Morning Report: Durable Goods Orders increase

Vital Statistics;

Last Change
S&P futures 2836.5 -4.75
Eurostoxx index 388.69 1.55
Oil (WTI) 69.2 -0.1
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.62%

Stocks are lower after fAANG leader Facebook reported a slowdown in revenues. The stock is under severe pressure this morning, having traded down 24% last night. Bonds and MBS are flat.

As expected, the ECB kept rates unchanged and reiterated their plan to end QE this year. German Bunds are down in Europe, which is pulling US rates higher as well.

Durable goods orders rose 1%, which was lower than expected. Capital Goods orders rose 0.6%, which is better than expected. May numbers were revised upward as well. Capital Goods Orders are a proxy for business capital expenditures and it looks like we are breaching the $68 billion level where we have historically stalled out.

capital goods spending

Initial Jobless Claims rose from a 48 year low to 217,000.

The US and the EU have come to an agreement on trade, where the Europeans will import more soybeans and LNG in exchange for an easing in auto tariffs. Euro automakers are up big this morning. They still have to come to an agreement on steel and aluminum tariffs however. Still it is good news for the markets and takes some of the pressure off.

PulteGroup reported strong earnings that beat consensus estimates. Revenues increased 25% and we saw margin expansion. New orders were only up 3%, however. Despite their strong growth, Pulte sold some land and bought back a lot of stock. Given the deceleration in new orders, it raises the question if they are sensing that the market is slowing down a little. With affordable land hard to come by, selling inventory and buying back stock in lieu of investing more in the business is a cautionary sign.

Maxine Waters (who will lead the House Financial Services Committee if Democrats take the House) said that reforming the GSEs will be a priority  Both liberals and conservatives would like to see the government less involved in residential real estate finance, and there is broad agreement on the model they would like to see. The problem is that there doesn’t appear to be the demand from private capital to pick up the slack, at least not yet. The private label securitization market is still a shadow of its former self and there are many governance issues that need to be solved before we see the buy side increase their appetite.

The FHFA announced that it will not make a decision about updating the credit scoring model and instead will continue to come up with new rules. Consumer advocates have complained that FICO scores are preventing some credit-worthy borrowers from accessing mortgages. Separately, Jeb Hensarling sounded like he is being considered to replace Mel Watt.

New rules intended to prevent the serial refinancing of VA IRRRLs are creating problems for some VA loans that were originated prior to the law change. These loans are not eligible for Ginnie Mae multi-issuer pools, which effectively “orphans” them. As a result, these loans are going to be illiquid and will probably trade at scratch and dent levels, exposing some originators to big losses.

Morning Report: New Home Sales fall

Vital Statistics:

Last Change
S&P futures 2816 -4
Eurostoxx index 387.12 -1.06
Oil (WTI) 68.52 0
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.61%

Stocks are lower this morning after lousy earnings out of the automakers. Bonds and MBS are flat.

Donald Trump tweeted contradictory statements about trade yesterday, both extolling the virtues of tariffs and also telling Europe that he is ready to end all tariffs if they are. He is also planning to use taxpayer money to help offset the negative effects of Chinese retaliatory tariffs on American farmers. This is New Deal type stuff and I have to imagine that Congress is contemplating legislation to take control of tariffs back from the Executive Branch. When tariffs were going down overall worldwide, it may have made sense to allow the President to lower them without involving the legislative branch, but the unintended consequence was that it allows the President to conduct a trade war unilaterally.

New Home Sales fell 5% on a MOM basis, but were up 2% on a YOY basis to a seasonally-adjusted annual level of 631,000. The Street was looking for something around 680,000. New Home Sales is a notoriously volatile estimate so that number could be revised upward next month. For sale inventory came in at 301,000 which represents a 5.7 month supply.

Mortgage Applications fell 0.2% last week as purchases fell 1% and refis rose 1%.

Flagstar reported earnings yesterday. EPS and revenues rose, however there are some acquisition-related effects happening (not Stearns though). Mortgage origination volume fell by 1.5% and gain on sale fell by 6 basis points. Flagstar appears to be taking share, at least judging by those numbers. Most other banks are reporting sizeable volume drops.

