Morning Report: The Fed maintains rates

Vital Statistics:

 

Last Change
S&P futures 2928 4
Eurostoxx index 390.26 -0.72
Oil (WTI) 62.94 -0.66
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are up this morning after the Fed maintained rates. Bonds and MBS are down.

 

As expected, the Fed maintained the Fed Funds rate at current levels, although they did tweak the rate on overnight reserves. During the press conference, Jerome Powell pushed back against the idea that the Fed’s next move will be a cut. Rates initially fell down the 2.46% level, but overnight retraced that move and we are back at levels we saw before the meeting. The Fed was surprised by the strength in both the job market and the overall economy and the fact that inflation remains lower than they would like to see.

 

At the press conference, a number of journalists asked about the market’s forecast for another rate cut. Powell stressed that the Committee’s view is that the current level of interest rates is “appropriate” and that core inflation was running close to the Fed’s target of 2% for most of 2018. The Fed Funds futures trimmed their estimates for a 2019 rate cut, from a 2/3 chance to more 50/50.  MBS spreads are slightly wider (meaning mortgage rates are a touch higher relative to the 10 year than they were yesterday).

 

Fed fund futures dec 2019

 

Construction spending fell 0.9% MOM and 0.8% YOY in March, according to the Census Bureau. Residential construction drove the decrease, falling 1.8% MOM and 8.4% YOY. Ex-residential construction, spending was solid, but we could see a downward revision in Q1 GDP estimates due to the resi numbers.

 

Productivity rose 3.6% in the first quarter as unit labor costs fell 0.9%. Q4’s productivity number was revised upward to 1.3%. Not sure what drove the decrease in unit labor costs – wages have been rising – but the problems with measuring productivity in this economy have been noted before. Regardless, the drop in labor costs and higher output mean inflation should remain below the Fed’s 2% target.

 

Initial jobless claims rose to 230k last week.

 

Lumber prices have been falling after spiking at record levels last year. Given that this is the time of year we should see more demand, this is surprising. The driver has been weather and continued weakness in homebuilding. Lower commodity prices should increase the margins for homebuilders and hopefully incent more homebuilding. Note that the S&P homebuilder ETF is up 25% this year.

 

What would happen to mortgage rates if we release Fannie and Freddie from conservatorship? Currently, Fannie and Freddie debt is treated as sovereign debt by investors, in other words, they believe the government will stand behind the debt if the GSEs run into trouble. This lowers their cost of funds, which gets passed on to borrowers in lower mortgage rates. If Fannie and Freddie are released from conservatorship, and the government no longer backs their debt, it will increase mortgage rates overall (their debt will definitely NOT be AAA), and will probably impact their ability to do perform the affordable housing part of their mandate. It is important to remember the reason why Fannie and Freddie were privatized in the first place – it was done in the 1970s to paper over the debt being issued to fund the Vietnam war. In a way, the government was using off-balance sheet financing, similar to the special purpose vehicles banks were using in the mid 00s. If there is more than 20% outside ownership in the subsidiary, then the parent is no longer required to consolidate the subsidiary’s debt on its balance sheet. In other words, they don’t have to claim that debt on their books, even if they are guaranteeing it. This accounting sleight of hand lowered the US debt numbers in the 1970s and it was hoped that this would help fight rising inflation (obviously that did not work). It may turn out that there would not be a bid for new Fannie Mae and Freddie Mac stock without a government credit wrapper, which means that hopes for a fully privatized Fannie and Freddie might turn out to be impossible to achieve.

Morning Report: Blowout ADP jobs number

Vital Statistics:

 

Last Change
S&P futures 2945.83 2.3
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.37 -0.27
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.18%

 

Stocks are higher as we await the FOMC decision. Bonds and MBS are up. Markets should be quiet this morning as most of Europe is closed for May Day.

 

Today’s Fed decision is set to be released at 2:00 pm. No changes in policy are expected and it should be a nonevent.

 

Pending Home Sales rose 3.8% in March, according to NAR. Activity increased pretty much everywhere except for the Northeast. Falling mortgage rates have helped boost activity and we are seeing a bit of an improvement in the inventory balance. Pending home sales reached a level of about 5 million, which is the same level as we saw in 2000. We have 50 million more people since then, which means there is a lot of pent-up demand.

