Morning Report: Holiday sales looking strong

Vital Statistics:

 

Last Change
S&P futures 2945 -6.25
Oil (WTI) 53.63 0.84
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.84%

 

Stocks are slightly lower on trade concerns and weak European data. Bonds and MBS are flat.

 

The upcoming week should be relatively quiet, with only inflation data and a slew of Fed-speak. Since increasing inflation is no longer front and center of the Fed’s concerns, the CPI and PPI should be non-events. We will also get the minutes from the September FOMC meeting on Wednesday.

 

Interesting stat on how long it takes to build a home in different geographic areas. The Mid-Atlantic region (which contains red-tape heavyweights like NY and NJ) is the longest at 10.5 months. The West Coast is right up there as well, at 9.9 months. The Southeast has the shortest timeline at 6.6 months.

 

new construction times

 

IPOs have been a treacherous investment over the past few years, as the venture capitalists and early entry investors have been reaping the rewards, at least for some of the biggest names (Uber, Lyft, Slack). We Work recently pulled its IPO as investors balked at the corporate governance issues and cash burn. While not all IPOs have been disasters, historically they have popped about 20% on the first day of trading. Not any more.

 

The National Retail Federation sees holiday sales at 3.8% – 4.2%, citing trade concerns over holiday spending. This is the low side of the holiday forecasts, which are coming in closer to 5%. The last 5 years have been around 3.7%, so the forecast is for something between “above average” and “great.” Since consumption is about 70% of the economy, we could be looking at better GDP numbers heading into the end of the year, which would put pressure on the Fed to slow down their pace of rate cuts.

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Morning Report: Personal incomes rise

Vital Statistics:

 

Last Change
S&P futures 2943 16.5
Oil (WTI) 56.33 -0.34
10 year government bond yield 1.51%
30 year fixed rate mortgage 3.77%

 

Stocks are up ahead of the 3 day weekend. Bonds and MBS are flat.

 

No word yet from SIFMA regarding an early close, so assume the bond market is open all day.

 

Personal incomes rose 0.1% in July, which was a deceleration from the previous few months. June was revised upward from 0.4% to 0.5%. Disposable personal income rose 0.3%, and spending rose 0.6%, which came in above expectations. The core PCE index (the Fed’s preferred measure of inflation) rose 0.2% MOM and 1.6% YOY, which is below their 2% target. The headline PCE rose 0.2% / 1.4%.

 

Consumer sentiment fell in August according to the University of Michigan Consumer Sentiment Survey.

 

Pending Home Sales fell 2.5% in July, according to NAR. “Super-low mortgage rates have not yet consistently pulled buyers back into the market,” said Lawrence Yun, NAR chief economist. “Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Regionally, they declined 1.6% in the Northeast and fell 3.4% on the Left Coast.

 

As bond yields have fallen, mortgage rates have not kept up as investors have been sweating prepayment speeds in the MBS market. The biggest issues have been rate volatility, which negatively impacts mortgage backed security pricing, along with fears we are entering a new refinance cycle. Also, many mortgage bankers set their staffing levels for the year back in late 2018, when it looked like we were in a tightening cycle and volumes would be much lower. “Do not expect much, if any of a drop in mortgage rates in the coming weeks,” said Mitch Ohlbaum, president, Macoy Capital Partners in Los Angeles. “It’s not because they shouldn’t, it’s because the lenders are already beyond capacity with refinances and frankly do not want any more volume.” There is probably some truth to that, but that is fixable. The volatility in the Treasury market and convexity risk is killing MBS investors. The classic example of a MBS investor is Annaly, a mortgage REIT, which has gotten clocked this year and cut its dividend.

 

NLY chart

 

PIMCO is advising the Fed to “aggressively cut rates” given the recent economic data suggests a slowdown. Their point is that recent data is “understating” the extent of the slowdown. They raise the point that labor market momentum has decelerated more than forecasters were predicting. Of course, at 3.7% unemployment, we are pretty much at or close to full employment. Wages are generally a lagging indicator, but this morning’s personal income disappointment was partially driven by a decrease in asset income, which probably just reflects falling interest rates.

Morning Report: Why mortgage rates don’t exactly mirror Treasury rates

Vital Statistics:

 

Last Change
S&P futures 2788 7
Oil (WTI) 59.1 0.1
10 year government bond yield 2.26%
30 year fixed rate mortgage 4.24%

 

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

 

First quarter GDP was revised downward from 3.2% to 3.1%. Increased exports offset a downward revision in residential fixed investment (homebuilding). The inflation number was also revised downward and is well below the Fed’s 2% target. The Fed funds futures are now forecasting a more than 80% chance of a rate cut this year.

