Morning Report: Rates continue to move lower

Vital Statistics:

 

Last Change
S&P futures 2746 -5
Oil (WTI) 54.23 0.76
10 year government bond yield 2.12%
30 year fixed rate mortgage 4.18%

 

Stocks are lower as trade fears dominate the market’s mood. Bonds and MBS are up (yields down). The 10 year hit 2.07% in the overnight session.

 

On the open, it is looking like mortgage backed securities are lagging the move in Treasuries. Prepayment speed worries are behind it. It may take a couple of days for mortgage rates to catch up.

 

The upcoming week will have a slew of important economic data, with construction spending, the ISM numbers and the jobs report on Friday. Productivity and costs will be another key number, although the Fed is more worried about a slowdown than an acceleration of inflation. After that, the Fed goes into their quiet period ahead of the FOMC meeting in two weeks.

 

Housing affordability is at its strongest in about a year, according to Black Knight Financial. The annual rate of housing inflation fell below the 25 year average of home price appreciation for the first time since 2012. 22% of median income was required to purchase the average house, which is will below the historical average of around 25%. Most of that has to do with lower interest rates, but slowing home price appreciation and rising incomes have been the drivers there.

 

According to Sentier Research, the median income in March of 2019 was $64,016. NAR has the median home price at $267,300. This puts the median house price to median income ratio at just under 4.2x. This is still elevated compared to historical numbers, but low interest rates offset the high multiple.

 

Affordability issues are driving a new business model for builders in some high-cost areas: build to rent. Toll Brothers is going to spend something like $60 million in a joint venture to build rental properties. “Renting by choice” is one of the new consumer trends, and it may not be going anywhere. The plan is to stick rental properties in planned communities that are more or less identical to neighboring properties. Why would people choose to rent? If they are worried about another housing bubble, they shouldn’t. That isn’t going to happen again for a long, long time. If they believe they need a 20% down payment, then the industry has an education job to do. If they are doing it because they want the freedom to move easily, that will probably change once they have kids.

 

Construction spending was flat in April, according to the Census Bureau. Residential was down 0.6% MOM and 11.2% YOY.

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Morning Report: Job openings, and the Fed.

Vital Statistics:

 

Last Change
S&P futures 2833.5 3
Eurostoxx index 381.78 0.68
Oil (WTI) 48.46 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.27%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

 

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No changes are expected in interest rates, and the Street will be focused primarily on the dot plot and whether it is catching up with what the Fed Funds futures are saying. The December 2018 dot plot predicted that the end of 2019 Fed Funds rate would be in the 2.75% – 3% range, in other words two more rate hikes in 2019. A Reuters poll of economists forecasts 1 more hike this year. On the other hand, the markets are predicting a Fed Funds rate in the 2.25% – 2.5% range – in other words no change. To be fair, there has been a major change in market sentiment since December, but one of the two (the experts or the markets) has clearly got it wrong. In December, only 2 out of the 17 forecasts expected the Fed to not hike this year, and nobody was looking for a rate cut. The futures on the other hand are handicapping a 75% chance of no hike and about a 25% chance of a rate cut. This is a massive expectations gap.

 

Other than the FOMC meeting, there isn’t much in the way of important economic data. We will get leading economic indicators on Thursday, and existing home sales on Friday.

 

There were 7.58 million job openings at the end of January, which is close to the record set back in November. The 2018 data series was also revised upward, with about 353,000 additional job openings on average. The quits rate was 2.3%, which is where it has been for most of 2013 after that series was revised. The quits rate describes the number of people who are leaving their current job to get another, so it tends to lead increases in wage growth.

 

job openings

 

The housing industry is driven at least partially by new home construction, and there is a noted labor shortage in that sector. The problem is most acute in skilled trades, like electricians and plumbers, but unskilled supply is still an issue. The job opening rate for construction was 3.9% last month, as opposed to 3.3% a year ago. The quits rate edged up for the sector as well, rising to 2.5%.