Morning Report: Consumer inflation remains muted

Vital Statistics:

 

Last Change
S&P futures 2787 2
Eurostoxx index 372.85 -1
Oil (WTI) 57.27 0.47
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.32%

 

Stocks are higher with a general “risk-on” feel to the tape. Bonds and MBS are down.

 

Lael Brainard speaks this morning and then the Fed enters its quiet period ahead of next week’s FOMC meeting.

 

Consumer inflation rose 0.4% MOM in February. Ex-food and energy, the index rose 0.4% and is up 2.1% YOY. Inflation remains under control, which should give the Fed the leeway to hold the line on rates next week. Falling energy prices at the end of 2018 helped keep the index under control, and we are seeing evidence that medical costs are finally stabilizing. Medical goods fell 1% MOM and services were flat. Stabilizing medical costs should translate into stable health insurance costs, which leaves more room for wage increases.

 

medical cpi

 

Retail Sales in January rose 0.2%, a touch higher than expectations. Those looking for a big rebound after December’s anemic numbers were disappointed. Given the strong consumption numbers in Q4 GDP, the holiday shopping season remains a bit of a mystery. The government shutdown is a possible explanation, and while it certainly hit the shops at Tyson’s Corner, the rest of the nation was unaffected. Note that the Fed’s consumer credit report showed that revolving credit increased only 1.1% in December and 2.9% in January, both well below run rates we have seen in the months leading up to it

 

Nancy Pelosi doesn’t support impeaching Trump. This is probably a tacit admission that the Mueller report isn’t going to contain anything we don’t already know.

 

Small business optimism rebounded in February. Earnings trends fell as many contractors were temporarily sidelined due to the government shutdown. Employment trends also slipped, probably for the same reason. Plans for expansion rose, however they are still below levels we saw in 2017-2018, which were extremely strong. Actual hires were the highest in years, and small business still finds a shortage of qualified workers. I am curious as to whether the “shortage of qualified workers” means (a) nobody around knows how to do the job, (b) nobody around knows how to do the job and can pass a drug test, or (c) nobody around that knows how to do the job will accept what I am willing to pay.

Morning Report: Foreclosure starts lowest in 18 years

Vital Statistics:

 

Last Change
S&P futures 2720 4
Eurostoxx index 362.25 3.31
Oil (WTI) 54.26 -0.3
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

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

 

Donald Trump stressed bipartisanship and unity at the State of the Union address, and reiterated his demands for border wall funding but stopped short of invoking emergency powers to get one built. Predictably, the reaction to the speech fell along partisan lines.

 

Mortgage Applications fell 2.5% last week as purchases fell 5% and refis rose 0.3%. This was a disappointment given that rates fell about 7 basis points, however the prior week had the MLK holiday adjustment so maybe there is some technical adjustment noise happening. Despite lower rates on a YOY basis, applications are down about 2% annually.

 

The service sector continued to grow in January, albeit at a slower pace, according to the ISM Non-Manufacturing Report. Some of this may have been government shutdown-driven. Employment rose, while new orders fell.

 

Foreclosure starts in 2018 decreased to 576,000, the lowest level in 18 years. Foreclosure completions were 175,000, another 18 year low. These numbers are 40% below their pre-recession averages. Higher loan quality in the aftermath of the credit crisis is a contributing factor, however the performance of refinances are better than purchases, which also is driving these numbers.

 

Housing reform and CFPB regulations may be headed for a conflict if what is called the “GSE patch” is not renewed when it expires in 2021. The CFPB discourages loans with debt to income ratios above 43%, but also permits GSE backed loans to fall under the QM umbrella, even though they permit DTIs up to 50%. Roughly a third of GSE loans fall in the 43-50% DTI range, which could become non-QM loans once the patch expires. The Urban Institute recommends that the GSEs replace the DTI rule with a 150 basis point cap over APOR to determine eligibility under QM.

 

Home prices rose 0.1% MOM and 4.7% YOY according to CoreLogic. Since house prices have been rising faster than incomes, affordability has suffered. Falling interest rates masked that issue most of the post-crisis period, but the music has stopped. CoreLogic now estimates that 33% of the housing stock in the US is now overvalued.  Separately, Redfin now estimates that the West Coast is a buyer’s market.

 

Corelogic overvalued

Morning Report: Retail sales strong

Vital Statistics:

 

Last Change
S&P futures 2432.5 -38.5
Eurostoxx index 331.96 -3.2
Oil (WTI) 45.4 -0.32
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are up.

 

Was there any particular catalyst for yesterday’s move in stocks? Not really. Markets don’t go up in a straight line, and they don’t go down in a straight line either. Bonds sold off heavily, but you didn’t see as much action in TBAs. They were down, but not like the 10 year. TBAs have been lagging the move in the bond markets anyway.

