Consumer Confidence – The Daily Tearsheet

Morning Report: Fed day

ital Statistics:

	Last	Change
S&P futures	3286	8.25
Oil (WTI)	53.98	0.22
10 year government bond yield		1.62%
30 year fixed rate mortgage		3.71%

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

The Fed is set to announce its decision at 2:00 pm this afternoon. No changes in rate policy are expected, however there might be some news regarding the balance sheet and overnight rates. It probably won’t be market-moving, but just be aware.

Mortgage applications rose 7.2% last week as purchases rose 5% and refis rose 8%. “Mortgage applications continued their strong start to the year, as borrowers acted on the drop in mortgage rates last week. Rates were driven lower by investors’ increased concern about the economic impact from China’s coronavirus outbreak, in addition to existing concerns over trade and other geopolitical risks,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With the 30-year fixed rate at its lowest level since November 2016, refinances jumped 7.5 percent. Purchase applications grew 2 percent and were 17 percent higher than the same week last year. Thanks to low rates and the healthy job market, purchase activity continues to run stronger than in 2019.” Note that there was an adjustment due to the Martin Luther King holiday.

Pulte reported better than expected earnings yesterday. Revenues were flat, but the 33% increase in new order stood out. “As demonstrated by our 33% increase in orders, the recovery in housing demand that began earlier this year gained momentum through the fourth quarter as we realized strong sales across all buyer groups,” said Company President and CEO Ryan Marshall. “Strong demand for new homes is benefiting from favorable market dynamics including improved affordability in part due to low mortgage rates, high employment and consumer confidence, and a generally balanced inventory of new homes,” added Marshall. The stock was up about 5% yesterday.

Consumer confidence perked up in January, according to the Conference Board. “Consumer confidence increased in January, following a moderate advance in December, driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects,” said Lynn Franco, Senior Director, Economic Indicators, at The Conference Board. “Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020.”

Strong consumer confidence, better homebuilding numbers and low rates mean that 2020 could be better than people are thinking for the mortgage industry. CNBC polls show that growth is expected to be 2% next year. Seems low if December’s housing starts weren’t a fluke, and judging by what we are hearing from the builders, it might not be. Those hoping for a recession will be encouraged by the inverting yield curve, but in this age of central bank intervention the signal doesn’t carry the weight it used to.

Morning Report: Meh jobs report

Vital Statistics:

	Last	Change
S&P futures	3280	4.25
Oil (WTI)	59.52	0.04
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.88%

Stocks are higher as it looks like hostilities are cooling between the US and Iran. Bonds and MBS are down.

Jobs report data dump:

Nonfarm payrolls + 145,000
Unemployment rate 3.5%
Labor force participation rate 63.2%
Average hourly earnings up 0.1% / 2.9%

Overall a meh report. Nothing special. Manufacturing payrolls fell by 12,000 which sort of meshes with the weak ISM report. Wage growth remains positive but below the sort of levels we were seeing a few months ago.

Initial Jobless Claims fell to 214,000 last week. No other economic data today, but we do have a lot of Fed-speak.

Want to give a compliance officer a heart attack? Go after a negative review on Yelp by trashing the borrower’s credit profile. Mount Diablo Lending was fined $120,000 for doing just that – “Your credit report shows 4 late payments from the Capital One account, 1 late from Comenity Bank which is Pier 1, another late from Credit First Bank, 3 late payments from an account named SanMateo. Not to mention the mortgage lates. All of these late payments are having an enormous negative impact on your credit score.” Note: credit profiles are confidential information, and your company should have procedures to protect it. Getting into a tiff with a declined borrower on Yelp is not a good way of going about that.

Remember when Quicken and United Wholesale got into a pricing war about this time last year? Well, it looks like Quicken just signed a 4 year contract with the NFL to be its exclusive mortgage sponsor. “Over the years we’ve been a brand and a company that likes to do big epic things,” Casey Hurbis, chief marketing officer for Quicken, said in an interview.

