Morning Report: Two Fed nominees head to the Hill.

Vital Statistics:

 

Last Change
S&P futures 3362 -17.25
Oil (WTI) 51.26 0.05
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning on coronavirus fears. Bonds and MBS are up small.

 

Consumer prices rose 0.1% MOM and 2.5% YOY in January, according to the CPI. Ex-food and energy, they rose 0.2% MOM and 2.3% YOY. The Fed doesn’t really pay too close of attention to the CPI, preferring the Personal Consumption Expenditures data. Regardless, inflation is not at a level to trigger any sort of rate hike.

 

Initial Jobless Claims came in at 205,000. The labor market continues to roll along.

 

The percentage of homes that sold above list price fell to a 3 year low in 2019, according to Zillow. On average, 19.5% of homes sold above list in 2019, while 21.5% did in 2018. This seems counter-intuitive given the supply / demand imbalance overall – NAR has existing home supply at roughly 3 months’ worth, well below 6.5 months, which is considered a balanced market. So what is going on? The real estate market is seasonal, and many people try and move during the summer months, which means home prices are negotiated in the late winter / spring. Early 2019 was marked by a continuing Fed tightening regime – we had multiple rate hikes in 2018 as the Fed wanted to get off the zero bound. This raised mortgage rates, which crimped affordability. The Fed only started easing in July, by which time the lion’s share of transactions are over. By the time mortgage rates fell meaningfully, 2019 was already in the books. 2020 should be a lot better, and judging by some of the comments from the builders, the spring selling season started early this year.

 

Jerome Powell’s Humprey-Hawkins testimony was largely uneventful, and today two of Trump’s Fed nominees head to the Senate for testimony. One of the nominees – Christopher Waller – is uncontroversial and should have no issues. The other one – Judy Shelton – has raised some eyebrows. Shelton has been critical of the Fed’s large balance sheet and its policy of paying interest on reserves. The policy of paying interest on excess reserves restricts credit needlessly, as she characterizes it as “paying banks to do nothing.” She is quite dovish and there are questions over whether she supports the gold standard, which is akin to pitching the idea of bloodletting to the AMA.

 

While we generally take for granted the idea that the Fed will maintain a larger balance sheet, this chart really puts into perspective how much things have changed. Pre-crisis the Fed had roughly $800 billion in assets. Now it is around $4.3 trillion. Has equity gone up 5x? um, no.

 

Fed assets

 

Credit rating agency Fitch is cautioning the CFPB from removing debt-to-income as a measure of a borrower’s ability to pay. The CFPB is considering using a measure like the difference between the borrower’s rate and the normal “market” rate, however Fitch thinks it is incomplete:

“Spread to APOR is a good measure of default risk. However, many factors can affect the price of a loan, some of which may have little to do with the borrower’s repayment capacity; these include liquidity, market movements, or attributes that present a low risk of loss to the lender, for example, a low loan-to-value. Aggressive lending programs could result in borrowers having a low APR but a high DTI and LTV where they cannot afford the loan but the risk of loss to the lender is low.”

 

Morning Report: Goldman sees the unemployment rate falling to 3.25% this year

Vital Statistics:

 

Last Change
S&P futures 3362 9.25
Oil (WTI) 50.51 0.72
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.66%

 

Stocks are higher this morning as China begins to restart industrial production. Bonds and MBS are down.

 

Jerome Powell goes to the Hill today for his semi-annual Humphrey Hawkins testimony. The Fed is closely monitoring the Coronavirus issue with respect to global growth. With this being an election year, the questioning will probably be more focused on political posturing (what would you do about income inequality? what would you do about affordable housing?) than anything else. I doubt there will be anything market-moving in the testimony, but you never know.

 

Small Business started the year off strong, according to the NFIB Small Business Optimism Index. “2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” Labor continues to be an issue: “Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”

 

Speaking of the labor market, Goldman Sachs Chief Economist Jan Hatzius sees the unemployment rate falling to 3.25% this year. That would be the lowest since 1953. But first, the Boeing and Coronavirus issues need to recede into the rear-view mirror.

 

The Trump Administration released its 2021 budget, which cut social programs and increased defense spending. Some housing related programs were hit, such as the Housing Trust Fund and the Capital Magnet Fund, which are funded by a 4 basis point charge on Fannie and Freddie origination. The Community Development Block Grants would be eliminated. As a general rule, these proposed budgets are not meant to become law (one of Obama’s budgets received exactly zero votes) – but are more statements of priorities. It also cuts Medicare and Medicaid, which means it would get no support from Democrats.

 

 

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 3340 -3.25
Oil (WTI) 50.38 -0.32
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning as investors sell winners. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls up 225,000
  • Unemployment rate 3.6%
  • Average hourly earnings up 3.1% annually
  • Labor force participation rate 63.4%
  • Employment-population ratio 61.2%

Overall, a strong report. Certainly payrolls were way above the 158,000 expectation. Construction gained workers, which comports with what we have been hearing from the builders – that they are ramping up for 2020. Wage growth and payroll growth remain strong, and more people are entering the workforce, with the participation rate up and a rise in the employment-population ratio.

