Fed Funds futures – The Daily Tearsheet

Morning Report: John Williams moves markets yesterday

Vital Statistics:

	Last	Change
S&P futures	3003	6.5
Oil (WTI)	55.74	0.54
10 year government bond yield		2.05%
30 year fixed rate mortgage		4.08%

Stocks are up this morning after Mr. Softee beat earnings estimates. Bonds and MBS are up small.

Signs of a recession? Not really. The Conference Board’s Index of Leading Economic Indicators was flat at -.3% in June, while the markets were expecting an uptick. “The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”

New York Fed Head John Williams sent bond yields lower yesterday when his prepared remarks to an academic conference were released. They said: “Take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer” when you do cut rates.” The markets immediately took this as an endorsement for a 50 basis point cut when the Fed meets next week. A spokesman from the NY Fed clarified that comment later, saying that he was referring to studies based on 20 years of monetary policy and was not referring to the FOMC meeting next week. A cut next week is pretty much expected, and the only question is whether it will be 25 or 50 basis points.

After Williams’ comments, the Fed Funds futures actually started handicapping a 70% chance for a 50 basis point cut and only a 30% chance of a 25 basis point cut. They had previously been forecasting a 25% chance for a 50 basis point cut. They ended up settling on 40% chance. There is some more Fed-speak today, and then they will enter the quiet period ahead of next week’s meeting.

FHFA Director Mark Calabria says the Trump Administration should be releasing a plan to deal with Fannie and Freddie sometime in August or September.

Morning Report: Looks like the Fed tightening cycle is winding down

Vital Statistics:

	Last	Change
S&P futures	2730.25	-14
Eurostoxx index	356.36	-1.74
Oil (WTI)	50.5	-0.96
10 year government bond yield		3.01%
30 year fixed rate mortgage		3.85%

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

The minutes from the November FOMC meeting were released yesterday, and they said nothing all that interesting. Bonds, which had been supported by Powell’s comments on Wednesday ticked up slightly. The media seemed to take the minutes as dovish, but there really wasn’t any sort of statement that jumped out.

Initial Jobless Claims increased by 10k to 234,000.

Personal incomes rose by 0.5% in October, and consumption rose by 0.6%. Those were extremely strong numbers, and support the idea that Q4 is going to be strong as well. It was also a bit of a Goldilocks report, with the personal consumption expenditures inflation reading sitting right at the Fed’s target rate, with the core rate (ex-food and energy) rising 1.8%.

The Fed Funds futures are pricing in a December hike as a pretty much a sure thing, and then have coalesced around the forecast that we get one more hike in 2019. In other words, we are in the late stages of this hiking cycle. Note that monetary policy acts with about a year’s lag, so we haven’t really begun to feel the hikes from this year. Below is the implied probability chart for the December 2019 Fed Funds futures.

Pending Home Sales fell 2.6% in October, according to NAR. For those keeping score at home, this is the 10th straight drop, and demonstrates the issues of higher home prices and mortgage rates. All regions experienced declines, and the West was hit particularly hard as home prices have experienced double-digit increases for years. Something has to give in the real estate market – either prices have to stabilize, interest rates have to fall, or incomes have to rise. Given the personal income numbers and other anecdotal data, rising wages will probably end up squaring the circle.

Morning Report: Lousy new home sales print

Vital Statistics:

	Last	Change
S&P futures	2932.25	-9
Eurostoxx index	357.94	0.56
Oil (WTI)	50.06	-0.15
10 year government bond yield		3.02%
30 year fixed rate mortgage		3.85%

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

Jerome Powell spoke yesterday and said that rates are “just below” the neutral range. These comments pushed up bond prices (rates fell) and contributed to a rally in the stock market. He may have been walking back an earlier unscripted statement which said that the Fed had a “ways to go” before hitting neutral. He also said that there were no financial bubbles in the US and that the stock market was near its long term valuation average. This put a bid under stocks and other risk assets.

The Fed Funds futures didn’t really react all that much, however a consensus seems to be building that we are looking at a hike in December, and probably one more in 2019.

TBAs have spent the last couple of days catching up with the move lower in the bond market. MBS were up a good 6 ticks or so in a flat Treasury market. Note we will get the minutes from the November FOMC meeting at 2:00 pm EST. It probably should be a nonevent, but just be aware.

GDP came in at 3.5% for the third quarter. This was the second revision out of BEA and there were few changes. This is a deceleration from Q2’s torrid 4.2% growth rate. The PCE price index rose 1.5%, which is slower than the second quarter’s 2.0% pace, and below the Fed’s target or 2%.

Mortgage applications increased 5.5% last week as purchases rose 9% and refis rose 1%. Last week contained the Thanksgiving day holiday, so there were all sorts of adjustments to these numbers. Still it is encouraging.

New Home sales came in much weaker than expected, and we saw major, major declines in the Midwest and Northeast (which dropped around 20%). New Home Sales is a notoriously volatile number, and is often subject to major revisions. That said, there is no way to put a positive spin on that number – it was simply lousy.