Corporate CEOs and consumers have differing views on the economy. CEOs think a recession in 2020 is the biggest risk, while almost all CFOs see the economy slowing next year. If you look at the chart below, CEO confidence is about where it was going into 2009, which quite simply makes no sense.

Morning Report: The impeachment process begins

Vital Statistics:

	Last	Change
S&P futures	2968	-2.25
Oil (WTI)	56.35	-0.64
10 year government bond yield		1.65%
30 year fixed rate mortgage		3.91%

Stocks are flattish this morning despite overseas weakness and Trump Impeachment news. Bonds and MBS are flat.

The news that Nancy Pelosi was opening an impeachment inquiry over the Trump / Ukraine situation was a non-event market-wise. Stocks and bonds didn’t budge. Supposedly Trump will release the transcript of the call today, and will make the whistleblower available to Congress. We will see where this goes, but market-wise it will take a while to play out. Check out the chart of the S&P 500 during 1998 when the whole Bill Clinton impeachment situation was played out:

Here is a chart of the bond market during the same time period (10 year yield). Looks like we saw a drop in the 10 year of about 160 basis points peak to trough during the whole process. Note that this is a classic example of the old market saw “buy the rumor, sell the fact.” The market priced in impeachment before the votes even took place. If you got short on the votes, you got your head handed to you. If you bought the Treasury flight to safety in late summer of 98, when the whole thing was coming to a head, you were too late, and were on the wrong side of the trade by that point.

There was some slight movement in the Fed Funds futures for December, with the current odds at 22% no cut, 52%, a 25 basis point cut, and 26% chance of 50 basis points. Note that the repo market issues has been taken by the Fed that they don’t have as much leeway to shrink the balance sheet as they had anticipated.

Mortgage applications fell by 10% last week as purchases fell 3% and refis fell 15%. Rates were more or less flat at 4.01% last week, so the refi number is a surprise. That said, mortgage rates had risen about 20 basis points over the past few weeks, so maybe this was a catch-up phenomenon. Despite the back up in rates, the MBA estimates that 2019 will be the best year since 2016, with originations expected to hit $1.9 trillion.

Consumer confidence fell in September on trade fears and darkening expectations. The present conditions index fell but it was mainly future expectations that drove the decline.

Morning Report: Global yields head lower

Vital Statistics:

	Last	Change
S&P futures	2862	-3.5
Oil (WTI)	56.05	1.14
10 year government bond yield		1.45%
30 year fixed rate mortgage		3.82%

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Global bond yields continue to head lower, and a larger percentage of the world’s sovereign yields are negative. Note that Germany has passed negative 70 basis points on the Bund, and France is not too far behind at negative 44 basis points. Japan is at negative 27 basis points. Even some of the ne’er-do-wells of Europe – Italy and Spain – have lower yields than we do. It is important to keep this chart in mind when you hear the business press push the “inverting yield curve means a recession is imminent” narrative. They inevitably ignore the fact that US bonds don’t trade in a vacuum and investors will sell negative yielding bonds to buy something positive.

Mortgage applications fell 6.2% last week as purchases fell 4% and refis fell 8%. Rates increased about 4 basis points for a 30 year conforming loan. Mortgage rates continue to lag the moves in the overall bond market. “U.S. Treasury yields were volatile over the course of the week, as the ongoing trade dispute between the U.S. and China continued to generate uncertainty among investors,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates increased for the first time since the week of July 12, but were still 80 basis points lower than the beginning of the year. With rates edging higher, refinances and purchase applications fell, at 8 percent and 6 percent, respectively.”

Consumer confidence remains elevated and close to record highs, according to the Conference Board. We are at levels last seen during the stock market bubble days of the late 90s, and the late 60s when we landed on the moon. Given the retail sales data, this could be one of the best holiday shopping periods in a long time.

Morning Report: Red October ends

Vital Statistics:

	Last	Change
S&P futures	2704	19.25
Eurostoxx index	361.06	5.53
Oil (WTI)	66.46	0.28
10 year government bond yield		3.14%
30 year fixed rate mortgage		4.89%

Stocks are recovering as we end the worst month for stocks in a while. Bonds and MBS are down.

