economy – The Daily Tearsheet

Morning Report: Jobs week

Vital Statistics:

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

Jerome Powell is speaking at 1:00 pm today.

The week ahead will be dominated by the jobs report on Friday, however we will get ISM data and a lot of Fed speakers. The Street is looking for payroll growth to slow and for the unemployment rate to be steady at 4.2%.

Consumer sentiment improved in September, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment extended its early-month climb, ultimately rising more than 3% above August. This increase was seen across all education groups and political affiliations. Furthermore, all five index components gained, led by a 6% surge in one-year business expectations. The expectations index is now 13% above a year ago and reflects greater optimism across a broad swath of the population. While sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow. Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten. At the same time, many consumers continue to report that their expectations hinge on the results of the upcoming election. Relative to August, consumers across political parties are increasingly expecting a Harris presidency, though about two-thirds of Republicans still expect Trump to win.”

A harbinger of slower economic growth ahead? Jeep maker Stellantis delivered lower guidance as the auto industry struggles with slower demand. “Deterioration in the global industry backdrop reflects a lower 2024 market forecast than at the beginning of the period, while competitive dynamics have intensified due to both rising industry supply, as well as increased Chinese competition,” Stellantis said in a statement Monday.

The stock is down 14% in European trading.

Morning Report: Consumer spending decelerates.

Vital Statistics:

Stocks are flattish this morning as we round out a good week for stocks. Bonds and MBS are down small.

Personal incomes rose 0.2% MOM in August, according to the Bureau of Economic Analysis. Personal consumption expenditures rose 0.2% as well. The drop in spending was pretty dramatic, falling from 0.5% in July. Both the income and consumption numbers were below consensus.

The PCE Price Index rose 0.1% MOM in August, which was in line with expectations. On a YOY basis, the index rose 2.2%. If you strip out food and energy, the index rose 0.1% MOM and 2.7% YOY.

Overall, the report shows that the battle against inflation has largely been won, and the concern is now turning towards economic weakness. Much of the GDP growth over the last quarter was due to inventory build, which means the economy requires robust consumption to maintain that growth rate. August’s consumption numbers were the first half of the back-to-school shopping season, which is a good barometer for the holiday shopping season. If the consumer is tapped out, economic growth will slow, and production will halt as manufacturers and retailers need to move the merchandise first.

Overall, this means that the Fed needs to get back to neutral in a hurry if it doesn’t want to tip the economy into a recession. The November Fed Funds futures are a toss-up between a 25 and 50 basis point cut, and the central tendency for December is inching below 4%.

Pending home sales rose 0.6% in August, according to NAR. “A slight upward turn reflects a modest improvement in housing affordability, primarily because mortgage rates descended to 6.5% in August,” said NAR Chief Economist Lawrence Yun. “However, contract signings remain near cyclical lows even as home prices keep marching to new record highs.”

The West saw increased growth, while the Northeast, Midwest and South saw declines. Overall mortgage rates have been moving lower, albeit the September rate cut didn’t have that much of an impact. As the economy slows and cuts rates further, we should see mortgage rates track lower.

“In terms of home sales and prices, the New England region has performed relatively better than other regions in recent months,” Yun said. “Contract signings rose in both the most affordable and most expensive regions – the Midwest and West, respectively – because mortgage rates have fallen nationally. Housing affordability will continue to see notable improvements.”
“The Federal Reserve does not directly control mortgage rates, but the anticipation of more short-term interest rate cuts has pushed long-term mortgage rates down to near 6% in late September,” added Yun. “On a typical $300,000 mortgage, that translates to approximately $300 per month in mortgage payment savings compared to a few months ago.”

Even if we don’t get a massive refi wave, lowering mortgage rates a little should help alleviate the rate lock in effect, which would encourage people to move and increase activity in the housing market.

Morning Report: Consumer confidence dims on weakening labor market

Vital Statistics:

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

Home prices hit a new record, according to the Case-Shiller Home Price Index. Prices rose 5.0% year-over-year in July, a deceleration from the 5.5% recorded in June. New York City led the charge, followed by Las Vegas and Los Angeles. “We continue to observe outperformance in most low-price tiers in the market on a three- and five-year horizon,” Luke continued. “The low-price tier of Tampa was the best performing market nationally with five-year performance of 88%. The New York market was the best market annually, posting a gain of 8.9%. New York’s low-tier index, which include home values up to $533,000, helped drive that growth with 10.8% annual gains. Over five years, markets such as New York and Atlanta saw low-price-tiered indices outperforming their market by as much as 20% and 18%, respectively. The relative outperformance of low-price-tiered indices has both benefited first-time homebuyers as well as made it more difficult for those looking for a starter home. The opposite is happening in California, which has the most expensive high-price tiers in the nation, all well over $1 million. The rich are getting richer in San Diego, Los Angeles, and San Francisco where their high-price-tiered indices outperformed on a one- and three-year basis.”

