Morning Report: Small business optimism slips

Vital Statistics:

 

Last Change
S&P futures 2968 -10
Oil (WTI) 57.95 0.25
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as we await a speech from Jerome Powell. Bonds and MBS are down.

 

Jerome Powell speaks at 8:45 this morning at the Boston Fed regarding stress-testing for the banks. Here are his prepared remarks. He doesn’t address monetary policy.

 

There were 7.3 million job openings in May, down slightly from April. The quits rate, which tends to lead increases in wages, was steady at 2.3%, where it has been all year. Private sector openings were flat, while government fell by about 40,000.

 

Small Business Optimism slipped in June, according to the NFIB. This reversed May’s jump, however sentiment is still at historically high levels. Expectations eased for sales and profitability, and the outlook for capital expenditures weakened. The capital expenditure level was the lowest since May 2015. Employment also decreased, however most firms are still in hiring mode, with the availability of qualified labor the biggest issue.

 

NFIB

 

The Congressional Budget Office analyzed the probable effects of raising the Federal Minimum Wage to $15 an hour. Unsurprisingly, they concluded that it would cost jobs, with the median estimate coming in at 1.3 million. The graph below looks at how the constant dollar minimum wage has behaved relative to the bottom 10th and 25th percentile of workers over time.

 

minimum wage

 

Mortgage delinquencies are the lowest in 20 years, according to CoreLogic. 30 day DQs fell 0.7% to 3.6%, while the foreclosure rate slipped 0.1% to 0.4%. Delinquencies fell pretty much across the board, with the exception of areas that were affected by natural disasters.

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Morning Report: Strong jobs report knocks stocks

Vital Statistics:

 

Last Change
S&P futures 2982.25 -8.4
Oil (WTI) 57.45 0.2
10 year government bond yield 2.02%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning after Friday’s strong jobs report stoked fears the Fed might not cut rates as much as the market expects. Bonds and MBS are up.

 

Jobs report data dump:

 

  • Payrolls up 224,000
  • Unemployment rate 3.7%
  • Labor force participation rate 62.9%
  • Employment-population rate 60.6%
  • Average hourly earnings up 3.1%

 

Overall, a strong report which should in theory argue against easing rates at the upcoming July meeting. That said, the deceleration in the labor market is being taken as a sign that the Fed needs to act, especially since inflation remains stubbornly below the Fed’s 2% target. The July Fed funds futures are pricing in a 100% chance for a cut, with a 92% chance for 25 basis points, and an 8% chance of 50 basis points.

 

We don’t have much in the way of economic data this week, however we do have Jerome Powell’s Humphrey-Hawkins testimony on Wednesday and Thursday. Humphrey-Hawkins testimony is usually more about posturing politicians than it is about useful insights, but with the markets on edge about a potential rate cut, we could see some volatility. Expect a lot of questions about Fed independence.

 

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Deutsche Bank is retreating back to Europe, as it cuts 18,000 jobs and exits a lot of overseas businesses. DB has been underperforming for years, and it looks like its decades-old attempt to become a player on Wall Street and in London are over. It would be cool to see them spin off Bankers Trust, Alex Brown and Sons and Morgan Grenfell, but it doesn’t look like that will happen.

Morning Report: The Fed prepares the markets for a rate cut

Vital Statistics:

 

Last Change
S&P futures 2957.5 24.1
Oil (WTI) 55.54 1.78
10 year government bond yield 2.01%
30 year fixed rate mortgage 4.10%

 

Stocks are higher this morning as interest rates fall globally. Bonds and MBS are up.

 

The Fed maintained interest rates at current levels, but signaled the willingness to cut rates if necessary:

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

The dot plot showed a 30 basis point decline in the fed funds expectations. You can see the plots side by side below. The central tendency for 2019 fell by 32 basis points to 2.17%

 

Jun Mar dot plot

 

FWIW, the Fed upped their forecast for GDP, and cut their forecast for unemployment and inflation. Why that would be consistent with a potential rate cut is beyond me, but such is life in our era of Calvinball monetary policy. The decision was nearly unanimous, with only Bullard dissenting, preferring to see a 25 basis point cut. The Fed funds futures are pricing in 100% chance of a rate cut at the July meeting.

 

Bonds rallied on the announcement, although mortgage backed securities were slow to follow. We did see some reprices for the better late in the day, but nothing too dramatic. Expect mortgage rates to lag the move in bonds, as usual.

