favorable conditions, the sentiment that has driven the homebuilder XHB down 25% this year has finally begun to hit the builders themselves.

The sell-off in the stock market has been particularly harsh on the erstwhile darlings – the FAANG stocks. These stocks have entered a bear market (defined as 20% or more lower from the highs). Remember Bitcoin? About one year ago, it made its meteoric rise from roughly 7,000 to 20,000 in the span of 3 weeks. Where is it now? Under $4,500 and unable to get out of its own way.

Morning Report: Quiet week coming up

Vital Statistics:

	Last	Change
S&P futures	2732	10.5
Eurostoxx index	357.96	0.25
Oil (WTI)	56.54	0.08
10 year government bond yield		3.08%
30 year fixed rate mortgage		4.89%

Stocks are lower this morning on no real news. Bonds and MBS are up.

We had a decent rally in the bond market last week, with the 10-year yield breaking 3.1% to the downside.

This should be a very quiet week coming up with the Thanksgiving Day holiday. The bond market will close early on Friday. There isn’t anything in the way of market-moving economic data, except for perhaps housing starts on Tuesday. We will also get existing home sales on Wednesday, along with the index of leading economic indicators. There will be some Fed-speak today, and the rest of the week is clear.

Industrial Production rose 0.1% in October, while Manufacturing production rose 0.3%. Capacity Utilization slipped a touch to 78.4%. Hurricane-related utility outages drove the lower IP number.

Larry Summers sees a 50/50 chance of a recession by 2020. “I think the risks if we have a recession are very, very serious so they [The Fed] need to bend over backward to avoid that,” he said. He thinks the Fed should probably err on the side of allowing inflation to build, and the fact it was so low for so long gives the Fed the breathing room to allow it to increase without unleashing an uncontrollable situation. He also thinks Trump should cut a deal with Democrats for an infrastructure spending package.

One strategist thinks it might be time to do some bottom-fishing in the homebuilding sector.

Morning Report: Inflation is tame, gas is not

Vital Statistics:

	Last	Change
S&P futures	2708	9.25
Eurostoxx index	360.56	-1.71
Oil (WTI)	56.32	0.07
10 year government bond yield		3.11%
30 year fixed rate mortgage		4.94%

Stocks are higher as oil stabilizes. Bonds and MBS are up. The 10 year is trading at 3.11%, quite the drop from the 3.27% levels of last week.

Inflation remains largely under control according to the Consumer Price index. The CPI in October rose 0.3% MOM and 2.5% YOY, right in line with street forecasts. Ex food and energy, it was up 0.2% MOM and 2.1% YOY.

A couple of trade groups wrote letters of support for Kathy Kraninger as head of the CFPB. The agency has been led by Mick Mulvaney, who also head OMB, as Acting Director. Kraninger is the supposed replacement. If she isn’t confirmed by the Senate in the lame duck session, the nomination returns to the President and Mick Mulvaney stays in charge for another 210 days. Kraninger promises to reform the CFPB in the same way Mick Mulvaney is, by ending “regulation by enforcement” and being more transparent about what the rules actually are.

It usually pays to keep tabs on markets unrelated to your own. While people have been focusing on the oil market, and the bear market in oil, we are seeing the opposite effect in natural gas. Oil has lost about 24% over the past month. Natural gas gained more than that this week. Seriously. Natural gas closed last Friday at around $3.70 a contract and closed yesterday at around $4.70 a contract. Many commodities, especially natgas, is extremely sensitive to weather forecasts – if you go to the New York Stock Exchange, you’ll see CNBC on the trading floor. If you go to the a commodity exchange like the Chicago Mercantile Exchange, they have on the Weather Channel. So, if you get a forecast for an extra-cold winter, the price can skyrocket. As the link above explains, while we are the Saudi Arabia of natural gas, supply is not the driver here, storage is. And if we have an unusually cold winter, the amount of gas in storage can fall to dangerously low levels, which means higher prices. There are rumors going around of a hedge fund that is short Natgas and in trouble, but who knows? Regardless, it is something to watch.

Speaking of keeping tabs on other markets, watch the corporate bond markets. General Electric has issues. While everyone is aware of what is going on the stock price, the bonds are down about 15 points since early October. In bond market terms, for a household name like GE, that is a lot. Bonds trading in the low 80s aren’t necessarily distressed, but this is GE we’re talking about. If this snowballs, we should see a tightening of credit overall. It probably won’t affect the MBS market and mortgage pricing, but it will almost inevitably act as a drag on interest rates overall, and it could keep the Fed at bay.

