Morning Report: Construction spending disappoints

Vital Statistics:

 

Last Change
S&P futures 3092 -21.25
Oil (WTI) 55.39 -0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.98%

 

Stocks are lower this morning on negative trade talk out of the White House. Bonds and MBS are up, following German Bund yields lower.

 

Home Prices rose 3.5% YOY in October, according to CoreLogic. “Nationally, over the past year, home prices are up 3.5% with the rate of growth accelerating from September into October,” said Frank Martell, president and CEO of CoreLogic. “We expect home prices to rise at least another 5% over the next 12 months. Interestingly, this persistent increase in home prices isn’t deterring older millennials. In fact, 25% of those surveyed anticipate purchasing a home over the next six to eight months.” CoreLogic conducted a survey with RTi Research regarding to consumer-housing sentiment and found that millennials are largely unconcerned about qualifying for a mortgage.

 

Construction spending disappointed in October, falling 0.8% on a MOM basis and rising 1.1% on an annual basis. Residential Construction fell 0.9% on a monthly basis and was up only 0.5% year-over-year. Despite the lousy number, the National Association of Realtors is optimistic that homebuilding will step up in 2020. “This housing cycle is definitely unique in the sense that it’s been a decade and we’re not back to normal in terms of home building,” said Lawrence Yun, NAR’s chief economist. “Many small-time builders are still out of the game. It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity….All the factors that contribute to higher home sales like the job situation are terrific, and of course mortgage rates are critical to buying a home and those are favorable,” Yun said.” Note that construction loans increased 0.8% in the third quarter.

 

The Fed is considering raising its inflation target above its 2% target, according to the Financial Times. The idea (called the “make-up” strategy) would be to temporarily raise the target level if inflation comes in below 2% (the current target). The Fed fears deflation more than inflation, and has been utterly vexed by their inability to push inflation up to their target rate. This would be a signal to the markets that the Fed intends to keep rates lower for longer, although many members are worried about communication issues with the markets.

 

HUD has put out a request for information regarding affordable housing development, specifically which laws, regulations or administrative practices are inhibiting building. “Owning a home is an essential component of the American Dream. It is imperative that we remove regulatory barriers that prevent that dream from becoming a reality,” said HUD Secretary Ben Carson, who is also Chairman of the White House Council on Eliminating Regulatory Barriers to Affordable Housing. “Through this request, communities across the country will have the opportunity to identify roadblocks to affordable housing and work with State, Federal, and local leaders to remove them.”

 

 

Morning Report: Jerome Powell explains the Fed’s thinking

Vital Statistics:

 

Last Change
S&P futures 2933.25 11.25
Oil (WTI) 58.88 1.05
10 year government bond yield 2.02%
30 year fixed rate mortgage 4.02%

 

Stocks are higher on positive news on the the trade front. Bonds and MBS are flat.

 

Durable goods orders came in lower than expected in May, and April was revised downward. The headline number fell 1.3% and the prior month was revised downward from -2.1% to -2.8%. Ex transportation, durable goods orders rose 0.3%. Capital Goods rose 0.4%, which is one bright spot in the report.

 

Mortgage applications rose 1.3% last week as purchases fell about a percent but refinances rose 3.2%. The 30 year fixed rate mortgage fell 8 basis points to 4.06%.

 

Jerome Powell spoke in NY yesterday and addressed some of the issues the Fed is dealing with.

Let me turn now from the longer-term issues that are the focus of the review to the nearer-term outlook for the economy and for monetary policy. So far this year, the economy has performed reasonably well. Solid fundamentals are supporting continued growth and strong job creation, keeping the unemployment rate near historic lows. Although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market. Along with this favorable picture, we have been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. When the FOMC met at the start of May, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate.

Since then, the picture has changed. The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy. Our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. For example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year.

Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows. Inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year. However, the risks to this favorable baseline outlook appear to have grown.

Last week, my FOMC colleagues and I held our regular meeting to assess the stance of monetary policy. We did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. Since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy change. We now state that the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation. Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.

The Fed Funds futures turned slightly less accomodative after the speech. They are now looking at something like a 70% chance of a rate cut at the July meeting, and the markets are coalescing around 75 basis points in cuts this year.

fed funds futures

 

The Trump Administration established a White House Council on Eliminating Barriers to Affordable Housing which will focus on removing burdensome regulatory barriers. The council will work to identify federal, state, and local barriers to affordable housing, and will take action to remove federal and administrative regulatory burdens. Note there is no mention of taking action to remove “state and local regulatory burdens,” which is often zoning restrictions. The Obama HUD aggressively sued local jurisdictions to force them to change their zoning laws from single family only to multi-family, but it looks like the Trump Administration won’t be going down that route.

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.

