Morning Report: Rates hit fresh lows as Coronavirus infects the markets.

Vital Statistics:

Last Change
S&P futures 2910 -40.25
Oil (WTI) 44.97 -1.79
10 year government bond yield 1.05%
30 year fixed rate mortgage 3.44%

 

Stocks are lower as the Coronavirus knocks down global equities. Bonds and MBS are up.

 

Washington State has reported the second US death due to Coronavirus, and one case has been reported in New York City. Globally there have been 87,000 cases and 3,000 deaths. The total number of confirmed cases in the US is 75. Most of the cases center around a nursing home in Kirkland, WA.

 

The 10 year is trading close to 1% as the market is anticipating a move out of the Fed, the ECB, and maybe the Bank of Japan to lower rates.  Fed Chairman Jerome Powell made a statement on Friday saying:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

This statement caused a big shift in the Fed Funds futures. The March Fed Funds futures are now calling for a 50 basis point cut. My guess is that we would have an intra-meeting cut if the sell-off continues this week, and then another 25 basis points in March. Oh, and guess what the central tendency is for December. 50 – 75 bps in the FF rate. In other words, 100 basis points in cuts this year.

fed funds futures march 2020

 

Those sorts of moves seem to anticipate a recession in the US this year. Unless this turns into a major pandemic in the US, that seems unlikely. You generally don’t see recessions with 3.6% unemployment. However, supply shocks out of Asia will definitely slow things down. FWIW, the Fed Funds futures are predicting a recession, and that seems to be a stretch unless you start seeing tens of thousands of cases in the US.

 

The OECD is predicting that the coronavirus will lop about .5% off global growth this year, from 2.9% to 2.4%, which is a best case scenario. This scenario assumes that Coronavirus remains largely contained in Asia. If major outbreaks happen in Europe and the US, we would be looking at 1.5% global growth this year.

Morning Report: Market signalling March rate cut

Vital Statistics:

 

Last Change
S&P futures 3070 -39.25
Oil (WTI) 46.77 -1.79
10 year government bond yield 1.28%
30 year fixed rate mortgage 3.54%

 

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

 

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

 

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver.  Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

 

new home sales

 

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

 

Interesting on the flight to safety trade – gold is up. bitcoin is not.

 

 

Morning Report: March rate cut comes into view

Vital Statistics:

 

Last Change
S&P futures 3143 11.25
Oil (WTI) 49.46 0.19
10 year government bond yield 1.36%
30 year fixed rate mortgage 3.54%

 

Stocks have stabilized this morning and rates are up a touch from their intra-day all time lows yesterday. At one point, the 10 year Treasury was trading at 1.31%. This morning, Treasuries are down a touch and MBS are flat. For the most part, MBS underperformed Treasuries yesterday.

 

Mortgage applications rose 1.5% last week as purchases increased 6% and refis fell by 1%. “Last week appears to have been the calm before the storm,” said MBA Chief Economist Mike Fratantoni. “Weaker readings on economic growth caused a slight drop in mortgage rates, bringing them back to their level two weeks ago, but applications overall moved 1.5 percent higher. Refinance applications for conventional loans dropped a bit, but FHA refinances increased more than 22 percent. Purchase volume remained strong, supported both by low rates and the increased pace of construction over the past few months. With housing supply at low levels, new inventory is a positive development for prospective homebuyers.”

 

The Coronavirus issue has spooked the Fed funds futures market. The futures are now predicting a 1 in 3 chance of a rate cut at the March meeting. Just one  month ago, the March futures were handicapping a 4% chance. Take a look at the December futures, which are now forecasting 2 or 3 cuts this year.

 

fed funds futures

 

Note that Dallas Fed President said yesterday: “It is still too soon to make a judgment about how it might relate to monetary policy. I still think we are a number of weeks away from being able to make the judgment” whether a rate change is required.” The April futures are already pricing it in.

 

Coronavirus fears didn’t do much to dampen US consumer confidence, which rose again. Historically consumer confidence has been an inverse of gasoline prices, in other words, when gasoline rises, consumers get salty and vice versa. Oil is now trading below $50 a barrel, and the refineries are beginning to switch from heating oil to gasoline refining. Good news for the summer driving season.

 

Luxury homebuilder Toll Brothers reported lower than expected earnings this morning and the stock is getting hammered pre-open (down about 9%). Earnings were down big and revenues missed guidance.