 

Home prices rose 5.5% in October, matching the move we saw in September. The usual suspects saw the biggest increases: Las Vegas, and San Francisco. Phoenix is now showing strength as well. Affordability remains the most pressing issue: “Home prices in most parts of the U.S. rose in October from September and from a year earlier,” says
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The combination of higher mortgage rates and higher home prices rising faster than incomes and wages means fewer people can afford to buy a house. Fixed rate 30-year mortgages are currently 4.75%, up from 4% one year earlier. Home prices are up 54%, or 40% excluding inflation, since they bottomed in 2012. Reduced affordability is slowing sales of both new and existing single family homes. Sales peaked in November 2017 and have drifted down since then.”

 

Retail sales were the strongest in 13 years for last week, with same store sales up 7.8%. Since consumption is 70% of the economy, I wouldn’t be surprised to see some strategists bumping up their Q4 GDP estimates.

 

Note that due to the government shutdown, the Commerce Department won’t be releasing economic numbers. We won’t be able to get tax transcripts out of the IRS, but FHFA should be running normally, so you should be able to get case numbers for FHA loans, and Ginnie Mae securitization markets should function normally.

 

The Trump Administration expressed confidence in Jerome Powell, and said that he is safe. There is a precedent for the President showing Fed Chairmen the door – Jimmy Carter dumped G. William Miller after a year on the job, though he kicked him upstairs to Treasury and nominated Paul Volcker.

Morning Report: The real reason why markets are selling off

Vital Statistics:

 

Last Change
S&P futures 2355.25 13.5
Eurostoxx index 335.24 -1.43
Oil (WTI) 53.35 0.82
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.60%

 

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

 

Not a lot of news to work with, but most of the business press is fixated on the stock market sell-off and trying to craft a narrative that Trump (or the government shutdown) is behind it. This is nonsense. There is a sea change in the market’s perception that the Fed has overshot, and you can see it the chart below, which shows the expected Fed Funds rate for a year from now.

 

Fed fund futures dec 2019

 

Right now, the central tendency is that there will be no more rate hikes in 2019. But take a close look at the implied probabilities today and compare them to where they were a month ago. At the end of November, the markets figured there was a 23% chance that there would be no further changes, a 37% chance of one more hike, and a 25% chance of two more hikes. Look at the probabilities now: 59% chance the Fed does nothing in 2019, a 17% probability they hike 25 basis points, and a 19% probability the next move is a rate cut. That is a tremendous change in market perception in just under a month, and THAT is what is driving the markets. Not the government shutdown. Not Trump jawboning Powell about interest rates, especially since the markets are saying that Trump is right. Hard for the business press to massage that point.

 

FWIW, the Atlanta Fed is predicting Q4 GDP to come in at 2.7%. If there is a recession coming in 2019, today’s numbers sure are not signalling one.

 

There is concern in the economy that housing is slowing down, but in all honesty, housing never really recovered all that much, at least as far as building is concerned. We still have such a deficit between supply and demand that any fears of another 2008 – style market collapse are misplaced. Bottom line: the US taxpayer has been bearing the credit risk of 90% of all new origination over the past 10 years. The banking system does not have the mortgage credit risk issues it did during the bubble days – the private label mortgage market does not have the footprint it did a decade ago.

 

There is fear of a drop in global demand, and that is what the declines in commodity prices are saying. The Chinese economy is living on borrowed time, as they have a massive real estate bubble that will burst at some point. Europe continues to muddle through, and Japan’s start-stop economy is beginning to hiccup again. Fears of a global economic slowdown are a valid fear, however the punch line from that is ultimately lower global interest rates, which is a plus for the US, not a negative.

Morning Report: More inflation data

Vital Statistics:

 

Last Change
S&P futures 2660.75 19
Eurostoxx index 347.9 2.9
Oil (WTI) 52.57 0.91
10 year government bond yield 2.89%
30 year fixed rate mortgage 4.72%

 

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

 

Donald Trump got into it with Democrats on live TV yesterday over funding for the wall. He said he would be “proud” to do a partial government shutdown in order to obtain funds for border security. “Partial government shutdown” all but screams that this shutdown will be symbolic only – usually the only thing they shut down are the monuments around DC – but that doesn’t always happen. As a general rule, the mortgage market should not be affected, but things like tax transcripts etc could be delayed. This sounds like it is all for show as both parties play to their respective bases.

 

Inflation at the wholesale level came in a hair above expectations, with the headline producer price index rising 0.1% MOM /  2.5% YOY. Ex-food and energy, the number was 0.3% / 2.7%. The Fed doesn’t necessarily put a lot of stock in the PPI, but it does show that inflation is beginning to creep above the Fed’s target of 2%. Building labor costs (which not only show up in direct wages, but also inputs like transportation) are being offset somewhat by declining commodity prices and strength in the US dollar.

 

Home prices rose 5.4% YOY in October, according to CoreLogic. “Rising prices and interest rates have reduced home buyer activity and led to a gradual slowing in appreciation. October’s mortgage rates were the highest in seven and a half years, eroding buyer affordability. Despite higher interest rates, many renters view a home purchase as a way to build wealth through home-equity growth, especially in areas where rents are rising quickly. These include the Phoenix, Las Vegas and Orlando metro areas, where the CoreLogic Single-Family Rent Index rose 6 percent or more during the last 12 months.”

