CFNAI – The Daily Tearsheet

Morning Report: Home sizes decrease

Vital Statistics:

	Last	Change
S&P futures	2664	-6
Eurostoxx index	357.22	-1.11
Oil (WTI)	51.69	0.06
10 year government bond yield		3.06%
30 year fixed rate mortgage		4.89%

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

We have a lot of Fed-speak today, with 4 different speeches. As we approach the December Fed meeting, the markets will hang on every word, looking for clues about 2019. The Fed funds futures are increasing their probability of a December hike, which is up to 80% compared to 66% a month ago.

Economic growth accelerated a touch in October, according to the Chicago Fed National Activity Index. The CFNAI is a meta-index of some 85 different statistics, and in October employment-related numbers (things like unemployment and initial jobless claims) were the drivers. Production-related statistics slowed a touch, but overall the economy is growing above trend.

Median home sizes are falling, as more and more builders focus on building starter homes. Home sizes rose during the housing bust as the luxury end of the market was about the only segment that was working. This trend was exacerbated by debt levels and employment uncertainty for the first time homebuyer. In addition, the Millennial generation tended to favor urban areas, and builders focused on apartment building. Now, we are seeing a glut of properties at the high end, and strong demand for starter homes as the first time homebuyer moves to the suburbs. Note that the latest existing home sales data had the first time homebuyer share at 31%. Historically, that number has been closer to 40%.

Signs of things to come? The Dallas home market is cooling off, as affordability issues bite. The Dallas market is a little different than the typical US housing market – Texas has some limitations on cash-out refinances that meant it largely avoided the big boom / bust of the real estate bubble. Prices are 50% higher than they were in 2007, which is similar to MSAs like San Francisco. On the other hand, Dallas homebuyers are more likely to finance their purchases than the typical foreign cash buyer on the West Coast. Builders have a glut of inventory and are cutting prices / adding features to move properties.

Morning Report: Asian sell-off spreads

Vital Statistics:

	Last	Change
S&P futures	2721.25	-35
Eurostoxx index	355.01	-4.73
Oil (WTI)	69.26	0.14
10 year government bond yield		3.15%
30 year fixed rate mortgage		4.93%

US stock index futures are down this morning as a sell-off that started in Asia has spread to Europe. Bonds and MBS are up on the risk-off trade.

Chinese markets are the catalyst behind the sell-off, and it appears that non state-owned firms are having financing difficulties. The Chinese government addressed the issue on Friday, and while it soothed fears for a couple of days, investors are still worried. Financing difficulties invariably accompany bursting real estate bubbles and China’s bubble has been going on for years.

If China’s real estate bubble is bursting, the effect on US interest rates could go a couple of ways. The most likely event will be a drop in inflationary pressures as China’s currency drops and they attempt to export their way out of the problem. They could sell Treasuries to repatriate cash (in crises, you sell what you can, not necessarily what you want to) which would temporarily put upward pressure on US rates. The most likely scenario would be a risk-off one, where Chinese money withdraws out of risky assets in favor of Treasuries. It might cause the Fed to take a break.

Speaking of the Fed, the December Fed Funds futures are handicapping a 82% chance of a hike at the December meeting.

Economic growth moderated a bit in September, according to the Chicago Fed National Activity Index.

Fair Issac, the creator of the FICO score is going to re-work their model in 2019, which may bump up the scores of the more marginal borrower. Borrowers with some dings on their scores could get a boost if they maintain a few hundred dollars in their checking accounts and don’t overdraw them.

Jim Cramer warned that a 5% mortgage rate is a “line in the sand” for the economy. “We’re going to see more and more bad earnings because [a] 5 percent mortgage is the end, that is the line in the sand,” Cramer said Monday on “Squawk on the Street. ” “The mortgage rate is very high in this country.” Cramer has become critical of the Fed’s tightening regime, saying that the Fed is ignoring signals of a slowdown in the economy (particularly in housing). The thing to keep in mind is that rate changes act with a lag of about a year. This year’s moves have yet to be felt in the economy.

Note we will get the first estimate of third quarter GDP this Friday. The consensus estimate is for 3.3% growth, a slowdown from the second quarter pace of 4.2%.

