Morning Report: FOMC minutes and homebuilder earnings

Vital Statistics:

 

Last Change
S&P futures 2569 -13.5
Eurostoxx index 346.51 -1.2
Oil (WTI) 51.94 -0.24
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.48%

 

Stocks are lower this morning on overseas weakness. Bonds and MBS are up small.

 

The FOMC minutes didn’t really contain much interesting information – the committee noted that financial conditions were tightening slightly and that the stock market was falling (we bottomed on Christmas Eve), but still decided unanimously to hike the Fed Funds rate 25 basis points. Despite fears in the market that the Fed has overshot, that possibility was not entertained by either the members or the staff. Incidentally, we will have a lot of Fed speakers throughout the day.

 

Homebuilder Lennar reported strong earnings for the fourth quarter, however it decided to hold off giving guidance on 2019 due to opaque market conditions. That said, new orders were up big, and margins were strong. Lennar is transitioning into a pure-play homebuilder and has been exiting businesses like asset management and real estate brokerage. This quarter should be the last with any CalAtlantic integration noise in the numbers. The Street was happy with the numbers, sending the stock up about 8%.

 

KB Home also reported numbers, although they saw a decrease in revenues, margins and a fall in average selling prices. KB is more of a turnaround story, however and the whole sector is so out of favor that it seems any non-disaster is taken as positive. KB was up 4% on its numbers.

 

Canary in the coal mine? No high-yield debt has been issued since November, according to DealLogic. This is the first December without junk issuance since 2008. This could have simply been due to the gyrations in the stock market, but this bears watching. Despite a spike at the end of 2018, credit spreads are still at historically normal levels, so it is too early to sound any alarms yet. The Fed noted tightening credit conditions in its FOMC minutes as well.

 

Donald Trump met with Democratic Congressional leaders yesterday on the subject of border security and the government shutdown. He characterized the meeting as a “waste of time” after being told there is basically no way Democrats will allocate funds for the wall. The government shutdown is almost 3 weeks old, and Federal workers are not getting paid. That said, unlike the Obama-era shutdowns, the Trump Administration is trying to make the shutdown as invisible as possible to the average citizen. The IRS is back issuing refunds and 4506-Ts, so for the most part there isn’t much of an effect on real estate with the exception of flood insurance. 75% of all realtors noticed no impact on buyers.

 

Michael Bright, who has been the interim president of Ginnie Mae for a year and a half, has resigned and will return to the private sector. 

 

The drop in interest rates means that another half a million borrowers (total of 43 million) will find it attractive to refinance, according to Black Knight Financial Services. This is up 29% from the bottom, but still down 50% from last year.

“As recently as last month, the size of the refinanceable population fell to a 10-year low as interest rates hit multi-year highs,” said Graboske. “Rates have since pulled back, with the 30-year fixed rate falling to 4.55 percent as of the end of December. As a result, some 550,000 homeowners with mortgages who would not benefit from refinancing have now seen their interest rate incentive to refinance return. Even so, at 2.43 million, the refinanceable population is still down nearly 50 percent from last year. Still, the increase does represent a 29 percent rise from that 10-year low, which may provide some solace to a refinance market still reeling from multiple quarters of historically low – and declining – volumes.

“In fact, through the third quarter of 2018, refinances made up just 36 percent of mortgage originations, an 18-year low. And of course, as refinances decline, the purchase share of the market rises correspondingly. So now, in the most purchase-dominant market we’ve seen this century, we need to ask whether the shift in originations will have any impact on mortgage performance. The short answer, based on historical trends, is that it certainly bears close watching.  Refinances have tended to perform significantly better than purchase mortgages in recent years. When we take a look back and apply today’s blend of originations to prior vintages, the impact becomes clear. A market blend matching today’s would have resulted in an increase in the number of non-current mortgages by anywhere from two percent in 2017 to more than a 30 percent rise in 2012, when refinances made up more than 70 percent of all lending. As today’s market shifts to a purchase-heavy blend of lending, Black Knight will continue to keep a close eye on the data for signs of how – or if – this impacts mortgage performance moving forward.”

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Morning Report: Fed Minutes out today

Vital Statistics:

 

Last Change
S&P futures 2577 4.5
Eurostoxx index 348.5 3.89
Oil (WTI) 50.86 1.06
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.48%

 

Stocks are higher this morning as optimism for trade talks with China is offset by pessimism over the government shutdown. Bonds and MBS are down.

 

The minutes from the December FOMC meeting are scheduled to come out at 2:00 pm EST. Given the massive change in sentiment over the past month, they will be the most interesting in a while. Generally these are not market-moving events, but today could be an exception, especially since rates have dropped so much recently. I would be leaning towards higher rates as investors get a reality check about how strong the economy really is.

 

Job openings fell to 6.9 million in November, according to the JOLTS job openings report. The quits rate edged down to 2.3% from 2.4%, which is surprising given the bump in wages from Friday’s jobs report. Overall, it continues to show a strong labor market – there are almost 900k more open positions than there are unemployed people. There is a skills gap to be addressed, but the jump in the unemployment rate shows that the long – term unemployed are beginning to return to the labor force and look for a job.