Facebook reported last night and rose despite a revenue miss. GM is up 10% pre-open on blowout earnings, while GE cut its dividend to a penny. Earnings are generally good this quarter, although if you focused only on the indices you would figure they were terrible.

Home prices rose 5.8% in August, according to the Case-Shiller home price index. Las Vegas led the way with 14% growth. San Francisco and Seattle were the other big winners. Underneath the headline number, we are starting to see some month-over-month declines if you look at the seasonally adjusted indices. Ultimately wages need to catch up with the new reality of higher interest rates and higher home prices.

Despite what is going on in housing, consumer confidence remains strong, with the consumer sentiment indices just off multi-decade highs. Historically this index has reflected gasoline prices (gas prices up, consumer confidence down), but that has broken down over the past couple of years. This confidence has allowed companies to raise prices for the first time in a decade, with a laundry list of firms from consumer staples to airlines increasing prices in reaction to increased costs, particularly fuel. Some companies are not raising prices, but cutting sizes. Wages are picking up, but they are generally lagging some of these increases in the inflation indices.

Freddie Mac sees home sales improving in 2019 despite an uptick in mortgage rates. Originations are expected to be flat at $1.65T while home price appreciation and GDP growth are expected to moderate. The 30 year fixed rate mortgage is expected to average around 5.1% for the year, and then jump an additional 50 basis points in 2020.

freddie mac mortgage rates

Janet Yellen told a conference that the current deficit track is unsustainable, and that if she had a magic wand, she would raise taxes and cut retirement spending.

Part of the inflation puzzle has always been healthcare inflation, especially in prescription drugs. Amazon looks to be entering the Rx business, and CVS is piloting a free delivery subscription program. Health care is a big part of the inflation picture and perhaps these big can take a bite out of inflation via their market strength.

Morning Report: Home price appreciation is slowing.

Vital Statistics:

	Last	Change
S&P futures	2929.5	4
Eurostoxx index	383.66	1.52
Oil (WTI)	72.54	0.46
10 Year Government Bond Yield		3.09%
30 Year fixed rate mortgage		4.86%

Stocks are higher as the Fed begins their 2 day meeting. Bonds and MBS are down small.

Home prices rose 0.2% MOM / 6.4% YOY according to the Case Shiller House Price Index. Prices are appreciating at a slower rate than last year (the second derivative has flipped to negative) and we are seeing less dispersion between geographic areas. The yellow highlighted portion of the graph shows the derivative flipping. The convergence is happening at both extremes – the red-hot Western markets are cooling a little, and some of the laggards in the Northeast and Midwest are picking up a little.

Separately, the Case-Shiller HPI reported that prices rose 0.1% MOM / 5.9% YOY. The index showed the same slowdown that FHFA reported, although Las Vegas and Seattle are still super-strong.

JP Morgan is out with an aggressive call this morning: The Fed will raise rates every quarter through June 2019, taking the Fed Funds rate up to 3.0%. FWIW, the Fed funds futures are predicting only a 6% probability of that forecast, which would have to include an off-meeting hike or a 50 basis point hike at one of the meetings to play out. IMO, the Fed would need to see inflation accelerate meaningfully from here to do that, but the dot plot forecast tomorrow will tell a better picture.

The jump in the 10 year over the past month is setting up for a “buy the rumor, sell the fact” situation if the FOMC statement and dot plots are not sufficiently hawkish. In other words, if the statement is hawkish, the move up in rates has kind of already been made. And if it is dovish, we should see a retracement back down in rates.

Regardless of the increase in rates, the consumer remains ebullient, with the Consumer Confidence index increased in August and is sitting close to an 18 year high. Retailers are noticing as well, as same store sales rose 5.8%. This is despite a run up in gasoline prices. Q4 GDP should be well-supported by strong consumption numbers. It is surprising to see the jump in oil prices have pretty much no effect on confidence or spending. It could be an indication of rising wages.