Donald Trump proposed 10% middle class tax cut, which will be voted on after the election. This is an attempt to rally Republicans to the polls in order to maintain Congress. As of now, it looks like the GOP will probably increase their seats in the Senate, while Democrats are looking to possibly take over the House.

Morning Report: Moody’s downgrades Chase’s jumbo status

Vital Statistics:

	Last	Change
S&P futures	2888	11
Eurostoxx index	385	0
Oil (WTI)	68.79	0.02
10 Year Government Bond Yield		2.82%
30 Year fixed rate mortgage		4.58%

Stocks are higher this morning on news that the US and Mexico might strike a deal on NAFTA. Bonds and MBS are flat.

We should have a quiet week heading into the Labor Day weekend. We will get GDP on Wednesday and Personal Incomes / Personal spending on Thursday and those are probably the only potential market-moving reports.

Mohammed El-Arian believes there is a 60% chance that Trump’s hard line on trade will result in a better deal for the US. There is a 15% chance that Trump’s stance could result in a beakthrough with China (similar to Reagan’s approach with the USSR during the Cold War), and another 25% chance that we go into a full blown trade war. He stressed that the US’s role as the world’s biggest consumer matters: “I’ve said from day one, it’s just a matter of time until other countries realize that their best approach is to collaborate with the U.S. and fix things that are broken,” El-Erian said.

Moody’s downgraded Chase’s jumbo underwriting rating to “above average” from “strong” based on concerns over the percentage of loans that come from its delegated correspondent channel. Moody’s also dinged them over their proprietary LOS (licensed from Quicken), disliking the look and feel of it. Chase obviously disputes the downgrade, and defended their underwriting. “We respectfully disagree with the rating and feel it’s based on insufficient information. While we provide select correspondent lenders with delegated underwriting authority, we also then conduct individual underwriting reviews on roughly half of those loans. These are high-quality loans that perform well,” Amy Bonitatibus, chief marketing and communications officer of Chase Home Mortgage, said in an email.

Elon Musk ended his proposed buyout of Tesla late last week. The Street never took it seriously to begin with, and was highly skeptical of his claim that funding for the deal was secured. The SEC is investigating the “funding secured” comment, which sounds like it was based largely on the existence of a pitch book, not any sort of letter from an investment bank (not even a “highly confident” letter).

Layoffs continue in the mortgage biz. Wells let go 600 people, mainly in servicing and retail fulfillment. Lower volumes and margins contributed to a 33% drop in mortgage banking income for Wells in the second quarter.

Economic activity decelerated in July, according to the Chicago Fed National Activity Index, which is a meta-index of 85 economic indicators. Production-related indicators decelerated, while employment-related indicators improved. The 3 month moving average fell as well.

Morning Report: New Home Sales jump

Vital Statistics:

	Last	Change
S&P futures	2745	-14.5
Eurostoxx index	379.79	-5.22
Oil (WTI)	69.07	0.49
10 Year Government Bond Yield		2.89%
30 Year fixed rate mortgage		4.57%

Stocks are lower this morning on continued trade tensions. Bonds and MBS are up

Economic activity decelerated in May, according to the Chicago Fed National Activity Index. Production-related indicators were a drag on the index (probably an effect of trade issues) while employment-related indicators had a positive impact once again. This index is a meta-index of 85 different sub-indices, and while it is backward-looking and generally not market moving, it provides a good global snapshot of the economy.

The trade war is beginning to have some real economic effects as the CFNAI indicated. While it is primarily limited to steel, many companies that use it as an input are raising prices, which is going to have a few negative effects on the economy – first firms that use steel and cannot pass on price increases are probably going to lay off workers, while the inflationary pressures from increased prices will keep the Fed raising interest rates. Retaliatory tariffs from our partners are causing US exporters to shift production overseas. Note that lumber tariffs are increasing the price of home construction, which is another drag on the economy.

Given the recessionary potential of trade wars the shape of the yield curve is going to become a bigger talking point for the business press and will be watched closely by the Fed. The shape of the yield curve essentially means the difference between short term rates and long term rates. The most common description is the 2s-10s spread, which is about 34 basis points at the moment. When the yield curve is strongly upward sloping (in other words, the 10 year yield is a lot higher than the 2 year yield) it generally means one of two things: either (a) the market is worried about inflation, and is therefore requiring a high interest rate to entice people to invest in Treasuries long term, or (b) the economy is so strong that investors prefer to put their money in more risky assets and therefore Treasuries have to offer a higher rate to get people interested. For the most part, the US yield curve has been in the second camp.