 

The ADP jobs report came in at an increase of 275,000 jobs in April. This was well above the Street expectation of 180,000 for Friday’s jobs report. Professional and business services led the charge, and we also saw an increase in construction employment. The service sector added 223,000 jobs, the biggest increase in two years. With the Fed out of the way, 2019 could be better economically than people were thinking. Note that Trump is still jawboning the Fed to cut rates.

 

ADP report

 

Mortgage Applications fell for the fourth straight week, dropping 4.3%. Purchases fell 4% and refis fell 5%. “Mortgage rates were lower last week, with the 30-year fixed rate declining to 4.42 percent, as concerns over global growth, particularly in Germany, outweighed more positive domestic news on first quarter GDP growth and business investment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications to refinance and purchase a home both fell, but purchase activity still remained slightly above year ago levels. The drop in refinances were driven by fewer FHA and VA loan applications, which typically lag the movement of conventional loans.”

 

Freddie Mac bumped up its origination forecast for 2019 by 4% to $1.74 trillion as rates have fallen. They expect the 30 year fixed rate mortgage to be 4.3% at the end of the year, and home price appreciation to moderate to 3.5%.

Morning Report: FOMC begins

Vital Statistics:

 

Last Change
S&P futures 2940 -2.9
Eurostoxx index 390.26 -0.72
Oil (WTI) 64.46 1.2
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.18%

 

Stocks are lower this morning after Google missed earnings last night. Bonds and MBS are down.

 

The FOMC begins its 2 day meeting this morning. The result should be announced tomorrow at 2:00 pm. No changes are expected in policy.

 

The employment cost index rose 0.7% in Q1, driven by a 0.7% increase in wages and a 0.7% increase in benefit costs. On an annualized basis wages and salaries increased 2.9% and benefits increased 2.6%.

 

Home Price Appreciation continues to slow, according to the Case-Shiller Home Price index. The index increased 4% YOY, compared to 4.2% in the previous month. “The pace of increases for home prices continues to slow,” says David M. Blitzer, Managing Director
and Chairman of the Index Committee at S&P Dow Jones Indices. “Homes began their climb in 2012 and accelerated until late 2013 when annual increases reached double digits. Subsequently, increases slowed until now when the National Index is up 4% in the last 12 months. Sales of existing single family homes have recovered since 2010 and reached their peak one year ago in February 2018. Home sales drifted down over the last year except for a one-month pop in February 2019. Sales of new homes, housing starts, and residential investment had similar weak trajectories over the last year. Mortgage
rates are down one-half to three-quarters of a percentage point since late 2018.

 

“The largest year-over-year price increase is 9.7% in Las Vegas; last year, the largest gain was 12.7% in Seattle. Regional patterns are shifting. The three California cities of Los Angeles, San Francisco and San Diego have the three slowest price increases over the last year. Chicago, New York and Cleveland saw only slightly larger prices increases than California. Prices generally rose faster in inland cities than on either the coasts or the Great Lakes. Aside from Las Vegas, Phoenix, and Tampa, which saw the fastest gains, Atlanta, Denver, and Minneapolis all saw prices rise more than 4% — twice the rate of
inflation.”

 

 

Morning Report: Surprisingly strong GDP report

Vital Statistics:

 

Last Change
S&P futures 2939 -3.25
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.11 -0.18
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.23%

 

Stocks are flattish as we end the month of April. Bonds and MBS are flat.

 

We have a decent amount of data this week, along with a Fed meeting. The biggest news will be the jobs report on Friday, although we will get income / spending data and the ISM.

 

Q1 GDP came in at a much higher than expected 3.2% versus the 2.3% growth that was expected. Even better, the inflation rate came in much lower than expected, which should mean the Fed is out of the way. The 10 year bond yield traded below 2.5% for the first time in 2 months, despite having the strongest Q1 growth in 4 years. Note that consumption didn’t drive the increase in growth (it only came in at 1.2%) – the growth was driven by exports  – which at a minimum should end the talking point that Trump’s trade wars are alienating our trading partners.