 

CoreLogic estimates that 35% of all MSAs are overvalued, including the NY-NJ-LI area. This is interesting given that this area has barely rebounded off the 2012 lows, and has massively underperformed the rest of the US. This is evidence of the lack of wage growth in this area, primarily driven by secular changes in the financial services industry. Some of this was undoubtedly being driven by 0% interest rates, but a lot of it is technology replacing people.

 

NYC MSAs

Morning Report: The MBA addresses LO comp

Vital Statistics:

 

Last Change
S&P futures 2730 -15
Eurostoxx index 356.25 0.66
Oil (WTI) 66.47 0.03
10 year government bond yield 3.15%
30 year fixed rate mortgage 4.93%

 

US stock index futures are lower despite a rally overnight in Asia and Europe. Bonds and MBS are up.

 

We have a lot of Fed-speak today, which could translate into some volatility in the bond market, but I suspect bonds are just going to be driven by stocks and the risk on / risk off trade.

 

The 10 year bond touched 3.11% yesterday around noon, and then sold off as stocks recouped some of their losses. One thing to keep in mind, especially during overseas-led sell offs: First, the European markets close around 11:30 EST. Often times, the best prices (ie lowest rates) can be found right around / after the European close. Second, TBAs (which determine mortgage rates) are slow to react to big moves in the 10 year. So even though the 10 year bond might be up a half a point, it doesn’t mean the scenario you just ran will be half a point better than yesterday.

 

Mortgage Applications rebounded 5% last week as purchases rose 2% and refis rose 10%. Rates increased by a basis point to 5.11% – the highest since Feb 2011.

 

The MBA sent a letter to the CFPB asking them to address LO comp, and in particular the inflexibility of it. During the crisis, loan officers were accused of steering consumers into the loans that paid LOs the most and weren’t often the best for the consumer. In response, Dodd Frank made LO comp insensitive to product – in other words the LO makes the same on every product. While this sounds great in theory, it ignores competitive realities, the fact that LOs sometimes screw up on an application, and that state housing programs can become unprofitable for the lender if the LO makes a full commission. The MBA is asking for clearer, bright line rules from the CFPB.

 

In the sea of red yesterday, the homebuilders were a bright spot after Pulte released earnings pre-open.  Revenues were up 74%, but new orders and backlog were up only single digits. Gross margins increased to 24%. The homebuilder ETF (which hasn’t been able to get out of its own way lately) was up smartly.

 

Donald Trump escalated his attacks on Jerome Powell, the Fed Chairman yesterday in an interview with the Wall Street Journal. “Every time we do something great, he raises the interest rates,” Mr. Trump said, adding that Mr. Powell “almost looks like he’s happy raising interest rates.” While Trump acknowledged the independence of the Fed, he would prefer low rates (as would every politician on the planet). BTW, I think Powell is happy the economy is in a strong enough state that he can put some distance between the Fed Funds rate and the zero bound. Monetary policy can become completely ineffective when rates are around zero.

Morning Report: Existing Home Sales fall

Vital Statistics:

Last Change
S&P futures 2856 -5.75
Eurostoxx index 383.91 -0.25
Oil (WTI) 67.32 0.89
10 Year Government Bond Yield 2.82%
30 Year fixed rate mortgage 4.58%

Stocks are modestly lower this morning after Paul Manafort was found guilty and Michael Cohen copped a plea. Bonds and MBS are flat.

Paul Manafort was found guilty of fraud and tax charges and there was a mistrial on the other charges. Nothing was found on the Russian front. Ex Trump lawyer Michael Cohen pled guilty to FEC violations, which relates to the Stormy Daniels case. Whether this ends up getting legs remains to be seen. FWIW, the markets are saying it is no big deal.

We will get the FOMC minutes today at 2:00 pm. Given the lack of liquidity in the markets, we could see some market movement in what should otherwise be a non-event.

Mortgage applications rose for the first time in 6 weeks as purchases rose 3% and refis rose 6%. Overall they rose 4.2%. Mortgage rates were unchanged, so that is a surprising jump in refi activity. Given that the index is sitting at lows not seen since the turn of the century, it doesn’t take much of a bump in activity to move the index.

Existing home sales fell again for the fourth month in a row. They fell 0.7% on a MOM basis and are down 1.5% on a YOY basis. This is the fifth straight month of YOY declines. It looks like much of the decline was attributable to weakness in the Northeast. The median house price rose 4.5% to 269,600.  Current estimates of median income are around 61,500, so that puts the median house to median income ratio around 4.4x. While other measures of housing affordability remain decent, this one is flashing red for valuations overall. The MP / MI ratio ignores interest rates, which are the biggest determinant of affordability, but over time house prices correlate with incomes, and it wouldn’t be a surprise to see home prices begin to take a breather.

Median House Price to Median Income Ratio

Fed Chairman Jerome Powell assured Senator Tim Scott that the Fed remains independent despite the jawboning from Trump. Powell said in a radio interview: “We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t … take political considerations into account,” Powell told the radio show. “I would add though that no one in the administration has said anything to me that really gives me concern on this front.” Separately, Dallas Fed Chairman Robert Kaplan said that the Fed only needs to hike 3 or 4 more times to get to neutral.