 

Initial Jobless Claims ticked up to 215k from 212k the prior week.

 

In market environments like yesterday, I always seem to get the following question: “Brent, the 10 year is down from 2.4% to 2.25% over the past two weeks. I just ran a scenario and only saw a small improvement in pricing. How come?” The short answer to that question is that mortgage rates are tied to the prices of mortgage backed securities which are influenced, but not determined by the 10 year. (This is why my opening statement always talks about bonds and MBS – they are different animals and will behave differently to changing market conditions)

 

To make things even more complicated, mortgage backed securities will behave differently depending on the coupon. Take a look below at what a typical MBS screen looks like. This lists the TBAs (stands for to-be-announced) mortgage backed securities that correspond to Fannie Mae loans. If you do a Fannie Mae loan, it is probably going to go into one of these securities. You can see that there is a different security for each month of delivery and note rate. On the far left hand side you can see the coupon groupings. It starts at 3%, then goes to 3.5%, then to 4% and so on. The delivery months are also listed: June, July, and August. Note that the price falls as you go out in the future. This is why a 45 day lock costs more money than a 15 day lock.

 

During the day, mortgage backed securities will trade and prices will be updated pretty frequently. So, if the 10 year bond rate falls by, say 5 basis points, you could see the implied yield of the Fannie 4% of August drop by 5 basis point, 2 basis points, whatever. It will be a function of the supply and demand for that mortgage backed security. Since these prices are the inputs to the rate sheets you see every day, this is the security that really matters, not the 10 year.

 

MBS

 

If you take a look at the 4% coupon, you’ll see them trading at just under 103. An investor who buys a mortgage backed security is paying 103 for a bond that will pay 100 at some time in the future. Why would a rational investor do that? The answer lies in the interest. The 4% interest payment is higher than the corresponding rate you would get on the benchmark Treasury, which is 2.375%. That difference is the compensation for paying more than par. The investor is betting that they will get that extra interest for a long enough period to cover the extra 3 points they paid. If the mortgages pay off earlier than expected, then the investor is out of luck. This is why early refinancings are a no-no and why Ginnie Mae is taking action to prevent early refinancings of VA loans.

 

So, when interest rates fall, like we have seen over the past couple of days, the rates on mortgages don’t fall in lockstep. MBS investors will re-evaluate their prepayment models and figure out the right price to pay given the fact that the period they will get that extra interest has changed. Before, they might have expected to get it for, say 7 years. Now they expect to get it for 6 years. When they crunch the numbers, they come up with a right price to pay for that 4% mortgage backed security. And the price for that mortgage backed security will then be used for everyone’s rate sheets. To make things even more complicated, the change in price for a 3% security will differ from a 4% security. The name for this whole phenomenon is called convexity, and it gets into some gnarly bond math. But the punch line about convexity is that mortgage backed securities have a lot of it, which causes them to behave differently than the 10 year. So, when you see on CNBC that the 10 year bond yield fell 10 basis points, you can’t expect to see a corresponding 10 basis point improvement in mortgage rates. It just doesn’t work that way.

Morning Report: Weak data sends yields lower

Vital Statistics:

 

Last Change
S&P futures 2832.5 -6
Oil (WTI) 61.11 -0.59
10 year government bond yield 2.36%
30 year fixed rate mortgage 4.17%

 

Stocks are lower after weak economic data out of China. Bonds and MBS are up.

 

Some weak economic data this morning, which is pushing bond yields lower. The 10 year is trading at 2.63%, which is the lowest level since December 2017.

 

Mortgage Applications fell 0.6% last week as rates were more or less steady. Purchases fell 0.6%, while refis fell 0.5%. The typical 30 year fixed rate mortgage came in at 4.24%. “Purchase applications declined slightly last week but still remained almost 7 percent higher than a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Despite the third straight decline in mortgage rates, refinance applications decreased for the fifth time in six weeks, albeit by less than 1 percent.”

 

Separately, 30-day and 60-day delinquencies did tick up in the first quarter, however foreclosure inventory is at the lowest level since 1995.

 

Retail sales disappointed, with the headline number coming in -0.2%. Ex autos, they rose 0.1% and the control group was flat. YOY, they were up 3.1%

 

Industrial Production and manufacturing production both fell 0.5% in April, while capacity utilization fell to 77.9%.

 

After the weak data, the December Fed Funds futures are forecasting a 76% chance of a rate cut this year, and the June futures are factoring in a 1 in 5 chance of a 25 basis point cut. 1 month ago, the markets were handicapping a 40% chance of a cut this year, so there has been a big change in sentiment. While that seems aggressive given the language out of the Fed, it is hard to ignore what the markets are saying.

