China – The Daily Tearsheet

Morning Report: Purchase applications are the highest in over a decade

Vital Statistics:

	Last	Change
S&P futures	3282	-5.25
Oil (WTI)	58.13	0.04
10 year government bond yield		1.79%
30 year fixed rate mortgage		3.87%

Stocks are lower this morning as China and the US sign a Phase I deal on trade. Bonds and MBS are up.

Note we will have some Fed-speak later this morning.

Trump characterized his Phase I deal with China as a “big, beautiful monster” and encouraged farmers to buy bigger tractors. China is agreeing to purchase an additional $200 billion of US goods over the next two years, which represents about half of the US trade deficit. Energy, agricultural, and industrial exports are all set to increase, while the US will cancel new tariffs on cellphones and laptops. Some other tariffs will be reduced while others will remain in place.

Mortgage applications increased 30% last week as purchases rose 16% and refis rose 43%. This was the first week after the holidays, so there is probably are some weird adjustments playing out. Rates fell 4 basis points to 3.87%. Most notably, purchase activity increased 8% from a year ago and is at the highest level since October 2009. A few homebuilders specifically mentioned on their earnings calls that they are seeing no season slowdown this year. At any rate, the Spring selling season is just around the corner. Note that while we are at a 10 year high on the purchase index, we are still well below bubble levels

Inflation at the wholesale level remains below the Fed’s target, with the headline producer price index up 0.1% MOM and 1.3% YOY. Ex-food and energy, it rose 0.1% and 1.1%. While the producer price index is not the preferred inflation index for the Fed, it confirms we are still not seeing much in the way of inflationary pressures.

Morning Report: Welcome to 2020

Vital Statistics:

	Last	Change
S&P futures	3251	20.25
Oil (WTI)	61.07	0.04
10 year government bond yield		1.88%
30 year fixed rate mortgage		3.95%

Stocks are higher this morning after China eased reserve rates overnight. Bonds and MBS are flat.

Announced job cuts (in other words, press releases discussing layoffs) fell to 32,845 in December according to outplacement firm Challenger, Gray and Christmas. “Confidence was high heading into the last month of the year. With some resolutions occurring in the trade war and strong consumer spending in the fourth quarter, companies appear to be taking a wait-and-see approach as we head into 2020,” said Andrew Challenger, Vice President of Challenger, Gray & Christmas, Inc. “The sectors with the highest number of cuts this year were all dealing with trade concerns, emerging technologies, and shifts in consumer behavior. We tracked a lot of hiring activity in these industries as well as cuts,” said Challenger. Separately, initial jobless claims fell to 222k last week.

Mortgage Applications fell by 5% as purchases and refis fell by the same amount. “The 10-Year Treasury yield increased [the week ending December 20] amid signs of stronger home building activity and solid consumer spending, leading to a rise in conventional conforming and jumbo 30-year mortgage rates to just under 4 percent,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “With this increase, conventional refinance application volume fell 11 percent. Refinance applications for government loans did increase, even though rates on FHA loans picked up. The change in the mix of business has kept the average refinance loan size smaller than we had seen earlier this year.”

The Trump Administration is saying that a Phase 1 deal is done, and everyone is waiting on translation. “It’s got great stuff in it,” he [Trade Advisor Peter Navarro] said. “It’s got essentially the same chapter we had in the May deal that the Chinese walked away from on intellectual property theft. So that’s a good deal….For Wall Street … financial market access for the banks, insurance companies and credit card companies,” he added.

Happy new year, and here’s to a prosperous 2020, with housing starts above 1.5 million, originations over $2.2 trillion and a 30 year fixed rate mortgage below 3.5%. Hey, it could happen.

Morning Report: Trade deal with China

Vital Statistics:

	Last	Change
S&P futures	3190	13.25
Oil (WTI)	60.14	0.14
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.97%

Stocks are up this morning on trade with China. Bonds and MBS are down.

The last full workweek of 2019 won’t have much in the way of market-moving data. We will get some housing data (housing starts and existing home sales) and the third revision to Q3 GDP, but that is about it.

China agreed to purchase more agricultural products from the US as part of an agreement that canceled additional tariffs that were supposed to take effect last night. This deal should end the tit-for-tat tariffs that have been weighing down financial markets for the past several months.

More evidence of weakness in the Eurozone as the German ISM numbers were downright awful, and were echoed by weakness in the UK and France. This will be the push-pull driving interest rates in the near future: an accelerating US economy will push rates higher, while stagnation in Europe will pull them lower.

Retail Sales rose 0.2% MOM in November, which was lower than expectations. Ex autos and gas, sales were flat.

The Fed is injecting liquidity into the system to prevent a repeat of September’s cash crunch, which sent overnight repo rates up to 10% at one point.

