FOMC minutes – The Daily Tearsheet

Morning Report: The Fed is concerned about coronavirus

Vital Statistics:

	Last	Change
S&P futures	3379	-6.25
Oil (WTI)	53.76	0.45
10 year government bond yield		1.54%
30 year fixed rate mortgage		3.69%

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

The FOMC minutes didn’t reveal anything too surprising. The central bank is concerned about coronavirus, and the situation “warranted close watching.” In his Humphrey Hawkins testimony, Jerome Powell said he wanted to see evidence that Chinese disruptions are having a material effect on the US economy that will last. China is idling factories and restricting travel, and companies are now seeing the downside of stretched supply chains. In addition they fretted about persistently low inflation and searched for reasons why it has consistently missed their 2% target to the downside. Basically the message is that if rates are going anywhere, it is down not up.

In other economic news, initial jobless claims came in at 210,000 and the Philadelphia Fed manufacturing survey surged to a robust level of 37.

Mortgage delinquencies are the lowest on record (going back to 2000). The total 30 day + DQ rate came in at 3.22%, which was down 14% YOY and down 5% on a MOM basis. This is unusual given that DQs often spike early in the year as holiday spending gets the better of people.

Morning Report: FOMC minutes confirm no move in December

Vital Statistics:

	Last	Change
S&P futures	3110	1.25
Oil (WTI)	57.39	0.74
10 year government bond yield		1.76%
30 year fixed rate mortgage		3.93%

Stocks are flat this morning after China invited the US for trade talks in Beijing despite the resolution backing Hong Kong. Bonds and MBS are down small.

In economic data, initial jobless claims were flat at 227,000 last week and the Philadelphia Fed manufacturing survey improved.

The CFPB is conducting an assessment of the TRID rule. There doesn’t appear to be any specific issues the CFPB is looking to address, but it is part of the Trump Administration’s push to eliminate unnecessary burdens on business.

Independent mortgage banks had their best quarter in 7 years as pretax production profit rose to 74 basis points from 64 in the prior quarter. “A surge in refinance activity and a healthy purchase market led to robust mortgage volume in the third quarter, pushing up production profits to a high not seen since the fourth quarter of 2012 ($2,256 per loan),” said Marina Walsh, MBA Vice President of Industry Analysis. “The increase in profits was primarily driven by declining production expenses and higher loan balances, which mitigated the effects of lower basis-point revenue.” Interestingly, production revenue and secondary marketing income fell. The purchase share of the market fell from 74% to 60%.

Bold prediction: Within the next two years, we will see the majority of loans go through the entire process without any human involvement. It will be a much more mechanized process.

The minutes from the Fed confirmed the market’s view that the central bank will be out of the picture for a while. They removed the “act as appropriate” language in order to signal that stance. From the minutes:

In describing the monetary policy outlook, they also agreed to remove the “act as appropriate” language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee’s expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook.

Translation: We aren’t moving in December. Note the Fed Funds futures agree with that assessment, although they are predicting more cuts in 2020. FWIW, the Fed generally tires to avoid modifying policy in the months leading up to an election for fear of appearing political. That said, the March futures are pricing in about a 25% chance of a cut.

Is the REO-to-Rental trade finally done? Blackstone has finally exited its entire position in Invitation Homes, which it created in the aftermath of the financial crisis. Invitation was one of the first to buy up distressed properties and rehab them to rent. Turns out Blackstone tripled its money on the trade.

Morning Report: Senate resolution complicates trade negotiations

Vital Statistics:

	Last	Change
S&P futures	3111	-6.25
Oil (WTI)	55.69	-0.74
10 year government bond yield		1.74%
30 year fixed rate mortgage		3.96%

Stocks are lower this morning as tensions increase between China and the US over Hong Kong. Bonds and MBS are up.

The Senate passed a resolution last night supporting democracy for Hong Kong and urging China to not use violence to suppress the demonstrations. This will undoubtedly complicate trade negotiations, and will push the markets to more of a “risk-off” (stocks down, bonds up) posture. Bond yields are lower this morning, with the 10 year trading at 1.74%.

Mortgage Applications decreased by 2.2% last week on a seasonally adjusted basis as purchases rose 6.7% and refis fell 7.7%. Veteran’s Day influenced the numbers. “U.S. and China trade anxieties and protests in Hong Kong pulled U.S. Treasuries lower last week, and the 30-year fixed mortgage rate followed the same path, dipping below 4 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite lower rates, mortgage applications decreased 2.2 percent, driven by an 8 percent slide in refinance activity. Rates have stayed in the same narrow range of around 4 percent since July, so we may be starting to see the expected slowdown in refinancing as the pool of eligible homeowners shrinks.”