Morning Report: Bond yields flirting with 2016 lows

Vital Statistics:

 

Last Change
S&P futures 3251 -88.25
Oil (WTI) 51.16 -2.19
10 year government bond yield 1.38%
30 year fixed rate mortgage 3.63%

 

Stocks are lower this morning on overseas weakness, as investors continue to fret about Coronavirus, which is spreading beyond Asia. Bonds and MBS are up (yields down) on the flight to safety trade.

 

The 10-year Treasury is trading just off the lows of 2016, where it hit 1.36%. FWIW, that is a modern historical low – long term rates never fell below 2% even in the Great Depression. How low can rates go? The thing about bubbles is that they on longer and further than anyone expects. How many people are talking about a sovereign debt bubble? It hasn’t even registered yet.

 

Existing Home Sales fell 1.3% MOM in January to an annualized rate of 5.46 million. Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.” The median existing home price was $266,300 up 6.8% from a year ago. The first time homebuyer accounted for 32% of sales.

 

Fannie and Freddie will be freed with “limited and tailored” government backstops, according to US Treasury Secretary Steve Mnuchin. SIFMA has warned that removing the explicit government guarantee from Fannie and Freddie’s MBS would have a devastating impact on the market. Remember during the crisis, a trial balloon was floated about removing the government guarantee, and Bill Gross shot it down with a howitzer. No mention was made of what will happen to current stockholders.

 

Wells agreed to pay $3 billion to settle DOJ and SEC cases over the fake accounts scandal. Whether this will permit the company to begin growing again remains to be seen. The Fed has restricted growth in Well’s balance sheet since 2017.

Morning Report: Rates falling on global growth fears

Vital Statistics:

 

Last Change
S&P futures 3243 19.25
Oil (WTI) 51.58 0.02
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.65%

 

Stocks are higher despite Chinese markets getting hammered on Coronavirus. Bonds and MBS are down small.

 

We saw a big jump downward in rates last week, both here and in Europe. The Coronavirus is triggering the “flight to safety” trade, which means investors sell risky assets like stocks to buy less risky assets like Treasuries. So far, we aren’t seeing major moves in the Fed funds futures, but this situation is still developing.

 

Stocks this week will probably be driven by developments in China more than the usual catalysts (earnings and economic data). We are in the heart of earnings season right now, with heavyweights like Google reporting tonight. Not much in terms of Fed speak this week, however we do have some important economic data with the jobs report on Friday.

 

Black Knight Financial estimates there are 9 million refinanceable mortgages in the market right now. By their numbers, 9.4 million borrowers could save an average lf $272 a month if they were to refinance, assuming 30 year mortgage, 20% equity and a 720 FICO. That adds up to $2.6 billion per month, the highest potential savings in 20 years.

 

Wells estimates that if Coronavirus takes a big bite out of global growth, we could be looking at low 1%s in the 10 year. They also think each 1% sell-off in the S&P 500 translates into about 4 basis points lower in the 10 year yield.

 

The homeownership rate ticked up in the fourth quarter to 64.8%, the highest level in the second quarter of 2014. I don’t know if we will get back to the peak levels we saw in 2005-2006 given that the financial conditions that spawned it aren’t present any more.

homeownership rate

Morning Report: Coronavirus hits stocks and lifts bonds

Vital Statistics:

 

Last Change
S&P futures 3245 -50.25
Oil (WTI) 52.58 -1.62
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.72%

 

Stocks are lower this morning as the Asian Coronavirus spreads. Bonds and MBS are up.

 

The upcoming week will have quite a bit of data – new home sales, the first pass at Q4 GDP, and personal incomes / spending. We will also have the FOMC meeting on Tuesday and Wednesday. The current consensus is that the Fed won’t make any changes in policy.

 

As a general rule, when you get big moves in the 10 year bond yield, it takes a while for the MBS market to catch up. This means that you can see the CNBC talking heads discussing how much lower rates are, then run a scenario and come away disappointed. We are seeing something similar this morning, where the 10 year bond is up over half a point, while the Fannie Mae 3.5s are flat. Even the Fannie 2.5s are only up 3/16. That said, this is a good opportunity to wake up your borrowers who might have missed an opportunity to refinance.

 

Fair Issac (the company behind the FICO score) is making changes to its credit scoring model. The change will focus more on payment history and consumer debt changes and less on overall debt such as student loans or a large mortgage. As a general rule, installment debt is less of a factor than revolving debt (i.e. credit cards).

 

Global real estate markets are cooling down. “Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September, the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.” Foreign asset demand seems to be the driver, and it has become more correlated with other asset classes, particularly stocks. For the US, the effects will probably be concentrated primarily in markets like New York City and the pricey West Coast markets.