 

The NAHB notes that 63 million households are unable to afford a $250,000 home. Interesting stat from the piece: “A previous post discussed the often-cited estimate that a $1,000 increase in the price of a median-priced new home will price 158,857 U.S. households out of the market for the home.  A second post discussed the related estimate that a quarter point increase in the mortgage rate will price out 1.3 million.”

 

On the other side of the spectrum, Redfin notes that luxury home prices are rising again as interest rates fall. “Demand for luxury is improving. That’s showing up primarily in an increase in sales right now, but it’s also putting some slight upward pressure on prices,” said Redfin chief economist Daryl Fairweather. “We’re ending the year in a much better position than we started, which is a good sign for 2020. I expect price growth to return to at least 3% to 5% by spring.”

 

 

Morning Report: 70% chance of a recession within the next 6 months?

Vital Statistics:

 

Last Change
S&P futures 3347 13.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Stocks are up after China announced they will cut tariffs on about $75 billion in goods by mid-month. Bonds and MBS are flat.

 

Announced job cuts doubled in January, according to outplacement firm Challenger, Gray and Christmas. Note that this is generally a weak employment indicator, as it focuses only on announced job cuts in press releases, which may or may not happen. Separately, initial jobless claims fell to 202k.

 

Productivity rose 1.4% in the fourth quarter, while unit labor costs rose by the same amount. The Street was looking for a 1.5% increase in both. Manufacturing productivity fell by 1.2%, which probably was Boeing-related.

 

JP Morgan Chase is entertaining getting back into the FHA business. JP Morgan had scaled back their FHA lending because of “aggressive use” of the False Claims Act, which resulted in large fines, and basically made the business too risky. Talks are still at the initial stage, but appeared to have been driven by a Trump Administration policy that will not penalize lenders for immaterial errors. JPM CEO Jamie Dimon said that the Obama Administration’s use of the False Claims Act to extract massive penalties for underwriting mistakes wiped out a decade’s worth of profit for the business.

 

Punchy bet: There is a 70% chance of a recession in the next 6 months, according to a study by State Street and MIT. They fit a model based on industrial production, nonfarm payroll growth, the slope of the yield curve, and stock market returns. They looked at over 100 years of data and concluded that the current set of circumstances would see a recession within 6 months about 76% of the time. FWIW, this sounds more like a “gee-whiz, look at what our model predicts!” sort of scenario than a real forecast. For starters, the economy is much less sensitive to industrial production than it was a century ago. Second, the yield curve’s behavior is being manipulated by unprecedented action out of central banks. Financial repression (the name for the central bank’s mission to push rates lower) also is pushing money into the stock market. This sort of activity was unthinkable even 15 years ago, so historical comparisons should be treated with caution. In other words, take this survey with a boulder of salt.

Morning Report: Big jump in employment

Vital Statistics:

 

Last Change
S&P futures 3327 23.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Another “risk-on” day as stock markets rally overnight and bonds get sold. MBS are performing a touch better than the 10 year.

 

Mortgage applications hit a six year high last week, which included an adjustment for the MLK holiday. The index rose 5% while refis increased 15%. The refi index is up 183% from the same week a year ago. Purchases fell 10%. “The 10-year Treasury yield fell around 20 basis points over the course of last week, driven mainly by growing concerns over a likely slowdown in Chinese economic growth from the spread of the coronavirus. This drove mortgage rates lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates.”

 

ADP reported that payrolls increased by 291,000 last month, a huge jump from December, which was revised upward from 139,000 to 202,000. The Street is looking for an increase of 158,000 nonfarm payrolls in Friday’s jobs report, so that number appears to be too low. There was a pretty big increase in construction workers as it looks like homebuilders are eager to finally fulfill the pent-up demand for housing out there. It looks like the ADP number was the strongest in at least a year

 

ADP report

 

Home prices rose 0.3% MOM in December, and are up 4% on an annual basis according to CoreLogic.

Morning Report: The government hires and advisor for Fannie and Freddie

Vital Statistics:

 

Last Change
S&P futures 3289 43.25
Oil (WTI) 51.38 1.02
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.63%

 

Stocks are higher after Chinese markets held up overnight. Bonds and MBS are down.

 

Construction spending fell 0.2% in November, but was up 5% on a YOY basis. Residential construction was up 1.4% MOM and up 5.8% YOY. Public residential construction was up almost 30% YOY.

 

Manufacturing performed better than expected in January, with the ISM Manufacturing Index rising to 50.9. This is a sharp rebound from December, which indicates that trade issues are in the rear view mirror.

 

The government is considering an expansion of the Federal Home Loan Bank’s customer base to include non-bank lenders and mortgage REITs. Federal Home Loan Bank borrowers generally get a sweetheart deal on financing, usually much better than even overnight repo lines. The reason? government subsidies. Note that some mortgage REITs currently do have FHLB lines, but I guess they want more mortgage REITs in the business. The Feds have been frustrated by the large banks, who have shied away from all but the most credit-worthy borrowers.

 

FHFA has hired an advisor to help recapitalize Fannie Mae and Freddie Mac. Houlihan Lokey won the deal. This will allow Fan and Fred to hire their own advisors for the equity sale. This is part of the government’s plan to decrease its footprint in the mortgage market. The share sale could top $125 billion, which would dwarf the largest IPO ever (Saudi Aramco in December) by a factor of 5. Lots of details remain, but progress is being made.

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