Morning Report: Senate resolution complicates trade negotiations

Vital Statistics:

	Last	Change
S&P futures	3111	-6.25
Oil (WTI)	55.69	-0.74
10 year government bond yield		1.74%
30 year fixed rate mortgage		3.96%

Stocks are lower this morning as tensions increase between China and the US over Hong Kong. Bonds and MBS are up.

The Senate passed a resolution last night supporting democracy for Hong Kong and urging China to not use violence to suppress the demonstrations. This will undoubtedly complicate trade negotiations, and will push the markets to more of a “risk-off” (stocks down, bonds up) posture. Bond yields are lower this morning, with the 10 year trading at 1.74%.

Mortgage Applications decreased by 2.2% last week on a seasonally adjusted basis as purchases rose 6.7% and refis fell 7.7%. Veteran’s Day influenced the numbers. “U.S. and China trade anxieties and protests in Hong Kong pulled U.S. Treasuries lower last week, and the 30-year fixed mortgage rate followed the same path, dipping below 4 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite lower rates, mortgage applications decreased 2.2 percent, driven by an 8 percent slide in refinance activity. Rates have stayed in the same narrow range of around 4 percent since July, so we may be starting to see the expected slowdown in refinancing as the pool of eligible homeowners shrinks.”

The retailers are announcing earnings and the markets are looking for indications of how this year’s holiday shopping season will shake out. Target and WalMart both announced strong earnings and took up their Q4 guidance. These two stocks are a bellwether for John Q Public’s spending habits.

The FOMC minutes will be out at 2:00 pm today. The minutes usually aren’t market-moving, but given the somewhat abrupt change in the Fed’s posture there is always the possibility that we could see some action. Just be aware when locking around that time.

Morning Report: Risk-on feel as China and US strike a trade deal

Vital Statistics:

	Last	Change
S&P futures	3088	12.25
Oil (WTI)	57.27	0.94
10 year government bond yield		1.88%
30 year fixed rate mortgage		3.97%

Stocks are higher this morning after the US and China agree to remove tariffs. China also made some high profile arrests to stem the tide of fentanyl coming into the US. The fentanyl issue was a key part of the US’s issues with China. Bonds and MBS are down on the “risk-on” trade.

After a dismal start to the year, the luxury end of the market (homes over $1.5 million) rebounded in the third quarter as rates fell. Prices rose 0.3% on average, but they had been falling since 2018. Manhattan was hit particularly hard on the new mansion tax. Florida was the beneficiary as prices rose over 100% in West Palm and some of the other nearby areas. Previously hot markets like San Diego also remained in the losing category. “Because recession fears peaked over the summer, I expected luxury home prices and sales to dip. But it appears that nerves alone weren’t enough to scare off wealthy homebuyers,” said Redfin chief economist Daryl Fairweather. “The U.S. economy grew faster than expected in the third quarter, partly as a result of healthy consumer spending. Those results, along with flat luxury home prices and rising sales, go to show that Americans are basing their spending habits on their own personal financial situation rather than concerns about global economic tensions. For many, that means strong incomes and good employment prospects.”

Fannie Mae is out with their housing forecasts for 2020. They anticipate the 30 year fixed rate mortgage will continue to fall, hitting 3.5% by the end of 2020, and home prices will rise about 4%. Interestingly, they do not anticipate any sort of pickup in housing starts – in fact they anticipate they will be flat with 2019. Despite the drop in rates, they anticipate origination volumes will fall to 1.86 trillion from 2.04 trillion as the refinance share of the market falls from 37% to 31%.

New York Fed President John Williams said that the FOMC sees no reason to cut interest rates further: “The three rate cuts we did were very effective at managing the risks” slowing global growth and trade uncertainty present to the U.S. economy, New York Fed President John Williams said at a Wall Street Journal event in New York. Chicago Fed President Charles Evans echoed the same sentiment.

Finally, we know that gathering strength in the US economy is helping push rates higher. It is important to note that rising rates is not simply a US phenomenon. US Treasuries don’t trade in a vacuum – they are always going to be subject to moves in overseas rates. For now, the key overseas interest rate to watch is the yield on the German Bund, which has increased by 45 basis points since early September. The Bund still has a negative yield, but it is now -27 basis points after bottoming at -72 basis points 2 months ago.

Morning Report: Trump’s tariff tweet send bond yields lower

Vital Statistics:

	Last	Change
S&P futures	2941	-11.5
Oil (WTI)	55.51	1.04
10 year government bond yield		1.90%
30 year fixed rate mortgage		3.96%

Stocks are lower after yesterday’s Trump Trade Tweet. Bonds and MBS are up.

Donald Trump sent bonds higher yesterday afternoon with this tweet saying that trade talks had broken down between the US and China, and he was therefore imposing an additional 10% tariff on $300 billion in goods from China. This sent stocks reeling, and the 10 year bond yield down about 10 basis points. MBS were slow to react, however we did have some reprices late in the day. If you look at the box scores above, you’ll see we finally have a 3 handle on the 30 year fixed rate mortgage. Commodities were also slammed, with oil down 8%.