With home prices back above peak bubble levels, the question of affordability invariably comes up. CoreLogic crunched the numbers and it turns out that if you adjust for inflation, the median mortgage payment (P&I) on the median house is much lower than the peak years. This is being driven by the drop in rates. Of the top 10 MSAs, only San Francisco and Denver were higher than the peak. Compared to pre-bubble years (2002), they are higher.

Corelogic median payment

Redfin notes that some of the least affordable MSAs are starting to see an increase in inventory. Homes for sale rose 35% in Portland, 12% in San Jose, and 24% in Seattle. Whether that inventory buildup remains enough to slow the double-digit home price appreciation in those markets remains to be seen. We are heading into the seasonally slow period, and as a general rule home prices decline in Fall and Winter. Overall, home prices rose 5.7% which is the smallest increase since late 2016. Inventory levels still declined on a YOY basis.

Chinese investors were net sellers of US commercial property in the second quarter for the first time in a decade. Pressure from Beijing is the catalyst, although China has a real estate bubble of their own to deal with. Chinese money was also behind some of the activity in the big West Coast MSAs, and it will be interesting to see if that dumps some supply on the market to balance it out.

Morning Report: Construction employment increases

Vital Statistics:

Last Change
S&P futures 2820.75 8.75
Eurostoxx index 388.15 3.27
Oil (WTI) 68.28 0.39
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher this morning after China instituted measures to stimulate the economy. Bonds and MBS are flat.

Bonds sold off hard (yields rose) in response to news out of Japan that their central bank would adjust their interest rate target for the 10 year bond. The Japanese Central bank targets 0% for the yield on their 10 year, and some market participants believe it would be about 30 basis points if it was allowed to float freely. Japanese yields rose the most in 2 years, dragging Euro yields and US yields with them. Remember this whenever you read these articles in the press about the slope of the yield curve and the forecast for a recession. The yield curve is so manipulated by central banks globally that it is hard to draw any conclusions from prices.

Manufacturing activity increased in July, according the Markit Flash PMI, but we are seeing price pressures – in fact pricing pressures were the highest on record (going back to 2009). Input prices (fuel, staff and metals) drove the increase, although the root cause is mainly tariff-driven. Meanwhile, the Richmond Fed Manufacturing Survey was flat but solidly expansionary.

Foreclosure starts fell to 43,500 in June, which is the lowest number in 17 years. Active foreclosures fell below 300,000 for the first time in 12 years. Total delinquencies edged up, but are down on a YOY basis. The foreclosure crisis is about wrapped up, although the judicial states (especially NY and NJ) still have inventory to clear.

House prices rose 0.2% MOM and 6.4% YOY according to the FHFA House Price Index. Prices are still rising at an unsustainable pace in the West and Mountain regions, although the West Coast is decelerating. The Middle Atlantic (which includes NY and NJ) is bringing up the rear.

FHFA regional

The West and the South lead the country in job gains and increases in construction employment. The states where construction employment is increasing the fastest? AZ and MI. AZ fits in with the rest of its neighbors, while MI stands out compared to neighbors like OH and IN. There are a few states decreasing construction employment – OK, SC, and NJ.

construction employment map

Morning Report: Existing home sales fall, financial stress increases in Europe

Vital Statistics:

Last Change
S&P futures 2798.25 -2
Eurostoxx index 384.88 -0.74
Oil (WTI) 68.98 0.72
10 Year Government Bond Yield 2.89%
30 Year fixed rate mortgage 4.51%

Stocks are flattish this morning as earnings continue to come in. Bond and MBS are down.

This should generally be a quiet week with regards to market-moving data, although we will get the first estimate of Q2 GDP on Friday. Aside from that, we do get some real estate data with existing home sales today and the FHFA House Price Index tomorrow.

