Morning Report: Surprisingly strong GDP report

Vital Statistics:

 

Last Change
S&P futures 2939 -3.25
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.11 -0.18
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.23%

 

Stocks are flattish as we end the month of April. Bonds and MBS are flat.

 

We have a decent amount of data this week, along with a Fed meeting. The biggest news will be the jobs report on Friday, although we will get income / spending data and the ISM.

 

Q1 GDP came in at a much higher than expected 3.2% versus the 2.3% growth that was expected. Even better, the inflation rate came in much lower than expected, which should mean the Fed is out of the way. The 10 year bond yield traded below 2.5% for the first time in 2 months, despite having the strongest Q1 growth in 4 years. Note that consumption didn’t drive the increase in growth (it only came in at 1.2%) – the growth was driven by exports  – which at a minimum should end the talking point that Trump’s trade wars are alienating our trading partners.

 

GDP

 

The immediate market reaction was subdued. The 10 year bond yield drifted lower, stocks were flat, and the Fed Funds futures didn’t change all that much – still predicting a 1/3 chance of no moves this year and a 2/3 chance of a rate cut.

 

In terms of the individual components, the trade numbers were affected by both an increase in exports (3.7%) and a drop in imports (-3.7%). Durable goods consumption fell 5.3%, which is probably related. Residential continues to be a persistent weak spot (-2.8%), and a bit of a head-scratcher given the sheer lack of inventory. Increased investment was driven by an increase in intellectual property (8.6%), which offset a decrease in building (-0.8%).

 

Housing’s contribution to GDP has been shrinking since the late 80s. The financial crisis caused it to fall from about 18% to 15%, and in the past decade it has been more or less stuck there. It looks like housing is again beginning to decline as a percent of GDP, and it is now below 15%. If housing can get back to at least normalcy, that should provide a good bump for GDP growth.

 

housing GDP

 

Personal Incomes rose 0.1% in March, which was below expectations. Consumption surprised to the upside. Inflation remains tame, with the headline PCE number up .1% MOM / 1.5% YOY and the core up 0.2% / 1.6% YOY.

 

New FHFA Director Mark Calabria has an ambitious agenda for housing reform, including solving problems with servicing, fixing the QM patch, and eventually releasing the GSEs from conservatorship. He is emphatic that he does not want to see the mortgage market return to the pre-2008 days.

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Morning Report: Hamptons Real estate is for sale

Vital Statistics:

 

Last Change
S&P futures 2931.75 0.7
Eurostoxx index 390.26 -0.72
Oil (WTI) 66.21 0.32
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are lower after 3M missed earnings. Bonds and MBS are flat as well. We will get Amazon.com and Ford after the close.

 

Durable Goods orders came in way higher than expected for March – increasing 2.7% versus expectations of 0.8%. Much of this was transportation-related. Ex transports, they rose 0.4%, which still beat the 0.2% forecast. Nondefense capital expenditures rose 1.3%, again better than the 1.2% expectation. We might see some estimates for Q1 GDP get taken up on these numbers.

 

Initial Jobless Claims rose 38k to 230,000. This is the highest print in a while, but it is too early to get a read on whether the labor market is changing. FWIW, organized labor has been scoring some victories lately as worker shortages have given them the upper hand.

 

Homebuilder D.R. Horton disappointed the street with their earnings this morning. Homebuilding revenue increased 8% YOY and homes closed increased 10% in units. Forward guidance was the issue as its revenue forecast came in light despite the sales estimate coming more or less as expected. The stock is down about 4% pre-open.

 

More problems with luxury real estate: a glut of inventory in the Hamptons. There are 869 homes for sale in the tony NYC summer vacation location, which is the highest since at last 2012. This seems to mirror the glut of luxury homes in Fairfield County CT as the market seems to be finally meeting its day of reckoning, which was pushed off in the immediate aftermath of the financial crisis. Most people had the wherewithall to wait out the market, hoping for a recovery that never really came. Now, they are getting impatient and it looks like this sector of the market will finally clear.

 

hamptons

 

Fed pick Steven Moore is in hot water, not for his ideology (though left econ has been piling on), but for calling Cleveland OH and Cincinnati OH “armpits” of America. This is probably a non-controversial opinion to most non-Ohians, but Sherrod Brown (D-OH) thinks this should disqualify him. Note the Washington post is miffed about some humor columns that he wrote in the past too. Herman Cain has withdrawn his application, and it looks like Moore might be on the ropes as well.