Morning Report: Inflation-adjusted land prices are still below bubble levels

Vital Statistics:

	Last	Change
S&P futures	2889	-9
Eurostoxx index	376.86	-2.5
Oil (WTI)	68.97	-0.89
10 year government bond yield		2.88%
30 year fixed rate mortgage		4.56%

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

Yesterday was a bit of a milestone as the 1 month T-bill briefly cracked the 2% level. Farewell, zero bound.

Tropical Storm Gordon is hitting the Gulf Coast. Oil prices have softened as the storm looks to be weaker than expected. We can still expect to see flooding issues and servicers should be prepared for an uptick in delinquencies. Things to know about your insurance if you are in the storm’s path.

Not much in the way of data today, but we have a lot of Fed-speak.

Emerging markets are getting slammed as a combination of central bank tightening, trade woes, and currency issues are pushing the asset class down. The flight to quality trade should support bond prices and help push yields lower.

Like Freddie Kreuger, government shutdown threats just keep returning. Congressional Republicans are looking to wrap up funding by October 1. Controversial issues like funding the wall would likely get pushed until after the election. As far as shutdowns go, the markets generally do not care, but originators need to remember that things like tax transcripts were unavailable the last time we shut down.

Mortgage applications fell 0.1% last week as purchases increased 1% and refis fell 1%. Rates increased about 2 basis points.

Same store sales rose 6.5%, yet another indication that the back-to-school shopping season was strong. As goes BTS, so goes the holiday season, meaning growth in Q4 should be strong. Note the Atlanta Fed raised their Q3 GDP estimate to 4.7%. Consumption is 70% of GDP.

Wells is out with a call for a 3.2% 10-year yield by the end of the year. A combination of higher deficits, lower trade deficits, and the expiration of a tax provision will lower demand in the face of rising supply. With strong spending bolstering the economy and a tight labor market, the Fed may try and squeeze in an extra rate hike to provide more breathing room in case the economy rolls over.

The September Fed Funds futures are at 99% chance of a rate hike, and the Dec futures are at a 70% chance of another.

Single-family lot prices reached a record level last year, however if you adjust for inflation, they are below the peak. Note however that lot sizes have been falling, and I don’t think this analysis corrects for that. For example, the typical lot size in the Northeast is 0.4 acres, and the typical price is $128k, which amounts to $320k an acre. On the Left Coast, the average lot size is .15 acres and the average price is $84k, which works out to be $560k an acre. Even if you correct for the declining lot size, we still aren’t back to peak levels in inflation-adjusted land prices. Builders constantly mention that land availability is a constraint on building, but this analysis shows that things were worse during the bubble years.

Morning Report: Turkey situation deteriorates

Vital Statistics:

	Last	Change
S&P futures	2836	-0.55
Eurostoxx index	384.89	-0.96
Oil (WTI)	67.37	-0.26
10 Year Government Bond Yield		2.88%
30 Year fixed rate mortgage		4.58%

Stocks are lower as the Turkey situation snowballs to other emerging markets. Bonds and MBS are up on the flight to quality trade.

Financial markets are being driven by the situation in Turkey, with the Turkish Lira continuing to depreciate. This has spread to other emerging markets currencies like the South African Rand. The Chinese currency has hit the lowest level in a year, which is bound to increase trade tensions with the US. There is the potential for this to affect the balance sheets of some European banks, however the US will be pretty much insulated from it. The most likely effect is that it will cause a flight to quality to the US dollar which will keep a lid on interest rates.

The Turkish crisis hasn’t affected the Sep Fed Funds futures, which are handicapping a 94% of a hike, but they have tempered the probability of a follow-on hike in December. It isn’t a dramatic move, but we have slipped from 66% to 61%.

We won’t have much in the way of market-moving data this week – retail sales on Wednesday will be the only one that matters. We will also get housing starts on Thursday. Other than that, it should be a dull week.

Ben Carson is changing the way HUD encourages multifamily real estate development. The Obama HUD used the stick approach – suing local governments to force them to change their zoning rules, based on demographic analysis. The Carson HUD will use the carrot approach – tying grants to changes in zoning restrictions.

Conventional financing accounted for 69% of all financing last year. Of the non-conventional types of financing, FHA loans led with 12%, followed by cash with 10% and VA with 4%.

Elon Musk clarified his tweet regarding taking Tesla private. He decided to use Twitter in order to notify the public of his intention to take the company private. Most companies file an 8-K with the SEC and do a press release, but Elon decided to use Twitter. Second, his “funding secured” comment was based on a conversation with the Saudi Sovereign Wealth Fund who asked if Tesla was interested in selling to the fund. Musk then looked at the assets of the fund, concluded they had the money, and then tweeted that funding was secured. One thing is for sure, if this deal ever happens, the background section of the proxy statement is going to make for some entertaining reading.