Fascinating statistic: It can cost $750,000 to build a unit of affordable housing in California. Obviously it is hard to come up with a business model that supports it at those sort of pricing levels.

Morning Report: The Fed worries about the yield curve

Vital Statistics:

	Last	Change
S&P futures	2903	3
Eurostoxx index	386.36	.8
Oil (WTI)	68.91	0.02
10 Year Government Bond Yield		2.87%

30 Year Fixed rate mortgage 4.58%

Stocks are higher this morning on optimism over trade talks with Mexico. Bonds and MBS are down.

We saw a strong buildup of inventory in July, both at the retail level and the wholesale level. Inventory growth was negative in the second quarter, which depressed GDP growth slightly. This improvement in inventories will provide a boost to the third quarter numbers. Durable goods and autos led the increase, with retail inventories up 0.4% and wholesale inventories up 0.7%.

Redbook reported that same store sales rose 5.1% last week, which was the third fastest pace this year. This bodes well for the back-to-school numbers which are the best predictors of the holiday shopping season. Consumption has been generally strong and these numbers bear that out.

Consumer confidence jumped to 133.4 in August according to the Conference Board. This is the highest level since late 2000.

House prices rose 6.2% in June, according to the Case-Shiller home price index. Las Vegas, San Francisco, and Seattle reported double-digit increases. The laggards included New York, Chicago and Washington DC which reported low single-digit gains. Las Vegas is one of the fastest growing US cities in terms of population and employment growth, which explains the rise there. Seattle and San Francisco has restricted supply along with foreign demand. On the other side, the Northeast continues to stagnate.

The Urban Institute looked at mortgage denial rates along demographic lines and found that most of the studies that report discrimination overstate denial rates because they fail to take into account incomes and credit scores. While they still found some evidence of racial disparity it is much lower when you correct for these things. Not sure if the difference is statistically significant though. Given that CRA loans are worth more than traditional loans (all things being equal) it is surprising that there is any difference at all.

As the long end of the curve continues to rally, we will have a steady diet of recession prediction stories in the business press. The latest Reuters story cites a Federal Reserve study that suggests the market may be warning of a potential recession: “In light of the evidence on its predictive power for recessions, the recent evolution of the yield curve suggests that recession risk might be rising,” wrote San Francisco Fed research advisers Michael Bauer and Thomas Mertens.

The flattening yield curve provides plenty of fodder for the Wall of Worry, however there are a couple of things to bear in mind. First, the yield curve almost always flattens during a tightening cycle. Take a look at the chart below, and you can see the yield curve flatten as short term rates rise.

The behavior of the yield curve is 100% normal. Not only that, longer term interest rates are being held artificially low due to the behavior of central bankers throughout the world. The Fed is still buying Treasuries, albeit at a slower pace, while Japanese and European central bankers are pushing down long-term rates, which influences US rates. The signal-to-noise ratio of the yield curve is extremely low right now. Finally, the short Treasury trade is probably the biggest macro bet on the Street right now. Every wiseguy is short, and that means you will sometimes get these rallies for no apparent reason.

Morning Report: Case-Shiller continues to move higher

Vital Statistics:

	Last	Change
S&P futures	2724	1.5
Eurostoxx index	378.31	1.12
Oil (WTI)	68.22	0.14
10 Year Government Bond Yield		2.88%
30 Year fixed rate mortgage		4.57%

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Consumer confidence slipped in June, according to the Conference Board. The decline, while still high by historical standards, was driven more by a drop in the outlook than it was by a decline in current conditions.

Home price appreciation continued in April, with some real eye-popping moves in a few MSAs. Seattle and Las Vegas were up 13%, YOY, San Francisco was up 11%. Bringing up the rear was Chicago and Washington, up 3%. While the index has hit its 2006 peak, it is important to remember these are nominal (i.e non-inflation adjusted) numbers. If you adjust for inflation, Dallas, Denver and Seattle have regained their bubble peaks, while everyone else is still lower. Inventory is still tight, but the picture is improving.