Existing home sales fell 0.6% in June, according to NAR. They are down 2.2% on a YOY basis. Blame low inventory. Lawrence Yun, NAR chief economist, says closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said. “The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Other stats from the report:

  • median home price 276,900 (up 5.2%)
  • Inventory 1.95 MM homes (4.3 month’s worth)
  • Days on market 26 days (down from 28 last year)
  • First time buyers 31% of sales
  • All-cash transactions 22% (up from 18% last year)
  • Sales rose in the Northeast and Midwest, fell in the South and West

Manufacturing activity picked up in June, according to the Chicago Fed National Activity Index. May’s abrupt downturn appears to have been a spurious data point, and not an indication of a change in trend. Employment and production-related indicators drove the increase in the index. So far, we aren’t seeing trade issues reflected in the production indices, however there is the possibility that manufacturers are stockpiling inventory and accelerating some production ahead of sanctions which is masking the effect. That said, we would expect to see a drop in the employment indicators, which isn’t happening.

Liquidity in the bond market is starting to dry up, at least if you measure by bid/ask spreads. Dodd-Frank rules were intended to curb proprietary trading but not market-making. Markets continued to function after the law was implemented, which gave some comfort to regulators that they were on the right track. Now that QE is ending, some of the market structure problems are getting exposed. Banks are less involved in market making and we are seeing bid / ask spreads increase in many markets. This is so far largely a European problem, however an anecdote from one fund who had trouble unwinding an Italian bond position is worrisome. They had a position in Italian sovereign debt and had trouble getting bids larger than $10 million, which is a miniscule trade – especially for G7 sovereign debt. So far it hasn’t had a huge effect in the US, but this is something to watch, especially the next time we get a credit crunch. Investors may find entire swaths of the bond market go no-bid, which will include the ETFs linked to these bonds. Tight bid-ask spreads and regulations might be good news for investors and taxpayers in normal times, but they aren’t free.

Despite the issues in the Euro bond markets, stress in the financial system did decrease slightly last month, according to the St. Louis Fed. Historically we are at very low levels, however the Fed is still employing extraordinary measures to support the market, so the past isn’t really all that comparable.

financial stress index

Interesting concept for real estate investors: Now there are a couple of online platforms that allow people to bid on single-family rental properties on line. Not sure what the fee is to transact, but the company also helps connect the investor with a mortgage lender and a property manager.

CFPB nominee Kathy Kraninger took a lot of heat from Democrats on Friday regarding her role in the Trump Administration’s border family separation policies. Not sure how much OMB (her current role) has in DOJ and DHS policy making but Democrats spent a lot of time on the issue. There is a lot of concern that she doesn’t have the financial regulatory background to run the agency, however her nomination does allow the Administration to reset the clock on Mulvaney’s tenure and he gets to stay if she doesn’t get confirmed by the Senate. Either way, the CFPB is getting reined in.

Morning Report: Donald Trump, The Fed, and housing affordability

Vital Statistics:

Last Change
S&P futures 2801 -3.75
Eurostoxx index 385.19 -1
Oil (WTI) 69.83 0.37
10 Year Government Bond Yield 2.85%
30 Year fixed rate mortgage 4.50%

Stocks are lower after the Trump Administration threatened more tariffs on Chinese goods. Bonds and MBS are down.

Donald Trump jawboned the Fed a little yesterday, saying he was “not thrilled” with interest rate hikes.  “I am not happy about it. But at the same time I’m letting them (the Fed) do what they feel is best.” For all the histrionics in the business press, this was pretty mild stuff. As a general rule, presidents respect the independence of the Federal Reserve and don’t criticize policy all that much. Obama never criticized the Fed’s monetary policy but of course he never had to deal with a tightening, so there wasn’t much to complain about. Alan Greenspan was considered “The Maestro” by the business press, so both Clinton and GWB gave him a wide berth. That said, Richard Nixon criticized the Fed, and Jimmy Carter installed a political hack (G William Miller – who was a complete disaster) to run the bank, so it isn’t like political meddling is unheard of. FWIW, the correlation between rising bond yields and criticism of the Fed is about 1, so expect more as we move from a secular bull market in bonds to a secular bear market.