Chart: Financial Stress Index:

Morning Report: Oil stumbles badly, rates fall

Vital Statistics:

	Last	Change
S&P futures	2724	3
Eurostoxx index	362.85	-1.64
Oil (WTI)	55.92	0.23
10 year government bond yield		3.13%
30 year fixed rate mortgage		4.97%

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Mortgage applications fell 3.2% last week as purchases fell 2.3% and refis fell 4.3%. It has been a long, cold winter for the origination business over the past 6 quarters or so. You can look at the chart of the MBA mortgage application index to get an idea of just how tough it is out there right now.

Home prices rose 0.4% MOM and 5.6% YOY in September, according to the CoreLogic home price index. Prices rose the least in the hottest markets, as affordability issues bite. CoreLogic did a study of Millennial attitudes, and less than half think they would qualify for a mortgage, which is interesting given that FHA and GSE low down payment programs are targeted towards the first time homebuyer and are very forgiving in terms of FICO and downpayments. The industry can benefit from doing some education here.

30 day delinquencies fell 0.6 percentage points to 4% in August. The foreclosure rate fell 0.1% to 0.5%. DQs are at the lowest level in 12 years. CoreLogic estimates that 1/3 of all MSAs are overvalued. Unfortunately, not all MSAs are created equal – there are a lot more people in the overvalued MSAs like San Francisco and Washington DC than there are in the some of the undervalued MSAs in the Midwest and Northeast. The overvalued MSAs will be most vulnerable to economic shocks.

Oil has been in a downward spiral, hitting the lowest levels in a year on fears of oversupply. It sounds like the hedge funds, CTAs and speccies have been long and wrong and are now capitulating. Note that commodity prices are often the canary in the coal mine with respect to global growth, and other cyclical commodities like lumber and copper are following suit.

Goldman sees unemployment falling to 3% within the next 18 months or so. Goldman also sees another 125 basis points in Fed hikes during this cycle.

Morning Report: NFIB small business optimism continues streak

Vital Statistics:

	Last	Change
S&P futures	2746	18
Eurostoxx index	364	2.1
Oil (WTI)	58.73	-1.25
10 year government bond yield		3.17%
30 year fixed rate mortgage		4.98%

Stocks are rebounding after yesterday’s sell-off. Bonds and MBS are up small.

Slow news day as bond investors return from a long weekend. Neel Kashkari speaks at 10:00 am EST.

Small Business Optimism continued to hit record levels going back to the early 70s. The NFIB Small Business Optimism Index rose to 107.3 in October. Job creation was strong, with small business adding about .15 workers. 59% of businesses reported spending on expansion, while reports of sales and new orders continued their solid showing. Inflation remains on a slight upward path, while not exhibiting any rapid rises. As commodities fall (oil especially) the big source of inflation remains transportation (driven by labor costs) and anything tariff-related.

Housing affordability dropped again, according to the NAHB / Wells Fargo Housing Opportunity Index. We are back at levels last seen around 2004 and 2009.

Lower affordability means that people are spending on their home improvement projects. The Despot reported earnings that easily topped analyst expectations. I guess when it is hard to move up, people fix up.

Morning Report: Commodity prices falling

Vital Statistics:

	Last	Change
S&P futures	2778	-30
Eurostoxx index	364.14	-1.6
Oil (WTI)	60.5	0.31
10 year government bond yield		3.19%
30 year fixed rate mortgage		4.98%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Markets are open today, however many people are taking the day off in observance of Veteran’s Day.

There won’t be much in the way of market-moving data this week (CPI on Wednesday and retail sales on Thursday are the only potential market movers), however we do have a lot of Fed-speak, with Jerome Powell speaking on Wednesday.

Inflation at the wholesale level was a little hotter than expected, rising 0.6% MOM and 2.9% YOY. Ex food and energy, it rose 0.5% / 2.8% and ex food, energy and trade services (the core rate) it rose 0.2% / 2.8%. Inflation using the PPI metric is higher than the Fed’s 2% target, but the PPI isn’t the measure they target. We will get inflation at the consumer level on Wednesday.

Consumer sentiment improved in the first reading of the November numbers, according to the University of Michigan sentiment survey.