The escalation in the tariff wars caused some strategists to bump up their probabilities of a September rate cut. Goldman’s Jan Hatzius sees a 70% chance of 25bps, 10% of 50, and 20% of no change at the FOMC meeting next month. This was mirrored in the Fed funds futures market, however the 50 basis point cut looks unlikely. They Sep futures are pricing in an 85% chance of another 25 bps. They were pricing in a 56% chance of a rate cut before the tweet came out.

Some of the rally in bonds yesterday was almost certainly due to convexity-related buying, which means hedge adjustment activity. This sort of buying is invariably violent and temporary, which means mortgage backed securities will probably lag the move for a day or two. That said, the path of least resistance for rates remains down, especially since overseas bond yields followed along. The German Bund now yields negative 48 basis points. In fact, their longest term bond – 29 years – is now negative. Think of it: tying your money up for 29 years to get…. absolutely nothing. This is the fixed-income equivalent of buying Salon.com stock at 1000x pageviews in 1999.

Jobs report data dump:

Nonfarm payrolls up 164k (in line with expectations)
Unemployment rate 3.%
Average hourly earnings up 0.3% MOM / 3.2% YOY (better than expectations)
Labor force participation rate 63%
Employment / population ratio 60.7%

Overall a good report, and now stock bullish given the Fed’s new posture. Wage growth is picking up and average hourly earnings keep trending upward despite PCE inflation that is stuck in the high teens.

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: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P futures	3009	0.35
Oil (WTI)	59.54	-0.07
10 year government bond yield		2.09%
30 year fixed rate mortgage		4.12%

Stocks are flat as bank earnings continue to come in. Bonds and MBS are up.

Another month, another disappointing housing starts number. Starts fell from an annualized pace of 1.3 million to 1.22 million in June, according to Census. Building permits were a mixed bag, falling to 1.25 million, however May’s numbers were revised upwards. Both starts and permits were below street expectations.

Despite the disappointing housing starts number, builder confidence rose one point to 65 in July. Demand remains strong, however labor shortages, few buildable lots and rising construction costs are making it difficult to build at the lower price points, where the demand is particularly acute.

Mortgage applications fell 1.1% last week as purchases fell by 3.8% and refis rose 1.5%. Rates increased, with the 30 year fixed rate mortgage rising by 8 basis points to 4.12%. “Mortgage rates increased across the board, with the 30-year fixed rate mortgage rising to its highest level in a month to 4.12 percent, which is still below this year’s average of 4.45 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Coming out of the July 4 holiday, applications were lower overall, with purchase activity slipping almost 4 percent. Refinance applications increased, with activity reaching its highest level in a month, driven mainly by FHA refinance applications. Historically, government refinance activity lags slightly in response to rate changes.”

Bank of America reported strong earnings this morning. Mortgage origination volume was up 56% YOY to $18.2 billion. Separately, Quicken announced they originated $32 billion in the second quarter.

Second quarter growth in China fell to 6.2%, the lowest level in 27 years. The implications for this will revolve primarily around inflation and Fed policy. The Chinese economy has a real estate bubble of epic proportions, and once that bursts it will have ramifications in the urban high-end market, but it will also be felt in lower inflation numbers. China will probably try and export its way out of the slowdown, although tariffs will make it difficult. That said, a slowdown in emerging Asia and Europe will usher in even lower interest rates.

Morning Report: 35% of the top 100 metros are overvalued

Vital Statistics:

	Last	Change
S&P futures	2821	26
Oil (WTI)	61.65	0.61
10 year government bond yield		2.42%
30 year fixed rate mortgage		4.17%

Stocks are higher this morning as overseas stocks rebound. Bonds and MBS are down.

Small Business Optimism increased in April, according to the NFIB. Pretty much every component of the index increased, with only capital expenditure plans unchanged from March. “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,” said NFIB’s Chief Economist Bill Dunkelberg.

What will global warming do to Florida real estate values? According to one environmentalist, lending for 30 year for Florida property is insane. “No one should be lending for 30 years in most of Florida,” [Woods Hole senior fellow Spencer Glendon] said at an investment conference in New York last week. “During that time frame, insurance will disappear and terminal values” — future resale income — “will shrink. I tell my parents that it’s fine to rent in Florida, but it’s insane to own or to lend.” Note that the US flood insurance is heavily subsidized and will probably have to be cut back if the more extreme forecasts end up being borne out.

Stocks had a bit of a rebound yesterday after Steve Mnuchin assured that the trade talks with China are still ongoing. Uber had another rough day, with the stock closing at $37.10 a share, down 18% from the IPO price on Friday.

30 day DQs are down 80 basis points from 4.8% to 4% according to CoreLogic. DQs fell in every bucket, and the foreclosure rate fell from 0.6% to 0.4%. Separately, home prices rose 3.7% YOY in February. 35% of cities have overvalued housing stock, while 26% are undervalued and 39% are fairly valued.

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.

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.