Trump has doubled down by tweeting about the Fed and the dollar this morning: “China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really? Farmers have been on a downward trend for 15 years. The price of soybeans has fallen 50% since 5 years before the Election. A big reason is bad (terrible) Trade Deals with other countries. They put on massive Tariffs and Barriers. Canada charges 275% on Dairy. Farmers will WIN!”

These comments are smacking the dollar this morning, which is pushing up the 10 year yield. The comments have made no changed to the Fed funds futures, which are still predicting an 85% of a 25 basis point hike in September and a 58% chance of another hike in December.

Note Russia is dumping Treasuries. Most of its position has been liquidated. This was in response to sanctions imposed earlier this year.

Housing affordability has been falling as rates and prices rise. The most affordable places in the US are the Northeast and the Midwest. The Midwest is the most affordable despite having the highest regional mortgage rates. There is a surprising amount of variation between mortgage rates in different parts of the country – a range of 25 basis points. The Northeast has high prices (but low rates) and the Midwest has low prices (but high rates). Affordability is back to 2009 levels.

mortgage rates regional

At least one commentator thinks housing has peaked for this cycle. As a general rule, housing construction is an early cycle phenomenon – in other words it generally leads the economy out of a recession. Since this expansion is very long in the tooth, it would follow that housing might have peaked. The problem with that theory is that housing didn’t show up in the early recovery – it kept falling well after the recession ended. FWIW, between the shortage we currently have and the fact that building margins are still healthy indicates housing has room to run.

Morning Report; LEI shows strong growth ahead

Vital Statistics:

Last Change
S&P futures 2808 -8.25
Eurostoxx index 386.86 -18
Oil (WTI) 68.23 -0.53
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.51%

Stocks are lower as earnings continue to come in. Bonds and MBS are down.

Initial Jobless Claims fell to 207,000 last week, which is the lowest level since 1969. Despite the tightness of the labor market, wage growth is tough to come by.

I have discussed at length the disconnect between the Northeast and the rest of the country when it comes to the real estate market. It turns out that not only does the real estate market lag, so does mortgage banking. Last year was a rough year for mortgage banking, and the typical profit per loan was about 31 basis points. That varied by region, with the Midwest in the lead at 39 basis points while the Northeast lagged at 8.

profits by region

The Fed’s Beige Book characterized the economy as strong, and said that labor shortages are beginning to impede growth. Engineers, skilled construction workers, truck drivers, and IT professionals are in short supply. So far increasing input prices are not translating into higher inflation – corporate margins are taking the hit. Residential housing continues to improve ever so slowly, and commercial real estate is flat. Overall, the picture points to a strong economy, with room to run. The lack of pricing pressures gives the Fed the leeway to go slow as they get off the zero bound.

The Conference Board echoed this assessment, with the Index of Leading Economic Indicators increasing 0.5% in June. The LEI is still rising faster than the CEI (basically the future indicators are showing that growth should accelerate) which means we have no sign of a slowdown.

Leading economic indicators

Kathy Kraninger, the Administration’s nominee to run the CFPB, will appear before the Senate Banking Committee today. Little is known about her views on financial regulation. Congressional aides have said that she will have enough support to pass the Committee on a party-line vote. In her prepared remarks, she said she will continue Mick Mulvaney’s work of balancing the need for consumer protection with the need to treat the financial sector fairly. Suffice it to say, having come from OBM, she doesn’t really fit the type of bureaucrat who would normally be tapped to run the CFPB, and that may be the point. If her nomination bogs down, Mick Mulvaney can continue to run the agency.

Interesting stat: 70% of the Millennials who own a home have buyer’s remorse. Many used their retirement savings to fund the down payment, which is generally a bad move. Many first time home buyers completely underestimate closing costs as well. Others underestimated the costs of upkeep, which is around $16,000 a year. I suspect many of these lessons are learned by every generation who buys their first home.

The CoreLogic Mortgage Fraud Risk Index rose 12% in the second quarter compared to a year ago. An increase in borrowers taking on loans for multiple properties (i.e more professional investors) appeared to drive the increase.