As the Fed has been raising the Fed Funds rate, the yield on shorter-term paper (like the 2 year) has been going up faster than the rate on the 10 year. Historically, the yield curve has flattened during tightening cycles, so this is nothing to be alarmed about. If the yield curve inverts, then that has historically been associated with the Fed overdoing it and it is taken as a recessionary signal. In the current environment, the flattening of the yield curve looks more like typical curve behavior during a tightening cycle, and not a signal of a recession. Don’t forget the yield curve has been highly influenced by central bank behavior. The Fed could drive up long-term rates by hinting at the possibility of selling some of its portfolio. Bottom line, the business press will be talking about the curve more and more, especially if the trade war begins to snowball and we start seeing a combination of rising input costs with a slowing out output.

New Home sales increased 6.7% MOM and 14.1% YOY to a seasonally adjusted annual rate of 689,000. This is the highest print since November last year. Interestingly, sales rose in the South, but fell everywhere else. In the West, where the supply shortage is most acute, sales fell by 9% MOM and are flat YOY. Both the median and average sales price fell, which is surprising given the torrid pace of home price appreciation in the home price indices like Case-Shiller and the jump in existing home sales prices according to NAR. It appears that more sales at the lower price points was behind the drop. Luxury sales have been more or less flat for the past year. Eventually tax reform is going to have an effect on the top end of the market, as luxury real estate is simply more expensive due to the changes in mortgage interest and the fact that most of the $1MM+ inventory is in high tax states. We will get more of a read on new homes this week as Lennar and KB both report earnings.

Fears of rising interest rates have clearly had no negative effects on new home sales. Given the acute housing shortage and the fact that rates are still very low historically, this isn’t really a surprise.

The Trump Administration announced a plan to reorganize many governmental agencies. The biggest one would merge the Department of Labor and the Department of Education into one agency. On the housing side, USDA loans would be moved from USDA to HUD, which is where they probably belonged in the first place. VA loans will remain under the VA however. Community Development Block Grants would move to Commerce from HUD. The document discusses the need to reform the GSEs and lays out broad ideas, but nothing concrete.

Morning Report: Consumer Credit to hit $4 trillion this year

ital Statistics:

	Last	Change
S&P futures	2737	4.75
Eurostoxx index	396.69	0.82
Oil (WTI)	72.55	0.31
10 Year Government Bond Yield		3.07%
30 Year fixed rate mortgage		4.66%

Stocks are higher this morning as the trade rhetoric with China cools. Bonds and MBS are up.

China said overnight it would cut its tariff duties on automobiles from 25% to 15%.

Things are looking grim for the origination business, according to people at the MBA Secondary Conference in NYC. A combination of declining volumes and skinnier margins are pushing the smaller originators out of the market. Hard to see what changes things, although an increase in homebuilding would help.

McMansion builder Toll Brothers missed quarterly earnings estimates on higher costs, driven by building materials, land and labor. Gross margins contracted 150 basis points, while revenues increased 17%. The stock is down 7% this morning.

Economic activity accelerated slightly in April, according to the Chicago Fed National Activity Index. Production-related indices accounted for the majority of the index gain, followed by employment indices. The CFNAI is a meta-index of 85 different economic indicators.

Oil continues its strong run on the back of OPEC cuts and supply disruptions out of Venezuela and Iran. Oil is the highest it has been in almost 4 years. The ability to turn on incremental supply quickly and cheaply will help keep a lid on prices, although higher gas prices for the summer driving season are going to dampen sentiment.

JP Morgan might get bigger in FHA loans, according to statements made at the MBS Secondary Conference. Regulatory risk caused the bank to publicly state it was pulling back from that market. Regulatory reform is helping, but the bank says that further fixes will be needed. Chase does do FHA lending, but it is tiny.

The level of consumer debt in the economy has a lot of people talking. Consumer debt is probably going to hit $4 trillion by the end of 2018. Certainly the chart of consumer debt looks worrisome:

Increased student loan debt is a big driver of the increase. That said, does that mean consumers are in over their heads? Can they service that debt? Well, if you look at this chart, it doesn’t appear to be a problem:

In other words, consumer debt is high, but the amount people are actually paying to service that debt is very low. Higher interest rates will move that debt service ratio up, but it is hard to make an argument that consumers are over-extended, at least by looking at that chart.