 

Initial Jobless Claims fell from 220,000 to 216,000 last week.

 

Home prices rose 3.6% YOY, the strongest acceleration in 7 months, according to Redfin. Interestingly, the only areas that dropped were the markets that rallied the most over the past few years: San Jose, New York, Los Angeles, where inventory is up smartly. Where was the fastest growth? Knoxville TN at 15%, Milwaukee WI at 15% and Camden NJ at 11%.

 

Judy Shelton is the latest potential nominee to the Fed. She is an advocate for much lower interest rates. She also favors ending the Fed’s policy of paying interest on excess reserves, which encourages banks to park money at the Fed versus lending it out.

 

Fannie and Fred are trying to do more to increase lending for manufactured homes.

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2925 -0.25
Oil (WTI) 53.85 -0.35
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.15%

 

Stocks are flat as we head into the FOMC decision, which is set for 2:00 pm. Bonds and MBS are down.

 

The disconnect between the current market forecast and the last Fed dot plot are so stark that we are probably set up for some volatility in bonds after the announcement. Be careful locking around then.

 

Donald Trump looked at ways to possibly remove Fed Head Jerome Powell. While the law protects the independence of the Central Bank, Fed Chairmen have been removed before. Jimmy Carter removed G. William Miller in the late 70s after something like 11 months on the job, and kicked him upstairs to Treasury. Note the President was unhappy with the ECB and their signals of new stimulus – it strengthened the dollar against the euro and that is a negative for US exporters.

 

Mortgage Applications fell 4% last week as purchases and refis fell by 4%. Rates rose by 2 basis points to 4.14%. “After seeing a six-week streak, mortgage rates for 30-year loans increased slightly, which led to a pullback in overall refinance activity,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Borrowers were sensitive to rising rates, but the refinance share of applications was still at its highest level since January 2018, and refinance activity was at its second-highest level this year. Government refinances actually increased last week, led by a 17 percent in VA refinance applications, while conventional refinance applications decreased 7 percent.” The refi index has rebounded to the highest level in almost 3 years:

 

MBA refinance index

 

New Jersey has tightened the requirements for nonbank servicers.

Morning Report: Housing starts fall

Vital Statistics:

 

Last Change
S&P futures 2910 13.25
Oil (WTI) 51.78 -0.15
10 year government bond yield 2.03%
30 year fixed rate mortgage 4.15%

 

Stocks are higher as we begin the 2 day FOMC meeting. Bonds and MBS are up smartly on statements out of the ECB.

 

US rates are pushing towards 2% this morning after ECB President Mario Draghi signaled that the central bank could roll out further stimulus if inflation fails to materialize. The German Bund yields -32 basis points this morning (a record low), and US interest rates will have a hard time rising in this sort of environment. Simply put, bond investors will rotate out of bonds paying nothing into bonds paying something, even if they have to bear currency risk. It is preferable to locking in a sure loss by holding Bunds.

 

Housing starts fell to 1.24 million units in May, which was below expectations, but the prior two months were revised upward. Starts were down on a month-over-month and a year-over-year basis. Building Permits cam in at 1.29 million, which was more or less flat MOM and YOY.

 

Homebuilder sentiment slipped in June, primarily due to weakness in the Northeast and the West. That said, the index is solidly in the mid-60s, which is an overall strong level. Home prices have become stretched relative to incomes, but falling interest rates are offsetting that slightly. Rising costs for land and labor are making starter homes unaffordable for many first time homebuyers.

 

30 day delinquencies fell by 0.3% in March to a rate of 4.0%. Delinquencies are still being driven by hurricane-related issues. The foreclosure rate fell from 0.6% in March 2018 to 0.4% in March of 2019. Separately, ATTOM reported that there were 56,152 foreclosure filings in May, up 1% YOY, but down 22% from a year ago. Completed foreclosures were down 50%. The states with the highest foreclosure inventory are New Jersey, Florida, Delaware, Illinois.

 

 

 

 

Morning Report: Fed Funds forecasts and mortgage rates.

Vital Statistics:

 

Last Change
S&P futures 2895.75 0.75
Oil (WTI) 51.89 -0.62
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.12%

 

Stocks are flat this morning as we enter Fed week. Bonds and MBS are flat as well.

 

The big event this week will be the FOMC meeting which starts Tuesday. Given the disconnect between the market’s perception of the road ahead and the Fed’s prior forecast, something has to give. FWIW, the market is now assigning a 20% chance they will ease by 25 basis points at this meeting. By the December meeting, the market is forecasting the FOMC will cut rates either 2 or 3 times!