Consumer confidence declined in September, according to the Conference Board. “Consumer confidence dropped in September to near the bottom of the narrow range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “September’s decline was the largest since August 2021 and all five components of the Index deteriorated. Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income.

The Present Situation Index has moved down markedly over the summer and continues to fall. Inflationary expectations remained elevated at 5.2%.

Mortgage applications rose 11% last week as purchases rose 1.4% and refis rose 20%. “Mortgage applications increased to their highest level since July 2022, boosted by a 20 percent increase in refinance applications after a large increase the prior week. The 30-year fixed rate decreased for the eighth straight week to 6.13 percent, while the FHA rate decreased to 5.99 percent, breaking the psychologically important 6 percent level,” Joel Kan, MBA’s Vice President and Deputy Chief Economist. “As a result of lower rates, week-over-week gains for both conventional and government refinance applications increased sharply. The refinance share of applications is now at 55.7 percent, and while the level of refinance activity is still modest compared to prior refi waves, they now account for the majority of applications, given the seasonal slowdown in purchase activity.”

Morning Report: Mortgage and rent payments are due

Vital Statistics:

	Last	Change
S&P futures	2650	-48.1
Oil (WTI)	19.81	1.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

Stocks are lower this morning after disappointing comments out of Exxon, Apple and Amazon. Bonds and MBS are flat.

It is May 1. Mortgage and rent payments are due. I suspect we will see a deluge of missed payments. Meanwhile, about half of US states are looking to loosen restrictions.

Construction spending rose 0.9% in March, despite the COVID-19 concerns. The ISM Manufacturing Index fell, but not as much as feared.

Fannie Mae reported net income of $461 million in the first quarter compared to $4.4 billion in the fourth quarter of 2019. Increased provisions for loan losses drove the decline. Fannie estimates that 7% of its book (or about a million loans) is in forbearance right now. Net worth fell by a billion to 13.6 billion. 1 million loans, $13.6 billion in equity.

According to Black Knight, 3.8 million mortgages are in forbearance. 1.7 million are Fannie / Freddie, 1.2 are GNMA and the rest are private label / other. UPB is $238 billion. Black Knight estimates that there will need to be $8 billion in P&I advances and another $1.7 billion in T&I advances.

Many large corporations are thinking of keeping work-from-home a permanent thing. It looks like productivity hasn’t suffered as much as employers have feared, and this could be a win-win for both employers and employees.

Morning Report: Market signalling March rate cut

Vital Statistics:

	Last	Change
S&P futures	3070	-39.25
Oil (WTI)	46.77	-1.79
10 year government bond yield		1.28%
30 year fixed rate mortgage		3.54%

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver. Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

new home sales

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

Interesting on the flight to safety trade – gold is up. bitcoin is not.

Morning Report: The Fed is sanguine on the economy

Vital Statistics:

	Last	Change
S&P futures	3322	-3.25
Oil (WTI)	50.11	-0.32
10 year government bond yield		1.56%
30 year fixed rate mortgage		3.66%

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

The upcoming week will be date-light, however we will have a lot of Fed-speak. Jerome Powell will be delivering his semi-annual Humphrey-Hawkins testimony on Capitol Hill on Tuesday and Wednesday. In terms of economic data, we will get CPI, retail sales and industrial production this week. None of these should be market-movers. The 10 year will be driven mainly by the global risk on / risk off trade which will be led by China.

The Fed said that downside risks to the US economy have diminished over the past few months, although Coronavirus remains a threat. Remember, recoveries don’t die of old age – they are either murdered by the Fed or are ended by some external event. “Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased. The likelihood of a recession occurring over the next year has fallen noticeably in recent months.”

The Atlanta Fed has Q1 growth coming in at 2.7%.

Mortgage credit availability dipped in January, according to the MBA. “Mortgage credit availability was mostly unchanged to start 2020, decreasing 0.2 percent in January,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Similar to December of 2019, the decline came from the reduction of low credit score, high-LTV programs. Furthermore, there continues to be movement with both adds and drops in the government program space, with the net result last month showing small growth in the government index. Although credit supply has flattened these last two years, the meaningful increase seen overall since the Great Recession has been helpful to the growing share of first-time homebuyers, as well as refinance borrowers looking to act on lower mortgage rates. Ongoing housing supply constraints in the lower-price range continues to hold prospective buyers back the most.”