Amazing statistic: 20% of China’s apartments are vacant. That works out to be 50 million apartments. One of the biggest symptoms of a bubble is oversupply, and a 20% vacancy rate would qualify. In the big cities, apartments are ridiculously expensive, trading for something like 40 – 50 times income. For reference, prices in the US topped out at just under 5 times income in 2006. Chinese economic statistics are heavily massaged by government, but there is no doubt that they have the sort of real estate bubbles that seem to occur after decades of rapid growth, similar to the US in the 20s and Japan in the 80s. Once their bubble bursts, China will try and export their way out of it, which will probably spark more trade tensions, but will also put downward pressure on inflation and interest rates globally. The US could go through another period of having its cake and eating it too – a period where they go through strong economic growth without inflation worries.

Speaking of inflation, oil has been getting shellacked over the past month, losing over 20% from mid-October. Part of this has been driven by the US allowing 8 companies to buy Iranian oil despite sanctions. OPEC is now entertaining production cuts, which has stabilized prices at least today.

Also note that lumber prices (which have been soaring due to Canadian tariffs) have now reversed and are heading lower. This should help lower new home construction costs, although the biggest bottleneck remains labor and affordable lots.

So, while we are seeing inflationary pressures building in the labor market, commodities are going the other way.

California passed a couple of housing affordability initiatives last week, which were mainly targeted to the Bay Area. Similar measures in Oregon and Florida also passed.

Morning Report: An anticlimactic Fed decision

Vital Statistics:

	Last	Change
S&P futures	2794	-14.75
Eurostoxx index	364.5	-2.58
Oil (WTI)	59.81	-0.86
10 year government bond yield		3.21%
30 year fixed rate mortgage		4.98%

Stocks are lower this morning on no real news. Bonds and MBS are up.

As expected, the Fed made no changes to monetary policy yesterday. The language in the statement was almost identical to the September release, with some small changes regarding the deceleration in business fixed investment. Bonds didn’t have much a of reaction to the decision. The December Fed Funds futures contracts are handicapping a 76% chance of another 25 basis points next month.

Initial Jobless Claims ticked up slightly to 214k last week. The labor economy continues to plug along.

A lack of housing inventory translates into a “new normal” for home sales, which is about 1 million units less per year than the pre-bubble days – in other words, the early 2000s, before the big jump in sales driven by the bubble years. The problem is that household formation has outstripped homebuilding for over a decade, and if you correct for population growth, we are still way below what is needed.

D.R. Horton reported earnings yesterday that missed street estimates and the stock was rocked to the tune of 9%. Earnings were up 41%, but on the call, DHI CEO David Auld said the market was “choppy” and noted some “momentum slipping from the market.” D.R. Horton focuses on starter homes, so this is worrisome given that luxury is already struggling a bit. The whole sector is struggling this year, with the homebuilder ETF down 25% from its high set earlier this year.

Morning Report: Fed Day

Vital Statistics:

	Last	Change
S&P futures	2805	-11
Eurostoxx index	367.48	1.08
Oil (WTI)	61.92	0.45
10 year government bond yield		3.22%
30 year fixed rate mortgage		4.96%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The FOMC announcement will come out at 2:00 pm EST today. No changes in rates are expected, and it should be a nonevent. Don’t expect to see any discussion of the recent sell-off in the stock market. About the only thing that could be interesting would be any discussion of how to quickly to shrink the Fed’s balance sheet, which is sitting at $4.1 trillion in assets, down from a peak of $4.5 trillion. That is still much lower than pre-crisis levels of below $1 trillion.

Donald Trump indicated that he would entertain an increase in the corporate tax rate if it was used for middle class tax relief. Democrats have complained that the middle class didn’t get a big enough tax cut, and the wealthy / corporations got too big of one. Don’t expect Democrats to bite, however. They want more healthcare entitlement spending and to raise taxes. Republicans aren’t going to vote to raise taxes, period.

UBS said it will fight an expected Justice Department civil suit over mortgage backed securities from 2007. They say they weren’t a “significant originator” of these mortgages.

The Fannie Mae Home Purchase Sentiment Index dipped in October. Affordability concerns are having an effect, as are higher mortgage rates. Despite the recent strong jobs numbers, more people are beginning to have job security worries. This is even more surprising when you consider that the number of respondents who said the economy is on the right track is at a record high.