Freddie Mac is launching its Borrower of the Future Campaign to take a look at how the industry will have to address the younger homebuyer. “The increase in self-employed and the rise of the sharing economy and digitally-driven lifestyles are having a tremendous impact and leading to shifts in behavioral, economic and societal factors,” said Chris Boyle, Chief Client Officer at Freddie Mac. “Collectively, the industry must now take into account these dynamics as we think about how to effectively help the next generation find the home of their dreams. We’re excited to serve in this important role to help the industry better understand the Borrower of the Future, and then drive the conversation on how to apply these insights to make the mortgage process more efficient and affordable.”

Neel Kashkari discusses how the Fed has beaten the Phillips Curve. The Phillips Curve dates back to the 1950s, and plots a relationship between unemployment and inflation. Kashkari cites the 2009 interventions, which should have caused deflation, but didn’t. We have unemployment below 4% and still no signs of real inflation.

Morning Report: 10 year pushing towards 3%

Vital Statistics:

	Last	Change
S&P futures	2675	3.9
Eurostoxx index	381.41	0
Oil (WTI)	67.33	-1.07
10 Year Government Bond Yield		2.97%
30 Year fixed rate mortgage		4.51%

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

US Treasury Secretary Steve Mnuchin signaled that the US is ready to discuss a truce in the trade war with China. He characterized his mood as “cautiously optimistic” and said he won’t make a commitment on timing. Beijing welcomed the announcement. Separately, Mnuchin also discussed easing sanctions on Rusal which sent aluminum prices back down.

Existing home sales rose on a month-over-month basis in March, but are down on an annual basis according to NAR. Lawrence Yun, NAR chief economist, says closings in March eked forward despite challenging market conditions in most of the country. “Robust gains last month in the Northeast and Midwest – a reversal from the weather-impacted declines seen in February – helped overall sales activity rise to its strongest pace since last November at 5.72 million,” said Yun. “The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.”

The median home price was $250,400, up 5.8% YOY. Inventory is down over 7% YOY to 1.67 million units, which represents a 3.6 month supply at current sales levels. A historically balanced market would be 6.5 month’s worth. Properties stayed on market for an average of 30 days, which is down almost a week YOY. The first time homebuyer accounted for 30% of sales, and all-cash sales were 20% of transactions.

Commodity price inflation has pushed the 10 year yield to 3%. Many technical analysts consider that to be confirmation that the 3 decade bull run in bonds is over. The one caveat is that the sell-off is being driven by rising commodity prices which tends to be temporary, especially if it doesn’t translate into wage growth. You can see the pop in yields post-election below. Hard to believe we were sub 1.8% in late October 2016.

This week will have some important data to the bond market, with GDP and the employment cost index on Friday. We will also get a slew of housing data with existing home sales, new home sales, and Case-Shiller.

The Street estimate for Q1 GDP is 2%. Generally speaking, the estimates from the banks are lower than the estimates from the regional Federal Reserve banks.

Economic activity moderated in March, according to the Chicago Fed National Activity Index. Production and employment indicators fell. February’s reading was unusually strong, however. The CFNAI is a meta-index of 85 different economic indices, and can be volatile. It isn’t a market-mover.

A paper suggests that the ratings agencies largely got it right with the bubble-era RMBS. The AAA tranches (even subprime) were largely money good, and the study pours cold water on the popular narrative that inflated ratings on RMBS caused the financial crisis.

The big banks are rushing to launch websites and apps for mortgages as volume contracts. Bank of America, Wells Fargo, and JP Morgan have either launched or plan to launch mortgage banking tech products in response to Rocket Mortgage from Quicken. The company claims that 98% of its customers in the first quarter (some $20 billion in origination) accessed Rocket at some point in the application process. That is an astounding number, though I wonder if that includes push notifications that the borrower didn’t necessarily respond to or interact with.

Speaking of tech, HUD is looking into allegations of housing discrimination by Facebook. Facebook uses big data to allow advertisers to slice and dice the demographics any way they want to target their specific market. What if advertisers decide to target some demographics and not others? That is considered non-problematic for things like consumer products, but housing could be a different story.