Interesting article in American Banker: Big banks lost money on mortgages in 2018. “Large banks withstood an average loss of $4,803 for every retail mortgage originated in 2018 (compared with a net profit of $376 per loan for independent mortgage bankers). Appetite for these kinds of losses is increasing.” Why were they doing this business? It is all about the MSR. And unfortunately for holders of servicing, rates have been going down, not up which is a negative for servicing assets. As rates have fallen, banks have had to reach for yield, which generally means taking more risk. I know that 2018 data is far in the rear view mirror, but that is an incredible number.

Morning Report: Bank earnings looking strong

Vital Statistics:

	Last	Change
S&P futures	2991	-6.25
Oil (WTI)	52.97	0.14
10 year government bond yield		1.74%
30 year fixed rate mortgage		3.97%

Stocks are lower this morning as bank earnings come in. Bonds and MBS are down.

Retail Sales disappointed, falling 0.3%, which was lower than expected. Ex autos and gas, they were flat, although August numbers were revised upward across the board. The control group was flat, and sales rose 4.1% YOY.

Mortgage Applications rose 0.5% last week as purchases fell 4% and refis rose 4%. “The ongoing interest rate volatility is impacting a borrowers’ ability to lock in the lowest rate possible. Despite a slight rise in mortgage rates last week, refinance applications increased 4 percent and were 199 percent higher than a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications slowed for the second week in a row. While near term economic uncertainty is still a factor, other fundamental issues, such as a lack of housing inventory in many markets, is preventing purchase activity from meaningfully rising. However, purchase applications were still much higher than a year ago. This is a reminder that the purchase environment in 2019 continues to be stronger than in 2018.”

Bank earnings are generally looking good, and mortgage backed securities trading desks are doing well as rates have fallen and volumes have picked up. The other side of the coin is that the drop in rates have negatively affected the values of mortgage servicing rights. Wells is a good example: despite a $127 million increase in origination revenue, total mortgage banking revenue fell by $292 million as their servicing book took a $419 million mark-to-market loss.

Morning Report: Global yields head lower

Vital Statistics:

	Last	Change
S&P futures	2862	-3.5
Oil (WTI)	56.05	1.14
10 year government bond yield		1.45%
30 year fixed rate mortgage		3.82%

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Global bond yields continue to head lower, and a larger percentage of the world’s sovereign yields are negative. Note that Germany has passed negative 70 basis points on the Bund, and France is not too far behind at negative 44 basis points. Japan is at negative 27 basis points. Even some of the ne’er-do-wells of Europe – Italy and Spain – have lower yields than we do. It is important to keep this chart in mind when you hear the business press push the “inverting yield curve means a recession is imminent” narrative. They inevitably ignore the fact that US bonds don’t trade in a vacuum and investors will sell negative yielding bonds to buy something positive.

Mortgage applications fell 6.2% last week as purchases fell 4% and refis fell 8%. Rates increased about 4 basis points for a 30 year conforming loan. Mortgage rates continue to lag the moves in the overall bond market. “U.S. Treasury yields were volatile over the course of the week, as the ongoing trade dispute between the U.S. and China continued to generate uncertainty among investors,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates increased for the first time since the week of July 12, but were still 80 basis points lower than the beginning of the year. With rates edging higher, refinances and purchase applications fell, at 8 percent and 6 percent, respectively.”

Consumer confidence remains elevated and close to record highs, according to the Conference Board. We are at levels last seen during the stock market bubble days of the late 90s, and the late 60s when we landed on the moon. Given the retail sales data, this could be one of the best holiday shopping periods in a long time.

Morning Report: Strong jobs report

Vital Statistics:

	Last	Change
S&P futures	2928	9
Eurostoxx index	390.26	-0.72
Oil (WTI)	61.85	0.04
10 year government bond yield		2.56%
30 year fixed rate mortgage		4.20%

Stocks are higher after the strong payroll number. Bonds and MBS are up small.

Jobs report data dump:

Nonfarm payrolls up 263,000
Unemployment rate 3.6%
Labor Force participation rate 62.8%
Average hourly earnings up 0.2% MOM / 3.2% YOY
Employment – Population ratio 60.8%

Overall it was a Goldilocks report for the markets. Stocks are happy about the payroll number while bonds like the wage data. Note the unemployment rate is at the lowest level since Jimi Hendrix did the Star Spangled Banner at Woodstock. We saw an uptick in construction workers as well as health care.

The Washington Post noted how difficult finding truck drivers has become: McClane Company is a large trucking and warehouse firm that specializes in moving food and grocery items around the country. They are advertising truck driving jobs for $70,000 a year and a $6,000 sign on bonus in Jessup, Pennsylvania, but even at that level of pay it’s been tough to get enough people in the door.

