Beige Book – The Daily Tearsheet

Morning Report: Foreign investment in US real estate falls

Vital Statistics:

	Last	Change
S&P futures	2984	-0.5
Oil (WTI)	57.04	0.24
10 year government bond yield		2.07%
30 year fixed rate mortgage		4.09%

Stocks are flattish after erstwhile market darling Netflix stunk up the joint with lousy earnings. Bonds and MBS are up small.

Initial Jobless Claims were flat at around 219k last week.

Negotiations continue over spending and the debt ceiling, which will probably be hit in September. Treasury Secretary Steve Mnuchin cited “progress” in negotiations, and there is general agreement on the “top line” which includes spending increases from the previous year. That said, Republicans want some spending cuts elsewhere to offset the increase, and Democrats are against cuts. We’ll see if this goes to the mat (and another shutdown), but in the end, we’ll probably just raise the ceiling again and things will go on their merry way. Remember the last time we had a long shutdown, lenders were unable to get tax transcripts out of the IRS so it is something to keep in mind.

The Fed’s Beige Book of economic activity showed that the economy continued to expand at a “modest” pace, with slightly higher sales and flat manufacturing. Employment grew at a modest pace, and appears to be decelerating somewhat, especially as the slack in the labor market gets taken up. The Boston Fed noted that tariffs are having a negative effect, and at least one company is moving some production overseas to escape them. The proposed 5% tariff on Mexican goods was mentioned as a significant shock.

Canary in the coal mine for international asset markets, particularly China? International buyers of US residential real estate fell by 36% over the past year, following a 20% decrease in the prior year. China has been dealing with a real estate bubble for years, and prices are way out of whack compared to incomes – you can see just how bad it is here. This may explain some of the emerging weakness at the high end, especially in the big West Coast markets like San Francisco, Vancouver, and Seattle. The first step in any bursting bubble is a “buyer’s strike,” followed by rising inventory, and then finally a market-clearing event. We may be at the first stage right now.

Macroeconomically, a downturn in China means several things. First, they are going to try and export their way out of it, which means more trade tensions especially if they go the currency devaluation route. Second, it will mean a global growth slowdown, which will act as an anchor on global interest rates. Don’t worry about inflation, the world is awash in capacity. Finally, it could mean a return to a time like the 1990s, where the US was able to have its cake and eat it too, with fast growth but little to no inflation. I wonder if the Fed sees the same thing (after all central bankers do coordinate policy somewhat) and that is part of the reason why they are planning on easing when there is absolutely zero evidence the US is entering a recession.

Morning Report: CoreLogic sees 2019 product mix as 75% purchase / 25% refi

Vital Statistics:

	Last	Change
S&P futures	2605	-8
Eurostoxx index	349.68	-0.7
Oil (WTI)	51.56	-0.75
10 year government bond yield		2.72%
30 year fixed rate mortgage		4.48%

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

The NAHB Housing Market Index rebounded slightly in January, but it is still way lower than the index peak in December 2017. The recent drop in rates is helping, but affordability issues and input costs are still dogging the homebuilding industry. Lennar and KB Home still reported decent numbers, and we have yet to see builders having to offer large incentives to move inventory. The supply / demand imbalance is still solidly in favor of the builders, but affordability issues are contributing to a decline in foot traffic.

CoreLogic estimates that refinances will account for only 25% of all mortgage origination in 2019, the lowest in 25 years. Rate / Term refis will become even less important, as prepayment burnout has taken hold at these levels. The opportunities will be largest in cash-out, where homeowners can refinance high interest rate credit card debt, and in product swapping, where FHA borrowers with sufficient home equity will be able to refinance into a product with no MI.

The Fed’s Beige Book noted that growth is slowing, but is still decent. The language in the report changed from growth being “solid” or “strong” “moderate to modest.” Many companies noted that input prices are rising, but they are unable to pass those increases on to customers. While residential real estate is rising in price, commercial and industrial real estate is not.

More problems for real estate prices at the high end. Greenwich CT prices continue to fall, which is about luxury real estate prices as much as it is about the changing nature of the financial industry. Note however that prices have fallen 7.3% in San Jose. Apple is reducing hiring due to weaker than expected iPhone sales, and the fizz is pretty much out of the social media craze.

Morning Report: Delinquencies rebound

Vital Statistics:

	Last	Change
S&P futures	2683	19
Eurostoxx index	354.73	1.46
Oil (WTI)	66.9	0.07
10 year government bond yield		3.12%
30 year fixed rate mortgage		4.93%

Stocks are higher this morning despite a huge sell-off in Asian shares last night. Bonds and MBS are flat.

Stocks got walloped yesterday yet again, making this month the worst since the bad days of the financial crisis. There really isn’t much of a catalyst to hang your hat on – just general overseas selling and the risk-off trade. I think part of this is a rotation back into the short term interest rate market. CDs are now paying over 2%, after having paid nothing for years. A moribund asset class is coming back, and stocks are going to feel the brunt of it.

With the NASDAQ officially down 10% from the high, and the S&P 500 pushing close to it, where do you think the VIX is? Just over 25, which isn’t even the high for the year. If you are hoping we have hit capitulation, we haven’t.

Home price appreciation decelerated in August, according to the FHFA House Price index. Prices rose 0.3% MOM and 6.1% YOY. The red-hot Pacific and Mountain MSAs have decelerated, while many of the laggards (Mid-Atlantic) are seeing improved performance.

New Home Sales fell dramatically in September on both a month-over-month and annual basis. They fell to a seasonally-adjusted annual rate of 553,000, which is down 5.5% MOM and over 13% YOY. With current inventory at 327,000 units, we have over 7 month’s worth of inventory, which would be characterized as a buyer’s market (6 – 6.5 months is considered “balanced.”). Note that new home sales can be extremely volatile but it confirms what we have been seeing in the homebuilder ETF – affordability is beginning to deter buyers.

“Modest to moderate.” was how the Fed’s Beige Book characterized economic growth. “Modest to moderate” was pretty much how the Fed characterized everything from 2010 to 2016. This is a downgrade from “brisk,” “solid” or “strong” – words the Fed has been using recently to characterize the economy. The Beige Book is a more qualitative assessment of the economy, so parsing the language is about the only thing you have to work with. The Fed has been expecting the economy to slow due to trade wars. If the economy is beginning to slow, the Fed might want to take a breather and let the recent rate hikes take effect before making any further moves. The Fed also noted that housing continues to underperform.

The sell off has affected the Fed Funds futures market. A week ago, the markets were handicapping a 80% chance for a hike. It is now down to 74%. A March 2019 hike is now a coin toss.

Delinquencies spiked in September, rising 13% for the biggest jump since November 2008. Hurricane Florence hit areas saw DQs rise by 38%, although there is a seasonal aspect to DQs – they typically rise during September and January.