Morning Report: Hurricane Florence could cost up to $5 billion

Vital Statistics:

Last Change
S&P futures 2908.5 -2.9
Eurostoxx index 377.97 0.1
Oil (WTI) 69.63 0.64
10 year government bond yield 3.01%
30 year fixed rate mortgage 4.68%

Stocks are flat on no real news. Bonds and MBS are down.

We should have a quiet week ahead with not much in the way of economic data and no Fed-speak. Bonds have been selling off ahead of the FOMC meeting next week. The Fed Funds futures continue to bump up the chance of a December hike, with the odds now over 80%.

While not market moving, we will get some housing data with builder sentiment tomorrow, housing starts on Wednesday, and existing home sales on Thursday.

Chinese stocks are trading at a 4 year low, partially driven by threats of a trade war. Declining stock markets typically put pressure on real estate prices (asset classes generally correlate on the downside), and China has a bubble on its hands. This has the potential to spill over to the US, at least in the higher priced West Coast markets, which should see an exit of Chinese speculative money. Separately, China is considering declining further trade talks.

Trade talks should continue on NAFTA this week. The biggest effect of NAFTA talks will be on housing costs, particularly lumber prices. Base metals have been weak on trade issues, which should dampen the inflation indices a bit.

Hurricane Florence didn’t pack the punch that people expected, but the flooding has been probably worse. CoreLogic estimates that the insured flood costs will be between 3 and 5 billion. For servicers, this will suck up some cash, as delinquencies will invariably spike and we will be heading into the holiday forbearance period just as these loans go 90 days down. Nonbank servicers should expect to see a spike in advance activity to go along with the normal seasonal spike.

Manufacturing growth moderated in September, according to the Empire State Manufacturing Survey. New Orders and employment were pretty much the same.

Realtor.com lists the top 10 suburbs in the US. Most are pretty pricey with respect to incomes, with median price / median income ratios ranging from 3.5x to 7.4x. To put that number in perspective, up until the late 90s, the median home price to median income ratio averaged about 3.2 – 3.6. It peaked at 4.8 in 2006. While median home price to median income ratios are an imperfect measure (since they ignore the effects of interest rates on affordability) they are still a relevant measure of how overpriced an area can be.

Retailers are struggling to hire temps heading into the holiday season. Some decided to start hiring this summer in order to beat the expected shortages, while others are offering higher pay and vacation time. Is the just-in-time employment model about to exhibit its weakness?

Goldman is forecasting growth to slow to 2.6% in 2019 and 1.6% in 2020. Many are now calling for a recession in 2020. The catalyst will be higher interest rates and end of the Trump tax cut “sugar high.” Perhaps the big investment in inventory build we are currently seeing will be the catalyst. Regardless, we don’t seem to have any asset bubbles in the US so we probably aren’t going to be looking at any sort of credit crunch. Overseas, there are issues (Canada, Scandinavia, Australia, China).

Morning Report: Empire State Outlook dims

Vital Statistics:

Last Change
S&P futures 2802 -1
Eurostoxx index 383.92 -1.14
Oil (WTI) 69.81 -1.2
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.50%

Markets are flattish as earnings season gets into full swing. Bonds and MBS are flat.

Oil is dropping after US Treasury Secretary Steve Mnuchin said the US could waive some Iranian oil sanctions.

Bank of America reported decent earnings this morning. This is a big week for earnings, with about 200 major companies reporting. The early part of reporting season is generally dominated by the banks.

Jerome Powell will testify in front of Congress on Tuesday and Wednesday. Generally these events don’t yield much in the way of useful info – they are mainly for the benefit of politicians who want to draw attention to some issue that may or may not relate to monetary policy. Expect a lot of questions regarding how a trade war and income inequality will affect growth from Democrats, and expect a lot of questions regarding regulation from Republicans. The prepared remarks are here.

Retail Sales rose 0.5% in June, which was in line with expectations. Ex-autos and gas they rose 0.3% while the control group was flat. May numbers were revised upward. The control group was below expectations, but with the May revisions offset that. Discretionary items (clothing, sporting goods, department stores) declined, which building materials and furnishings rose.