Steve Moore withdrew his name from consideration to join the Fed after it appeared the he wouldn’t have the votes to get confirmed. Establishment Republicans are not ready for non-traditional types to join the Fed, though it might be a good thing, if only to break the group-think that goes on there.

Ginnie Mae is taking a look at 90%+ LTV cash out refinancings. They put out a request for input. Initially, they were looking at the prepay speeds for VA IRRRL loans, and how it was affecting GNMA MBS investors, but it looks like they are now broadening their focus as VA loans still have higher prepay speeds than comparable FHA or Fannie / Freddie loans. Specifically, VA refis occur earlier than FHA refis, and high LTV VA cashouts have higher prepay speeds than comparable FHA cash-outs. FHA cash outs are limited to 85% LTV, while VAs can go up to 97.5%, and the funding fee can be financed. It looks like GNMA is not looking at tightening the restrictions for VA refis, but it is more interested in perhaps creating new GII pools for shorter duration loans (i.e. fast prepays).

Morning Report: Weak housing starts number

Vital Statistics:

	Last	Change
S&P futures	2821.25	14.5
Eurostoxx index	376.34	2.01
Oil (WTI)	59.65	0.83
10 year government bond yield		2.45%
30 year fixed rate mortgage		4.08%

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

Lots of housing data to chew through. Let’s start with existing home sales, which increased 11.8%, according to NAR. While this month-over-month print of 5.51 million sounds impressive, we are still down on a YOY basis. Lower rates are helping, and we are beginning this season with a little more inventory to work with. We had 1.63 existing homes for sale, which represents a 3.6 month supply. A balanced market needs something like 6 months. Prices are still rising – the median house price rose by 3.6% – but the rate of appreciation has slowed. The median home price came in at $249,500, and that puts the median house price to median income ratio just over 4. Historically that is a high number, but lower interest rates help the affordability issue. The first time homebuyer represented 32% of home sales, an increase from last year but still below the historical average of around 40%.

Housing starts fell 8.7% to 1.16 million, a disappointing number. We saw a huge decrease in single family construction – from an annualized pace of 970k to 805k. Last February, the number was 900k so this is a big drop. One note of caution – the margin for error on these numbers is huge (around 17%), so there is a good chance this gets revised upward in subsequent releases. Building permits were a little better – falling only 2% to 1.3 million. Housing construction has largely been absent from this recovery, and could provide a huge boost to the economy if it ever gets back to normalcy (around 1.5 million units a year).

More evidence that home price appreciation is slowing: the Case-Shiller home price index rose 4.3% in January, the slowest pace since 2015. In general, 2018 was a year to forget for the mortgage industry as rates rose 100 basis points. They have now given back most of those gains, so perhaps 2019 will be a bit brighter, although if you have been counting on MSR unrealized gains to paper over weakness in lending, the Q1 mark is going to be harsh.

The economy seems to be slowing, according to the Chicago Fed National Activity Index. It edged downward to -.29 in February, and the 3 month moving average is negative as well. The CFNAI is a meta-index of 85 different economic indicators, of which many are leading as well as lagging. While it is too early to start declaring 2019 a slow-growth year, the first quarter is looking weak.

The FHA is backing away from a 2016 decision to loosen credit – it is now tightening standards and flagging more loans as “high risk.” The biggest effect will be for the first time homebuyer, and FHA estimates that 40,000 loans or so might be affected. At the heart of the issue is a 2016 decision to no longer require a manual underwrite for FHA loans with FICOs below 620 and DTIs above 43. FHA was largely a backwater pre-crisis, and most of these types of loans were subprime. As the subprime market disappeared, FHA stepped in to fill the void. Home Ready and Home Possible have emerged as low downpayment competitors, and FHA has suffered from negative selection bias. While FHA permits very low credit scores, most lenders don’t go as low as FHA permits in the first place.

Trump nominates free-marketer Steven Moore to the Federal Reserve Board and Paul Krugman isn’t taking it well. For a little economics inside-baseball, this resembles the Spacely Sprockets / Cogswell Cogs rivalry in the economics profession. Since most of the free-market caucus comes from the University of Chicago, they are called “fresh water economists” and Krugman comes from Ivy / Coastal academia (Princeton) so his school is called “salt water” economists. In terms of ideological bent, the fresh water economists are much more non-interventionist than the salt water economists, who support direct government intervention in the markets and economy. Steven Moore is a true believer in the free market approach, and to be honest, most of the Fed and academia are not. A little diversity of opinion is not a bad thing….