Morning Report: median earnings rising slower than average earnings

Vital Statistics:

Last Change
S&P futures 2808 -2.5
Eurostoxx index 386.74 1.76
Oil (WTI) 67.62 -0.46
10 Year Government Bond Yield 2.85%
30 Year fixed rate mortgage 4.51%

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

Mortgage Applications fell 2.5% last week as purchases fell 5% and refis rose 2%. The refi share rose to 36.5%.

Housing starts hit their lowest level since September last year, falling to 1.17 million annualized. This is a huge drop from the strong May print of 1.33 million. The Midwest and the South explain the declines, which was both in single family and multi. June weather was generally good, so that isn’t the explanation. Building Permits fell as well, although not as dramatically. They came in at 1.27 million. The Midwest accounted for most of the decline in permits. Housing starts tend to be volatile, but the moving average is turning down, which is worrisome.

Despite the drop in starts, builder confidence remains strong, at least according to the NAHB. The index was flat at 68, which is an elevated number. Pricing remains strong, but the supply is not there. Rising material costs are becoming an issue as lumber tariffs raise costs. So far builders are able to pass these costs on, but there is a limit, especially if wage inflation remains below house price inflation. The median house price to median income ratio is getting back to extreme levels, and interest rates are not going to come to the rescue this time around.

Jerome Powell begins his second day of testimony on Capitol Hill. There was nothing market-moving yesterday, so expect more of the same. Yesterday, his message was that the US economy has clear sailing ahead with strong growth and moderate inflation. With regard to the potential trade war, Powell downplayed the risks to the economy and said there will be a benefit if it turns out that Trump’s actions lower tariffs overall in the global economy. The US generally has much lower tariffs than its trading partners, and Trump has already made the offer to eliminate all US tariffs if our trading partners eliminate theirs. Separately, Powell said that it would ultimately be better for the US if the GSEs were off the government balance sheet. That is pretty much a universal opinion in DC these days, as the US taxpayer bears the credit risk of the majority of the mortgage market.

Median weekly earnings have not kept pace with the CPI lately, which means workers are losing ground, at least according to the latest survey out of the BLS. It shows that the median weekly wage rose 2% in the second quarter versus an increase in the CPI of 2.7%. Interestingly, the average hourly earnings increase during Q2 was 2.64% in April, 2.74% in May and 2.74% in June. It seems strange that the difference between average wage inflation and median wage inflation would be so stark, which would imply that wages are mainly rising at the high end, not the lower end. Note the other BLS measure of wage inflation, the employment cost index, shows comp growth of 2.9%, which takes into account benefits. For the most part, average hourly earnings have been rising faster than the core PCE index:

AHE vs PCE

New York, Connecticut, New Jersey, and Maryland sued the government yesterday over the state and local tax deduction cap. The lawsuit if probably more for show than anything and doesn’t seem to have much chance of success. Some of the states are looking at workarounds, allowing people to “donate” to charitable funds which go to funding state and local services. Charitable deductions are still deductible. At the end of the day, the biggest issue to states like NY and NJ are the property taxes. NY and NJ have some of the highest property taxes in the country, where people routinely pay $20 – $30k or more. That explains at least partially why you can’t find buyers for luxury properties in the Northeast.

The ECB concludes that QE may have helped the rich, but it helped the poor more. While QE did boost asset prices (housing, bonds, stocks etc) it also boosted growth, which more than offset the increase in asset prices.  “Low short rates do hurt savers via a direct effect, that is a reduction in income on their assets . . . however [low rates] also benefit savers, like all other households, via an indirect effect — that is, the reduction in their unemployment rate and the increase in the labour income,” the paper, called “Monetary policy and household inequality”, said. “The indirect effect dominates . . . The paper also finds that [QE] reduced inequality, mainly through a reduction of the unemployment rate of poorer households.”

Note that this contradicts the observation between median and average earnings. If QE was actually decreasing inequality, you should see median earnings growth close to average earning growth or even slightly higher. Not way below.