Morning Report: Coronavirus hits stocks and lifts bonds

Vital Statistics:

 

Last Change
S&P futures 3245 -50.25
Oil (WTI) 52.58 -1.62
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.72%

 

Stocks are lower this morning as the Asian Coronavirus spreads. Bonds and MBS are up.

 

The upcoming week will have quite a bit of data – new home sales, the first pass at Q4 GDP, and personal incomes / spending. We will also have the FOMC meeting on Tuesday and Wednesday. The current consensus is that the Fed won’t make any changes in policy.

 

As a general rule, when you get big moves in the 10 year bond yield, it takes a while for the MBS market to catch up. This means that you can see the CNBC talking heads discussing how much lower rates are, then run a scenario and come away disappointed. We are seeing something similar this morning, where the 10 year bond is up over half a point, while the Fannie Mae 3.5s are flat. Even the Fannie 2.5s are only up 3/16. That said, this is a good opportunity to wake up your borrowers who might have missed an opportunity to refinance.

 

Fair Issac (the company behind the FICO score) is making changes to its credit scoring model. The change will focus more on payment history and consumer debt changes and less on overall debt such as student loans or a large mortgage. As a general rule, installment debt is less of a factor than revolving debt (i.e. credit cards).

 

Global real estate markets are cooling down. “Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September, the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.” Foreign asset demand seems to be the driver, and it has become more correlated with other asset classes, particularly stocks. For the US, the effects will probably be concentrated primarily in markets like New York City and the pricey West Coast markets.

Morning Report: Asian sell-off spreads

Vital Statistics:

 

Last Change
S&P futures 2721.25 -35
Eurostoxx index 355.01 -4.73
Oil (WTI) 69.26 0.14
10 year government bond yield 3.15%
30 year fixed rate mortgage 4.93%

 

US stock index futures are down this morning as a sell-off that started in Asia has spread to Europe. Bonds and MBS are up on the risk-off trade.

 

Chinese markets are the catalyst behind the sell-off, and it appears that non state-owned firms are having financing difficulties. The Chinese government addressed the issue on Friday, and while it soothed fears for a couple of days, investors are still worried. Financing difficulties invariably accompany bursting real estate bubbles and China’s bubble has been going on for years.

 

If China’s real estate bubble is bursting, the effect on US interest rates could go a couple of ways. The most likely event will be a drop in inflationary pressures as China’s currency drops and they attempt to export their way out of the problem. They could sell Treasuries to repatriate cash (in crises, you sell what you can, not necessarily what you want to) which would temporarily put upward pressure on US rates. The most likely scenario would be a risk-off one, where Chinese money withdraws out of risky assets in favor of Treasuries. It might cause the Fed to take a break.

 

Speaking of the Fed, the December Fed Funds futures are handicapping a 82% chance of a hike at the December meeting.

 

Economic growth moderated a bit in September, according to the Chicago Fed National Activity Index.

 

Fair Issac, the creator of the FICO score is going to re-work their model in 2019, which may bump up the scores of the more marginal borrower. Borrowers with some dings on their scores could get a boost if they maintain a few hundred dollars in their checking accounts and don’t overdraw them.

 

Jim Cramer warned that a 5% mortgage rate is a “line in the sand” for the economy.  “We’re going to see more and more bad earnings because [a] 5 percent mortgage is the end, that is the line in the sand,” Cramer said Monday on “Squawk on the Street. ” “The mortgage rate is very high in this country.” Cramer has become critical of the Fed’s tightening regime, saying that the Fed is ignoring signals of a slowdown in the economy (particularly in housing). The thing to keep in mind is that rate changes act with a lag of about a year. This year’s moves have yet to be felt in the economy.

 

Note we will get the first estimate of third quarter GDP this Friday. The consensus estimate is for 3.3% growth, a slowdown from the second quarter pace of 4.2%.

 

Donald Trump proposed 10% middle class tax cut, which will be voted on after the election. This is an attempt to rally Republicans to the polls in order to maintain Congress. As of now, it looks like the GOP will probably increase their seats in the Senate, while Democrats are looking to possibly take over the House.