 

GDP

 

The immediate market reaction was subdued. The 10 year bond yield drifted lower, stocks were flat, and the Fed Funds futures didn’t change all that much – still predicting a 1/3 chance of no moves this year and a 2/3 chance of a rate cut.

 

In terms of the individual components, the trade numbers were affected by both an increase in exports (3.7%) and a drop in imports (-3.7%). Durable goods consumption fell 5.3%, which is probably related. Residential continues to be a persistent weak spot (-2.8%), and a bit of a head-scratcher given the sheer lack of inventory. Increased investment was driven by an increase in intellectual property (8.6%), which offset a decrease in building (-0.8%).

 

Housing’s contribution to GDP has been shrinking since the late 80s. The financial crisis caused it to fall from about 18% to 15%, and in the past decade it has been more or less stuck there. It looks like housing is again beginning to decline as a percent of GDP, and it is now below 15%. If housing can get back to at least normalcy, that should provide a good bump for GDP growth.

 

housing GDP

 

Personal Incomes rose 0.1% in March, which was below expectations. Consumption surprised to the upside. Inflation remains tame, with the headline PCE number up .1% MOM / 1.5% YOY and the core up 0.2% / 1.6% YOY.

 

New FHFA Director Mark Calabria has an ambitious agenda for housing reform, including solving problems with servicing, fixing the QM patch, and eventually releasing the GSEs from conservatorship. He is emphatic that he does not want to see the mortgage market return to the pre-2008 days.

Morning Report: Hamptons Real estate is for sale

Vital Statistics:

 

Last Change
S&P futures 2931.75 0.7
Eurostoxx index 390.26 -0.72
Oil (WTI) 66.21 0.32
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are lower after 3M missed earnings. Bonds and MBS are flat as well. We will get Amazon.com and Ford after the close.

 

Durable Goods orders came in way higher than expected for March – increasing 2.7% versus expectations of 0.8%. Much of this was transportation-related. Ex transports, they rose 0.4%, which still beat the 0.2% forecast. Nondefense capital expenditures rose 1.3%, again better than the 1.2% expectation. We might see some estimates for Q1 GDP get taken up on these numbers.

 

Initial Jobless Claims rose 38k to 230,000. This is the highest print in a while, but it is too early to get a read on whether the labor market is changing. FWIW, organized labor has been scoring some victories lately as worker shortages have given them the upper hand.

 

Homebuilder D.R. Horton disappointed the street with their earnings this morning. Homebuilding revenue increased 8% YOY and homes closed increased 10% in units. Forward guidance was the issue as its revenue forecast came in light despite the sales estimate coming more or less as expected. The stock is down about 4% pre-open.

 

More problems with luxury real estate: a glut of inventory in the Hamptons. There are 869 homes for sale in the tony NYC summer vacation location, which is the highest since at last 2012. This seems to mirror the glut of luxury homes in Fairfield County CT as the market seems to be finally meeting its day of reckoning, which was pushed off in the immediate aftermath of the financial crisis. Most people had the wherewithall to wait out the market, hoping for a recovery that never really came. Now, they are getting impatient and it looks like this sector of the market will finally clear.

 

hamptons

 

Fed pick Steven Moore is in hot water, not for his ideology (though left econ has been piling on), but for calling Cleveland OH and Cincinnati OH “armpits” of America. This is probably a non-controversial opinion to most non-Ohians, but Sherrod Brown (D-OH) thinks this should disqualify him. Note the Washington post is miffed about some humor columns that he wrote in the past too. Herman Cain has withdrawn his application, and it looks like Moore might be on the ropes as well.

Morning Report: New home sales surprise to the upside

Vital Statistics:

 

Last Change
S&P futures 2937.5 -0.5
Eurostoxx index 391.52 0.39
Oil (WTI) 65.92 -0.36
10 year government bond yield 2.54%
30 year fixed rate mortgage 4.34%

 

Stocks are flat as we await earnings from heavyweights like Facebook, Microsoft and Caterpillar. Bonds and MBS are up.

 

New Home Sales surprised to the upside, coming in at 692,000, indicating that lower mortgage rates are helping sales. The most interesting number in the report was the median price of $302,000, which is down 10% from a year ago. This indicates that builders are concentrating on the lower price points, or at least that is where the sales are concentrated. Still, a 10% drop in median home prices is an eye-popping number.