 

lumber

 

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: Fed Decision Day

Vital statistics:

Last Change
S&P futures 2924.75 3.5
Eurostoxx index 384.06 0.14
Oil (WTI) 71.82 -0.45
10 Year Government Bond Yield 3.08%
30 Year fixed rate mortgage 4.79%

Stocks are up small as we head into the FOMC decision. Bonds and MBS are flat.

The FOMC decision will be announced at 2:00 pm EST today. Be careful locking around that time. Given how much rates have increased ahead of the decision, the bond market is probably set up for a rally if the statement and / or supporting materials contain a dovish surprise. TBAs (and therefore mortgage rates) will be slower to respond to a sharp move in rates however and take a few days to fully react.

One thing to look for: whether the Fed considers its policy stance to be “accomodative.” There has been debate at the Fed whether that term is outdated. FWIW, sub 3% Fed Funds and a continuing bond purchase program sounds pretty accomodative to me, at least compared to Federal Reserve history.

Mortgage applications rose 3% last week. Both purchases and refis rose by the same amount. This is in spite of a big jump in rates, with the 30 year fixed conforming rate pushing 5%. 5/1 ARMS hit 4.22%, the highest since the survey began.

New home sales increased to an annualized pace of 629k in August, according to Census. This is an increase of 3.5% MOM and 12.7% YOY.  Inventory sits at 6.1 months’ worth.

Housing demand was unchanged in August, according to Redfin. You can see the effect rising rates and home prices have had on demand. Unfortunately the series doesn’t go back far enough to give much of a historical perspective, but it certainly indicates that the last year has had a marked negative effect on buyers. What will change that? Wage inflation.

housing demand

Mark Zandi looks at what expanding the housing trust fund might do to alleviate the supply / demand imbalance. He notes that most of the post-bubble building was at the high end price points (urban apartments and McMansions especially), and that entry-level / affordable housing has been neglected. Whether that is a case of NIMBY-ism or higher regulatory costs is open for debate.  Zandi estimates that increasing the housing trust fund could add an additional 200k units next year.

Morning Report: Fed hikes rates as expected

Vital Statistics:

Last Change
S&P futures 2786 8
Eurostoxx index 389.9 1.7
Oil (WTI) 67.03 0.39
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.61%

Stocks are higher after the FOMC raised interest rates a quarter of a point. Bonds and MBS are up.

As expected, the Fed raised the Fed funds rate by 25 basis points to a range of 1.75% – 2%. The economy is clicking on all cylinders, with unemployment down, consumer spending up and business investment increasing. They took up their estimates for 2018 GDP growth to 2.8% from 2.7%, took up core PCE inflation to 2% from 1.9% and took down their unemployment rate forecast to 3.6% from 3.8%. The dot plot was increased slightly and the Fed funds futures shifted to a 60/40 probability of 2 more hikes this year.

Bonds initially sold off on the announcement, touching 3% at one point, but have since rallied back. The ECB also announced that it will stop buying bonds in September, depending on the data. Bunds are rallying on that statement and the 10 year could be rallying on the relative value trade. The Fed noted that longer-term inflation expectations have not changed, and they didn’t change their outlook for inflation from 2019 onward. One other thing of note: the Fed is going to start having press conferences after every meeting in order to disabuse people of the idea that the Fed can only hike in December, March, June and September.

Jun-Mar dot plot comparison

In other economic news, initial jobless claims fell to 218,000 last week, while retail came in way higher than expected, rising 0.8% for the headline number and 0.5% for the control group, which excludes gasoline, autos and building materials. Restaurants and apparel were the big gainers, increasing 1.3% and 1.5%. Consumer discretionary spending is back, as the FOMC statement indicated.  Finally, import and export prices were higher than expected, with increasing energy prices pushing up imports and higher ag prices increasing exports.

Outgoing Republican Congressman Darrell Issa is supposedly one of the finalists who will be appointed as the head of the CFPB. The Administration has said that it will abide by its June 22 deadline to appoint a permanent head of the CFPB. Acting Chairman Mick Mulvaney is not involved in the selection process. Mark McWatters, a former banking regulator is another top choice, and probably makes more sense than Issa.

The May real estate market was the strongest on record, according to Redfin. Prices rose 6.3% and the average home was on market 34 days. In Denver, the time on market was under a week. Over a quarter of the homes sold in May went over their listing price. San Jose saw a price increase of 27% YOY to a median home price of over $1.2 million.

Note that rents rose by 3.6%, which is tilting the rent-vs-buy decision a little. Interestingly, Sam Zell, a famous real estate financier, thinks the multifam market is topping and should become less attractive going forward.

Affordable home advocates are touting a statistic that shows a minimum wage worker cannot afford a 2 bedroom apartment anywhere in the country. That is an awfully high bar – heck entry level investment bankers can’t afford a 2 bedroom apartment either. That is why young adults usually have roommates. I get there is a shortage of affordable housing, but that is a completely disingenuous statistic. Sam Zell is probably correct, however there could in fact be a glut of luxury apartments and a shortage of affordable ones.