 

The drop in rates is finally beginning to show up in mortgage applications. The MBA reported that applications increased 24% from the previous week. Refis rose 35%, and the refinance percentage of applications is the highest since February 2018. Purchases were up 17%. Rates fell anywhere from 9 to 20 basis points depending on the product. While there is some holiday noise in the numbers, they are also being depressed by the government shutdown.

 

Amerisave is buying the retail mortgage operations of TMS as they focus more on servicing and fintech than origination.

Morning Report: Homebuyer sentiment softens

Vital Statistics:

 

Last Change
S&P futures 2571 20
Eurostoxx index 346.77 3.89
Oil (WTI) 49.14 0.86
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

Stocks are higher this morning on no real news. Bonds and MBS are down small.

 

As the shutdown drags on with no end in sight, the IRS has decided to begin issuing tax transcripts. It will probably take a few days to catch up with the backlog, but at least this headache for originators will go away.

 

Small business sentiment remains strong, according to the NFIB. “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.” Bill Dunkelberg notes the cognitive dissonance in the business press these days:  “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates,” said NFIB Chief Economist Bill Dunkelberg. “However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

 

Growth in the service sector decelerated in December, according to the ISM Non-Manufacturing Index. New Orders were the bright spot in the report while most other indicators fell. Note that we are still at historically very strong levels, so there is nothing recessionary in this report. Residential construction remains an issue. One of the respondents said: “New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases.” I found that surprising given that lumber prices have been falling steadily for the past 6 months and are down 22% YOY.

 

lumber

 

Homebuyer sentiment has been souring as well, according to the latest Fannie Mae National Housing Survey. Blame high house prices: “Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Although home price growth slowed in 2018, the cumulative impact of sustained, robust increases in home prices outpacing income growth likely helped drive the share of consumers citing high home prices as a primary reason for a bad time to buy a home to a survey high.” The net number of people who think it is a good time to buy fell from 23% to 11%. The net number of people who think home prices will rise fell slightly, but nothing as dramatic as the good time to buy statistic. Note that there was no major moves in the personal economics numbers either – the net number of people not concerned about losing their job hit 79%, a series high.

 

The Washington Post summarized the 2019 housing forecasts from the MBA, NAR, and more. The MBA is forecasting that the 30 year fixed rate mortgage will hit 5.1%. (Zillow is even more bearish – they are forecasting 5.8%) While those forecasts are certainly a possibility, they seem unlikely if the Fed is indeed done with this tightening cycle.  Despite that rate forecast the MBA does see purchase origination increasing, while refis will decline. The NAHB is predicting new home sales will be flat with 2018, around 618,000.

Morning Report: No progress on shutdown

Vital Statistics:

 

Last Change
S&P futures 2528.75 -3
Eurostoxx index 341.85 -1.49
Oil (WTI) 49.18 1.22
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.43%

 

Stocks are flattish on no real news. Bonds and MBS are down small.

 

No progress was made over the weekend with respect to re-opening the government. Trump mentioned the possibility of declaring a national emergency in order to obtain funding for the wall without Congressional approval.

 

The drop in rates over the past month has caused an increase in activity in what is typically a dead part of the year. Falling interest rates have lured some buyers back into the market who are looking to take advantage of the decline before they move up again. FTN Financial estimates that if we get another 20 basis point drop in the 30 year fixed rate mortgage, 300 billion conforming loans will become in the money and refinanceable. With the Fed Funds futures predicting the next Fed move will be a rate cut, that is in the realm of possibility.

 

Friday’s jobs report showed an increase of 300k jobs, yet the unemployment rate rose from 3.7% to 3.9%. Does that make sense? It does if you get deep in the weeds on how the BLS calculates these numbers.

 

New York State is legendary for how long a delinquent borrower can live in their house without paying the mortgage. Some have been there for almost a decade.

Morning Report: Strong wage growth in December

Vital Statistics:

 

Last Change
S&P futures 2480 32.75
Eurostoxx index 338.85 4.35
Oil (WTI) 48.05 0.95
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.43%

 

Stocks are higher on no real news. Bonds and MBS are down.

 

Jobs report data dump:

  • Nonfarm payrolls up 312k, street expectation 177k
  • Average hourly earnings up 0.4% MOM / 3.2% YOY, street expectation 0.3% / 3.1%
  • Labor force participation rate 63.1%, November 62.9%
  • Unemployment rate 3.9%, street expectation 3.7%

Overall a strong report. The uptick in the unemployment rate was a surprise, but is still below 4% and the labor force increased by quite a bit. Wages are increasing smartly, rising 3.2%. Those in the press (and DC) hoping for recessionary data will be disappointed with this report.