Housing demand was up 7% in May, according to Redfin. Redfin measures housing demand by counting the number of offers and requests for home tours. Demand is actually down from a year ago, but the market is still a seller’s market.

Fears of a trade war are causing big asset allocations into government bonds. The government bond ETF GOVT saw record volume on Friday of $600 million. Momentum traders are beginning to pile into the long Treasury trade. Morgan Stanley is calling the top in yields. “While trade tensions have yet to negatively impact U.S. economic data noticeably, the Fed has started to hear more concern from business contacts. We see risk that such tension will impact economic data more in the coming months, even if a benign outcome comes to pass eventually.” FWIW, the Fed Funds futures are still handicapping a toss-up between 1 or 2 more hikes this year.

For mortgage originators, trade fears are probably going to help keep the 10 year below 3%, though it probably won’t be enough to bring back refi volume or to save the year.

Speaking of saving the year, in the second quarter cost cutting was a #1 or #2 concern for 30% of all mortgage originators. Last year, only 11% saw cost cutting as a #1 or #2 concern, focusing more on consumer-facing technology and process streamlining. In the first quarter, mortgage bankers reported a loss on production for only the second time in 10 years.

Morning Report: New Home Sales and prices soar

Vital Statistics:

	Last	Change
S&P futures	2682	10.5
Eurostoxx index	383.28	0.1
Oil (WTI)	68.68	0.01
10 Year Government Bond Yield		2.99%
30 Year fixed rate mortgage		4.56%

Stocks are up this morning on strong earnings by Caterpillar. Bonds and MBS are down.

New Home Sales rose 4% MOM and 8.8% YOY to an annualized pace of 694,000 in March. The median sales price was$337,200 and the inventory of 301,000 represented about 5 month’s worth. The number was well above Street estimates, however the confidence interval for this estimate is invariably wide.

Consumer Confidence improved to 128.8 in April as tax cuts have pushed sentiment to post-recession highs.

Home price appreciation is accelerating, with the Case-Shiller Home Price index up 6.8% YOY. We saw double-digit annual increases in San Francisco, Seattle, and Las Vegas.

The FHFA House Price Index reported a bigger increase – 7.2% YOY. The FHFA index only covers conventional loans, so it is a narrower index than Case – Shiller. The increases ranged from 4.8% in the Middle Atlantic to 10.3% in the Pacific.

What is the issue with the lack of home construction? Lack of labor. The construction industry has about 250,000 unfilled jobs right now, according to the NAHB. At the peak of the bubble, there were about 5 million people in construction; today that number is closer to 3.8 million. Many of these workers found employment in other industries (especially energy extraction) and aren’t about to go back. Immigration restrictions are another headache, as the government estimates that 13% of the construction workforce is working illegally. Finally, the opiod epidemic is particularly problematic in an industry where people are likely to be injured on the job and in pain generally. Ultimately, wages will have to increase to the point to lure a new generation of construction workers out of their climate controlled offices.

Round numbers always bring out the strategists, and as the 10 year sits close to the 3% level, we are seeing pieces discussing the asset allocation implications. Since the financial crisis, the earnings yield on the S&P 500 has been higher than the 10 year, although the premium is at the lowest level since 2010. One strategist thinks the 1950s are a good analogy for investors, where interest rates gradually rose as the memories of the Great Depression faded and the economy was strong. As an aside, Jim Grant discusses how the big retail investor trade in the 1950s was the leveraged curve flattener, where people would borrow short term money to invest in long-term Treasuries. That trade worked until the bond market crashed in the late 50s and a lot of people got carried out.

Is demand falling for houses? According to Redfin’s Housing Demand Index it is. “Abnormally late winter weather and an early Easter likely delayed homeowners planning to list their homes for sale in March,” said Redfin chief economist Nela Richardson. “While inventory levels are still not nearly high enough to meet strong buyer demand, we do expect new listings to pick up in April and May.”

The House has introduced legislation to end regulation by enforcement by the CFPB. HR 5534 would require the CFPB to provide guidance on its regulations and to establish a framework for monetary penalties.