Business Inventories rose 0.4% in May. The inventory-to-sales ratio is down to 1.34 from 1.39 last year.

Business activity in New York State exhibited continued strength in June, according to the New York Fed’s Empire State Manufacturing Survey. While the current conditions index exhibited strength, the outlook has slipped. The survey doesn’t say whether this is being driven by a potential trade war or something else. Planned capital expenditures (a proxy for expansion plans) decreased.

Empire State

The Atlanta Fed took up their Q2 GDP estimate to 3.9%. Morgan Stanley warns that we are seeing a bit of a sugar rush in the economy courtesy of trade tensions. As companies worry about a potential trade war, they stockpile raw materials and other inputs. This gooses the inventory numbers which makes the current quarter look particularly strong. The problem is that you get a double whammy if the trade war materializes. Activity will drop, and that inventory will be liquidated, both of which will reduce GDP growth. Even if a trade war doesn’t happen, uncertainty could cause companies to pull in their horns. FWIW, I am skeptical of the “uncertainty” argument. Regulatory “uncertainty” out of DC generally causes companies to be cautious. The rest of the clatter is just noise. Certainly investors (judging by the S&P 500) aren’t worried.

One stat to watch: Corporate bond spreads. We are seeing a slight widening in some of the junkier investment grade debt. Baa spreads increased to 200 basis points from 165 in February. While spreads are still tight relative to historic levels, this is something to watch. Years of financial repression have given issuers the upper hand with regards to covenants and some of those chickens will come home to roost in the next recession.

Morning Report: Zillow gets slammed after changing its business model

Vital Statistics:

Last Change
S&P futures 2672 14
Eurostoxx index 378.3 -0.91
Oil (WTI) 66.56 -0.84
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.44%

Stocks are higher despite coordinated strike in Syria over the weekend. Bonds and MBS are down.

Watch the oil markets. North Sea Brent crude is rising on tensions in the Middle East, but West Texas Intermediate (which is the main oil used in the US) is shrugging off the news. Bullish bets on Brent oil have hit record highs.

The 2 year hit 2.4%, the highest level since 2008. The flattening of the US yield curve continues.

There isn’t much in the way of market-moving data this week, although we will get a lot of Fed-speak. Probably the biggest one will be housing starts tomorrow.

Retail sales rose 0.6% in March, which was better than the Street 0.4% consensus. The control group increased by 0.4%, a touch below the 0.5% consensus estimate. Gasoline sales were up on higher prices. Revisions were lower, however.

Business activity in New York State decelerated last month according to the Empire State Manufacturing Survey. New Orders and Production slowed down somewhat, but employment remained firm and the workweek increased. Future sentiment declined to the lowest level in 2 years.

The NAHB / Wells Fargo Housing Market Index slipped last month, but builder sentiment remains strong.

Wells Fargo faces $1 billion in fines due to force-placed auto insurance and improper charges for lock extensions. The big banks have all reported strong earnings, and the tax law changes are certainly helping.

Zillow shares fell 9% on news they plan to get into the house flipping business. “We’re entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers,” Zillow CEO Spencer Rascoff said on CNBC’s “Squawk Alley.” “After testing for a year in a marketplace model, we’re ready to be an investor in our own marketplace.” Investors are understandably skeptical, as the multiple for a fintech company is much higher than one for a property company, and it puts Zillow in direct competition with the realtors who utilize the site. Investors are not wild about changing focus from an ad model with high margins and low balance sheet usage to one that is low margin and uses a lot of balance sheet. Another issue: will people trust Z-scores if the company has a financial interest in the value of real estate in a particular area?

Want to know how acute the housing shortage is in California? From 2000 – 2015, the state built 3.4 million too few homes to keep up with job, population, and income growth. That is over 2 year’s worth of current housing starts for the whole US population. Pretty astounding when you consider those years start before the housing bubble really got going. CA has always had NIMBY issues, and now there is a push to allow dense multi-family building near public transit, even if local zoning codes prohibit it. Separately, it looks like Dodd-Frank regulations did have an adverse affect on smaller banks. I wonder how much that plays into the housing shortage.

Speaking of CA housing, here is what you can get for $800,000 in San Jose. Handyman special.