 

fed funds futures

 

 

 

 

Morning Report: Rebound in refinances this year

Vital Statistics:

 

Last Change
S&P futures 2917.25 5.85
Eurostoxx index 388.92 -0.35
Oil (WTI) 64.39 0.34
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.32%

 

Stocks are higher this morning as bank earnings continue to come in. Bonds and MBS are down on stronger-than-expected data out of China.

 

Mortgage Applications fell 3.5% last week as purchases rose 1% and refis fell 8%. “Mortgage applications decreased over the week, driven by a decline in refinances,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With mortgage rates up for the second week in a row, it’s no surprise that refinancings slid 8 percent and average loan sizes dropped back closer to normal levels.” The average mortgage rate rose 4 basis points to 4.44%. The refinance index has rebounded smartly over the past several months, but we are nowhere near the levels of the 2015 refi boom, let alone the 2011-2012 boom.

 

refi index

 

Builder optimism inched up as the the NAHB / Wells Fargo Housing Market index rose 1 point to 63. As has been the case throughout the recovery, the West led the pack, with the Midwest and Northeast picking up the rear. “Builders report solid demand for new single-family homes but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots,” said NAHB Chairman Greg Ugalde.

 

Industrial Production slipped 0.1% in March, while manufacturing production was flat. Capacity Utilization dropped .2% to 68.8%. This was generally a disappointing report, however orders for business equipment and capital expenditures bounced back after a deep decline in February. Over the past several years, the first quarter has been weak, and it looks like this year is more of the same.

 

New FHFA Chairman Mark Calabria said he takes the role with a “great sense of urgency” with regard to reforming Fannie Mae and Freddie Mac. He was confirmed as FHFA Chairman last week on a straight party line vote. “The mortgage market was at the center of the last crisis, as it has been for many past financial crises,” Federal Housing Finance Agency Director Mark Calabria said Monday in his first official remarks as head of the agency. “I believe the foundations of our current mortgage finance system remain vulnerable.”

Morning Report: Housing cycles and bond markets.

Vital Statistics:

 

Last Change
S&P futures 2815 -4
Eurostoxx index 377.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.63%
30 year fixed rate mortgage 4.28%

 

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

 

Initial Jobless Claims fell slightly to 224k last week.

 

Durable Goods orders increased 0.4% in February, driven by an increase in commercial jet orders. Ex-transportation, they were down 0.1%. Core capital goods increased 0.8% as companies continue to plow capital back into expansion opportunities. Much of the increase in capital expenditures was in machinery, which is a positive sign for manufacturing. Still, economists are cautious on Q1 GDP, with many forecasting sub 1% growth for the quarter.

 

Construction spending rose 1.3% MOM and is up 0.3% YOY. Residential construction was down on a MOM and YOY basis. Housing continues to punch below its weight. Since construction is seasonally affected, January numbers tend to be a bit more volatile and have less meaning than summer numbers.

 

The MBA released its paper on CFPB 2.0, where they list out their recommendations for the CFPB. Much of what they say is similar to what Mick Mulvaney and Kathy Kraninger have been doing – increasing transparency regarding rulemaking and giving more guidance on what is legal and illegal. The Obama / Cordray CFPB was purposefully vague in promulgating rules, which makes life easier for regulators but makes it harder for industry participants. Regulation by enforcement was the MO of the Cordray CFPB, which ended with the new Administration, and the MBA agrees.

 

Specific to the mortgage business, the MBA recommends that the CFPB allow loan officers to cut their compensation in response to competitive dynamics, to extend the “GSE patch” which means loans that are GSE / government eligible are automatically considered to be QM compliant, to allow mortgage companies to pass on error costs to loan officers, and to raise the cap on points and fees.

 

CoreLogic looks at home price appreciation and the economic cycle. The punch line: While the current expansion is just short of a record length, and home price appreciation is declining, it doesn’t necessarily mean that house prices are in for a decline. In fact, housing typically weathers recessions quite well. I could caveat that the chart below only looks at a bond bull market. The 1978 – 1982 timespan of the misery index and inflation marked the bottom of the Great Bond Bear Market that lasted from the mid 1950s to the early 80s. The Great Bond Bull Market that began in the early 80s ended a few years ago, and while a bear market probably hasn’t begun yet the tailwind of interest rates falling from 17% to 0% isn’t going to be around this time. Finally, there are a few massive supports for the real estate market: rising wages, low inventory, and demographics. It is hard to imagine another 2008 happening if the economy peters out.

 

corelogic home prices

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.