 

fed funds futures dec 19

 

Compare that to the March 2019 dot plot, which showed most members of the FOMC thought rates would be unchanged for the year and about 1/4 of the members wanted to see a rate hike:

 

dot plot Mar 2019

If the Fed Funds futures are correct and we are looking at a 1.5% Fed Funds rate, where will mortgage rates go? If history is any guide, probably nowhere. The last time the Fed Funds rate was around 1.5% (late Dec 2017), the 30 year fixed rate mortgage (according to the MBA) was in the low 4% range, in other words, right about here.  Long term rates have already priced in the move. MBA 30 year FRM chart:

 

MBA mortgage rate

 

Quicken Loans settled with the DOJ over false claims allegations regarding FHA origination going back to 2015. The case was dismissed and Quicken settled for $32.5 million with no admission of guilt. Quicken fought the case the entire way, and eventually narrowed it down to a tiny fraction of what the Obama Administration wanted. Quicken Vice Chairman Bill Emerson said: “I think the current HUD administration realized how faulty the previous administration’s tactics were, and frankly, as we’ve said before, we viewed them as extortionist tactics and we just could not go along with that,” Emerson said. “We know we didn’t do anything wrong and so we continued to fight, and if that somehow caused the new administration to evaluate it differently, then great.”

 

Ed Demarco discusses the ways that private capital can be drawn back into the mortgage market. First, the CFPB’s ATR and QM rules need to change to bring down the allowable DTI ratios on Fannie and Freddie loans to that of the rest of the market. This is known as the QM patch, which basically says that any loans that meet F&F criteria meet the ability to repay test. The problem is that the QM laws specify a max DTI ratio of 43% and the GSEs allow up to 50%. This gives Fan and Fred a huge advantage over other lenders. The second issue revolves around the SEC and refining the data definitions in the registration rules. Third, Fan and Fred have all sorts of mortgage performance data that is unavailable to the broader market, and leveling the playing field would mean allowing other participants to see that data. Note however that DeMarco is only looking at the issue from the standpoint of originators. Buyers of private label securities have other issues that are still unresolved, especially when the issuer of the bonds also retains servicing. There is a conflict of interest issue that must be resolved as well. I discussed this about a year ago in Housing Wire.

 

Profitability improved for independent mortgage bankers in the fist quarter of 2019. Average revenue per loan came in at $9584, while average cost per loan was $9,299, or a net gain of $285 per loan, compared to a loss of $200 a loan in the fourth quarter. It looks like mortgage bankers reported a loss in the first quarter of 2018 as well.

Morning Report: Disappointing payroll number

Vital Statistics:

 

Last Change
S&P futures 2819 14.35
Oil (WTI) 53.02 -0.46
10 year government bond yield 2.12%
30 year fixed rate mortgage 4.13%

 

Stocks are higher this morning after yesterday’s rally continued overnight. Bonds and MBS are flat.

 

Fed Chairman Jerome Powell said yesterday that the central bank was monitoring the trade tensions between China and the US and would “act appropriately” to maintain the economic expansion. Investors took this to mean that the Fed would probably cut rates this year. The stock market had its best day in 5 months, and bonds sold off a touch, although lower rates should be supported by low overseas yields and the prospect of a rate cut.

 

Donald Trump announced that he would institute tariffs on Mexican goods if the country didn’t do more to curb illegal immigration into the US. This new front in the trade war was the catalyst to push the 10 year below 2.1%. Yesterday, Republican senators warned that there was not support for tariffs in the Senate.

 

Mortgage Applications increased 1.5% last week as purchases fell 2% and refis increased 6%. “Mortgage rates dropped to their lowest level since the first week of 2018, driven by increasing concerns regarding the ongoing trade tensions with China and Mexico,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Some borrowers, particularly those with larger loans, jumped on the opportunity to refinance, bringing the index and average refinance loan size to their highest levels since early April. Additionally, refinances for FHA and VA loans jumped by 11 percent.”

 

Payrolls only increased by 27k last month according to the ADP Employment Report. Small firms reduced payrolls by 52,000 last month, and it looks like the majority of that was in construction. Manufacturing fell by 3,000 which might be tariff related. The service sector increased employment by 71,000 and large employers increased by 68,000. Street expectations are for a 185,000 increase in payrolls for Friday’s jobs report. Now that the Fed is out of the way, the wage growth number is no longer the focus.