 

new home sales

 

Mortgage applications fell 7% last week as purchases fell 4% and refis fell 11%. Rates were up 2 basis points for the week, however the week included the Good Friday holiday so there might be some noise in there as well. “The 30-year fixed mortgage rate has risen 10 basis points in three weeks, and is now at its highest level in over a month,” said MBA Chief Economist Mike Fratantoni. “Borrowers remain extremely sensitive to rate changes, which is why there has been a 28 percent drop in refinance applications over this three-week period. Purchase activity also declined, but remains almost 3 percent higher than a year ago. Borrowing costs have recently drifted higher because of ebbing geopolitical concerns, as well as signs of strengthening in the U.S. economy, including the recent data pointing to robust retail sales.”

 

The CFPB is becoming a little more creditor-friendly, by giving firms under investigation information about what they did that was wrong. “Consistent with the updated policy, CIDs [civil investigative demands] will provide more information about the potentially applicable provisions of law that may have been violated,” the Bureau said in a news release. “CIDs will also typically specify the business activities subject to the Bureau’s authority. In investigations where determining the extent of the Bureau’s authority over the relevant activity is one of the significant purposes of the investigation, staff may specifically include that issue in the CID in the interests of further transparency.”

 

Flagstar reported a 30% drop in originations in the first quarter, falling from $7.9 million in the first quarter of 2018 to $5.5 million in the first quarter of 2019. On a QOQ basis, originations were down 13% as well. Gain on sale margins rebounded from the fourth quarter, increasing to 72 basis points from 60, although they are down from 77 in the first quarter of last year.

 

The NY Fed asks the question whether tax reform has inhibited home sales. Spoiler alert: it looks like that is the case.

Morning Report: Home price appreciation is slowing

Vital Statistics:

 

Last Change
S&P futures 2910.5 -2
Eurostoxx index 389.7 -0.8
Oil (WTI) 65.66 1.29
10 year government bond yield 2.59%
30 year fixed rate mortgage 4.34%

 

Stocks are flattish this morning as we await earnings from some of the FAANG heavyweights. Bonds and MBS are flat as well.

 

Existing home sales fell 4.9% in March to a seasonally adjusted annualized level of 5.21 million. A decrease was expected since February’s numbers were stronger than expected. On a year-over-year basis, sales are down 5.4%. The median home price rose 3.8% to $254,400, and it looks like home price appreciation is slowing down here as well. Inventory remains the problem, with 1.68 million homes for sale, representing a 3.9 month supply. A balanced market would be closer to 2.6 million homes for sale. In addition, we have a glut at the luxury price points and a shortage at the entry-level price points. Days on market increased YOY to 36 from 30. First time homebuyers represented a third of all transactions. Historically that number has been closer to 40%.

 

Home prices rose 0.3% MOM in February and are up 4.9% YOY, according to the FHFA House Price Index. Note the difference in price appreciation versus the NAR numbers (+4.9% versus +3.8%) – this reflects the fact that the FHFA index excludes jumbos, which is where there real slowdown is being seen, especially in high tax states.  Take a look at the YOY price appreciation comparison regionally and check out the difference between this time last year in home price appreciation on the West Coast.

 

FHFA regional

 

Herman Cain has withdrawn his name from consideration to the Fed. A handful of Republican senators expressed reservations about his nomination, which was probably enough to make his actual confirmation unlikely. The top Democrat in the U.S. Senate, Chuck Schumer, said Cain’s “failure to garner adequate support should not be used as a pathway by Senate Republicans to approve Stephen Moore, who is equally unqualified, and perhaps more political.”

 

The Trump Administration is taking a look at downpayment assistance programs – generally government programs that help borrowers put together their 3.5% down payment for a FHA loan. As you would expect, borrowers who need help scraping together 3.5% are riskier, and indeed the default rates on these mortgages are double those of a traditional FHA mortgage (and FHA DQs are much higher than conventional DQs). HUD promulgated new guidance for downpayment assistance programs last week tightening documentation rules. Ballard Spahr summarizes the new guidance here.