 

Yesterday, we touched 2.57% on the 10 year bond yield. If you were hoping to see that reflected in mortgage rates, you were probably disappointed. MBS are lagging the move in Treasuries (as usual).

 

The action in the Fed funds futures is truly astounding. There has been a complete sea-change in market perception over the past month. Look at the January 2020 futures (a year from now). Implied probability of another hike in 2019? Zero. Chance of a rate cut? Better than 50/50. Note the implied probabilities a month ago versus today. The market is saying the Fed overshot.

 

fed fund futures dec 2019

 

Compare that to the dot plot from the December meeting which suggests another 50 basis points of hikes:

 

dot plot

 

This is an astounding change in sentiment in just a month. It is certainly possible that the Fed Funds futures have it wrong, but it is clear the market and the Fed aren’t seeing the future even remotely the same.

 

Chinese demand is collapsing, as evidenced by falling consumption tax receipts. People have known that China has a real estate bubble and a shaky banking system for a while, but bubbles generally go on for longer than anyone ever expects. With the Chinese pulling out of the hot US markets, we are seeing a decline in places like Manhattan, where the median apartment price fell below $1 million for the first time in 3 years. There is a 16 month supply of luxury apartments in Manhattan, compared to an overall 4.5 month supply of existing homes for sale in the US. 6.5 month’s worth is generally considered a balanced market. The same thing is happening in the hot West Coast markets.

 

Kathy Kraninger, the new head of the CFPB sent an email to staffers saying that the agency will “continue to vigorously enforce the law,” but keep in mind “costs and benefits” and “maintain an open mind, without presumption of guilt.” So, she sounds like a continuation of the Mick Mulvaney approach and not a return to the Cordray “regulation by enforcement” model.

 

Mr Cooper bought IBM’s $48 billion servicing portfolio.

Morning Report: Apple’s guidance fuels more global growth concerns

Vital Statistics:

 

Last Change
S&P futures 2474.5 -35.25
Eurostoxx index 335 -2.14
Oil (WTI) 46.64 0.1
10 year government bond yield 2.64%
30 year fixed rate mortgage 4.43%

 

Stocks are lower this morning after Apple cut guidance. Bonds and MBS are up.

 

Apple cut its profit forecast last night after the close, which added fuel to the “risk off” trade. Declining iPhone sales in China were the issue, which is adding to the slowing global growth story. Tesla also cut its forecast, so some of the darlings of the 2018 stock market are beginning 2019 in the hole. The 10 year bond yield is at 2.64% the lowest level in almost a year.

 

The economy added 271,000 jobs in December, according to the latest ADP jobs report. This is the strongest reading over the past year, and indicates that 2018 finished on a strong note, despite the turmoil in the markets. This print is also well above the Street estimate for payrolls (177k) in tomorrow’s jobs report.

 

ADP report

 

Speaking of labor data, initial jobless claims came in at 231k last week. This is a touch higher than the previous numbers we have been seeing, but there probably is some seasonal noise in the number. Challenger and Gray noted 43,884 job cuts in December, and said that total job cuts in 2018 were 29% higher than 2017, largely driven by retail bankruptcies.

 

Mortgage applications were down about 10% last week as purchases fell 12% and refis fell 8%. The number includes an adjustment for the Christmas holiday, so there probably is some noise baked in, however it shows that (so far) mortgage applications aren’t really reacting much to the drop in rates. Again, this is the seasonally slow period so it is hard to read too much into it. The spring selling season begins in about a month.

 

Realtor.com sees continued tough sledding for the luxury end of the market, as excess supply, higher rates and tax changes all contribute to weakness. FWIW, the luxury end of the market had been outperforming for years, and supply has finally caught up with demand.

Morning Report: Markets start new year on a lower note

Vital Statistics:

 

Last Change
S&P futures 2470.5 -35.25
Eurostoxx index 334.98 -2.61
Oil (WTI) 45.01 -0.4
10 year government bond yield 2.66%
30 year fixed rate mortgage 4.60%

 

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

 

The global economy is slowing down, and we are seeing the effects in the “risk off” trade, which is lower stock prices and lower interest rates. The 10 year in the US is now comfortably below 2.7%, and the German Bund is at a multi-year low. While overseas events don’t necessarily drive the US markets, they aren’t immune either, and that is partially what is driving the US bond yield lower, along with lower commodity prices.

 

The Atlanta Fed is forecasting 2.7% growth for Q4, and many strategists anticipate that Q1 will be in the low 2s. Now that Fed Policy is considered neutral, it would be hard to continue to hike rates as long as PCE inflation remains stuck where it has been for the past decade.

 

Now that the holidays are over, the focus shifts to the government shutdown and what to do about it. With a new Congress coming in, compromise seems more difficult than before, and both sides are still dug in on the issue of the wall. Democrats have prepared bills that keep the government open until the end of the fiscal year, but doesn’t include anything for a wall. That is a non-starter for Trump and therefore won’t even be considered in the Senate. The deal that is waiting to be struck is something along the line of Dreamer legislation for a wall.