Morning Report: 2019 housing forecasts are similar to 2018

Vital Statistics:

 

Last Change
S&P futures 2901.75 -8.75
Eurostoxx index 390.46 0.87
Oil (WTI) 65.29 1.29
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.27%

 

Stocks are lower this morning as investors return from the long weekend. Bonds and MBS are flat.

 

There isn’t much in the way of market-moving data this week, although we will get some housing data with existing home sales, the FHFA House Price Index, and New Home Sales.

 

President Trump plans on ending the practice of allowing waivers for countries that import oil from Iran. Oil is up over a buck this morning on the news. China, India, and Turkey are Iran’s biggest customers.

 

The economy looks like it exited the first quarter with a pickup in growth, according to the Chicago Fed National Activity Index. The first quarter has been weak for the past several years, and it looks like that pattern repeated this year. Employment-related indicators drove the improvement in the index.

 

Fannie Mae is forecasting 2.2% GDP for 2019. On one hand, Fannie Mae expects to see growth impacted by the fading effects of the 2018 tax cuts and slowing corporate capital expenditures. On the other hand, they are forecasting a pickup in housing. Falling interest rates have been a pleasant surprise, and refinance activity is expected to be a bit higher than previously forecast. That said, prepayment burnout is pretty high at this point, and home price appreciation is probably going to drive refi activity more than interest rates.

 

“On housing, the recent dip in mortgage rates to their lowest level in over a year – combined with wage gains and home price deceleration – supports our contention that home sales will stabilize in 2019,” Duncan continued. “The greatest impediment to both sales and affordability continues to be on the supply side, as new inventory, particularly among existing homes, is being met quickly by strong demand – as evidenced by the already thin months’ supply hitting a new one-year low.”

 

Grant Thornton believes that a shortage of entry-level homes will be a constraint on the housing industry this year. “The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor – immigrants – that once made new housing affordable has all but disappeared.” They expect the median home price to rise 3.5% this year, compared to 4.8% in 2018. Existing home sales are expected to be unchanged at 5.9 million.

Morning Report: Jamie Dimon throws cold water on mortgage banking

Vital Statistics:

 

Last Change
S&P futures 2898.75 -1.5
Eurostoxx index 390.41 0.82
Oil (WTI) 63.91 0.15
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.32%

 

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

 

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

 

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

 

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

 

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

 

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

 

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

 

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

Morning Report: Bank earnings come in

Vital Statistics:

 

Last Change
S&P futures 2915 6.25
Eurostoxx index 388.92 0.82
Oil (WTI) 63.31 -0.09
10 year government bond yield 2.57%
30 year fixed rate mortgage 4.23%

 

Stocks are higher as bank earnings come in. Bonds and MBS are down.

 

Earnings season has begun, and the banks are all reporting.

 

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

 

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

 

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

 

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

 

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

 

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

 

fed funds futures

 

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: The Fed begins to catch up with the markets

Vital Statistics:

 

Last Change
S&P futures 2898.25 3.5
Eurostoxx index 387.47 0.4
Oil (WTI) 64.02 -0.59
10 year government bond yield 2.49%
30 year fixed rate mortgage 4.14%

 

Stocks are higher after the UK and the EU agreed to kick the can down the road on Brexit. Bonds and MBS are flat.

 

The FOMC minutes didn’t reveal much new information. They did move closer to what the markets have been saying all along: that the Fed is done with rate hikes: “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.” That said, the Fed Funds futures are handicapping a more than 50% chance for a rate cut this year, so there still is a disconnect. The FOMC also seemed eager to end the balance sheet reduction exercise, concerned that allowing it to fall further risks pushing up the overnight borrowing rate by creating a reserves shortage.

 

The CEOs of the biggest banks appeared before the House yesterday and it was basically a political posturing event. Democrats complained about diversity, deregualation and student loans. Republicans talked about Brexit and politically targeting industries by cutting them off (firearms). Aside from creating clips for donor emails, the whole dog and pony show was contained nothing of use for investors and professionals.

 

The Producer Price index increased 0.3% in March, which is up 2.9% YOY. Declining energy prices were offset by increasing final demand inflation.

 

Initial Jobless Claims were again below 200,000, falling to 196,000. These are extraordinary numbers, the like we haven’t seen in half a century.

 

 

Morning Report: Job openings fall

Vital Statistics:

 

Last Change
S&P futures 2890.5 8
Eurostoxx index 386.66 0.98
Oil (WTI) 64.39 0.06
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.16%

 

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

 

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

 

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

 

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

 

JOLTs

 

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

 

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.”  Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

 

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.