Morning Report: Second quarter GDP revised downward

Vital Statistics:

	Last	Change
S&P futures	2695	-8.5
Eurostoxx index	376	-3.9
Oil (WTI)	72.39	-0.39
10 Year Government Bond Yield		2.83%
30 Year fixed rate mortgage		4.53%

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

The third estimate for first quarter GDP came in lower than expected, as an upward revision in the price index and a downward revision in consumer spending lowered the third and final estimate from 2.2% to 2%. The price index was revised upward from 1.9% to 2.2%, while consumer spending was revised downward from 1% to 0.9%. Housing was actually a negative in the first quarter. I may sound like a broken record, but from 1959 to 2002, housing starts averaged 1.5 million per year, with a much smaller population. Post-bubble, we have averaged around a million per year. Just to get supply and demand into balance probably requires 2 million starts, which would do wonders for GDP. Incidentally, yesterday’s inventory figures prompted the Atlanta Fed to take up its tracking estimate for second quarter GDP to 4.5%.

The drop in the 10 year yield has probably been influenced by the Fed Funds futures, which have been inching towards one more hike this year as opposed to 2. Current probability levels:

No more hikes: 11%
One more hike 44%
Two more hikes: 42%
Three hikes 2%

While the US economic data probably supports more hikes in interest rates, wage growth remains muted, and the sell-off in emerging markets is being viewed as a canary in the coal mine for global growth. Finally fears of a trade war are bearish for the economy, which would give the Fed another excuse to hold off in either September or December.

Initial Jobless Claims increased to 227k last week, which is still an astoundingly low level. Meanwhile corporate profits were revised upward in the first quarter from 0.1% to 2.7%.

Ben Carson testified in front of the House Financial Services Committee yesterday, where he laid out some of the changes he has implemented at HUD. He has made some changes with the Home Equity Conversion Mortgage program (aka reverse mortgages) to put the insurance fund on sounder footing. He is emphasizing the removal of lead paint and other hazards in HUD housing, and has suspended the Obama-era scheduled cut in the FHA mortgage insurance premium. HUD is concerned about the number of FHA cash-out refinances, which have increased from 45% of refis to 60% in the last year. (As an aside, since rate / term refi opportunities are largely gone, so you would expect to see an increase in the percentage of cash-outs).

Why socially responsible investing sounds like a nice idea, but isn’t a free lunch. You can “do good” but you should be prepared to underperform.

Morning Report: December Fed Funds futures still leaning towards 3 hikes this year

Vital Statistics:

	Last	Change
S&P futures	2767	-8.25
Eurostoxx index	385.56	-0.38
Oil (WTI)	65.78	-0.17
10 Year Government Bond Yield		2.93%
30 Year fixed rate mortgage		4.59%

Markets are lower this morning on negative news out of Apple. Bonds and MBS are down small.

Something to watch: We are seeing bigger bets against emerging markets currencies and some European bonds. These trades will bump up against Treasury shorts, which were increased last week in the wake of the Italian election results. One of the biggest trades in the hedge fund community is short Treasuries – which means hedge funds are betting on rising rates. A sell-off in Euro bonds and emerging markets will add buying pressure to Treasuries on the flight to quality trade. So, expect some volatility in Treasuries as fast money enters and exits the market.

Rising interest rates are creating another phenomenon – increased flows into money market funds. Money market funds had been a moribund asset class after the crisis, with interest rates at 0% and the memories of breaking the buck still fresh in many investors minds. Money market funds are seeing the biggest inflows since 2013. Expect to see more of this as bond investors also look for ways to shorten duration. This is yet another reason why hedge funds are short Treasuries.

After the Italian led drop in rates, the market adjusted its prediction for the Fed Funds rate. Still sitting at a 60-40 bet for 3 or less hikes this year / 4 or more.

Warren Buffett and Jamie Dimon are exceedingly bullish on the US econom y. “Right now, there’s no question: It’s feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now” is how Warren Buffet characterized it. Jamie Dimon’s view: “The way I look at it, there is nothing that is a real pothole,” he said. “Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit.”

Buffett and Dimon are also arguing for companies to stop providing earnings guidance. They claim that focusing on short term quarterly earnings causes companies to de-emphasize long-term growth. Berkshire Hathaway does not provide any sort of guidance to the Street. It is an interesting idea, however companies provide guidance to the Street because investors as a general rule prefer predictable companies to unpredictable ones.

How not to “teach your servicer a lesson.” Yikes. If you think your lender is making a mistake, or you are unhappy with the service, don’t stop paying as a means of retaliation.

The OCC is taking a more constructive approach with the banks. At the top of the agenda: re-writing community reinvestment rules to be less onerous for the industry. Obama’s head of the OCC was a career regulator who made a point of challenging the perception that the OCC was too close to the banks it regulated. The Obama administration pushed hard for banks to take less credit risk, and I wonder how much of the issue with a lack of housing construction is due to that. While this wouldn’t affect the Lennars of the world, most construction is with smaller builders who would have to go to their local community bank for financing.