The retailers are announcing earnings and the markets are looking for indications of how this year’s holiday shopping season will shake out. Target and WalMart both announced strong earnings and took up their Q4 guidance. These two stocks are a bellwether for John Q Public’s spending habits.

The FOMC minutes will be out at 2:00 pm today. The minutes usually aren’t market-moving, but given the somewhat abrupt change in the Fed’s posture there is always the possibility that we could see some action. Just be aware when locking around that time.

Morning Report: Existing home sales rise

Vital Statistics:

	Last	Change
S&P futures	2937	8.5
Oil (WTI)	56.34	0.64
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.83%

Stocks are higher this morning on no real news. Bonds and MBS are down.

The Fed is at Jackson Hole today and tomorrow. There is a chance that they could say something market moving, so just be aware.

Initial Jobless Claims fell to 209,000 last week, while the Markit PMI showed a deceleration. Note the manufacturing PMI fell below 50, which is a sign of contraction.

Existing Home Sales rose 2.5% in July, according to NAR. On a year-over-year basis, sales were up about half a percent. Half a percent isn’t anything to get excited about, however it is the first annual gain in a year and a half. “Falling mortgage rates are improving housing affordability and nudging buyers into the market,” said Lawrence Yun, NAR’s chief economist. However, he added that the supply of affordable housing is severely low. “The shortage of lower-priced homes have markedly pushed up home prices.” The median home price was $280,800 an increase of 4.3% YOY. Since the market bottomed in 2012, homes in the lower-priced half rose at a considerably faster pace than those in the higher priced half. In some areas, they more than doubled off the bottom.

Inventory remains the biggest issue for sales, with only 1.89 million units in inventory, which represents a 4.2 month supply. This is partly why NAR is working with FHA to increase the universe of condos which would qualify for GNMA guarantees. Sales increased everywhere but the Northeast. The first time homebuyer fell to its recent average of 32%, which is lower than the pre-crisis average of about 40%. Despite the continued disappointment in housing, the homebuilder stocks are doing well and the XHB homebuilding ETF is up about 31% this year versus 19% for the S&P 500.

The FOMC minutes were non-eventful, however the statement “Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.” was a bit of a head-scratcher given they decided to cut rates. Overall, the doves based their arguments on a deceleration in manufacturing, persistently low inflation and risk management. “Several” FOMC members argued against cutting rates, judging the economy “was in a good place” and some worried that lowering the Fed Funds rate would inflate asset prices. Others worried about the signal a rate cut would send to the market’s about the Fed’s perception of the economy. Also, a couple voters wanted to cut rates by 50 basis points.

Morning Report: Dovish FOMC minutes

Vital Statistics:

	Last	Change
S&P futures	2835.25	-22.4
Oil (WTI)	60.47	-0.95
10 year government bond yield		2.36%
30 year fixed rate mortgage		4.41%

Stocks are lower this morning on trade fears and European elections. Bonds and MBS are up.

The minutes from the April FOMC meeting were released yesterday, and the Fed continues to adjust its sails to the messages from the market. The bond market took the minutes to be dovish, and bond yields dropped after they were released. The quote that investors focused on:

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some
time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”

That statement (even if global economic and financial conditions continued to improve) is an all-clear signal to the bond market that positive economic data is no longer a threat. Given the background of creeping Eurosclerosis and a trade dispute, the highs for interest rates are probably in, and strategists are already talking about an insurance rate cut.

Talk of a rate cut is probably premature however. The data just don’t support it, and with the jawboning out of the White House the Fed is going to resist cutting rates if only to prove they are independent. That said, the circumstances required to justify a rate hike are even more unlikely.

Troubles in the luxury end of the real estate market? Not so fast. McMansion builder Toll reported earnings yesterday that exceeded street expectations, and Toll CEO Doug Yearley noted that the Spring Selling Season, which had been a bit of a disappointment, has finally woken up. “We are encouraged by the improvement in demand as the quarter progressed. FY 2019’s April contracts surpassed FY 2018’s April on both a gross and per-community basis. Although the Spring selling season bloomed late, it built momentum. We view this as a positive sign for the overall health of the new home market.”

Initial Jobless Claims ticked up to 215,000 last week, while the Markit purchasing managers’ index decreased in April.

New home sales ticked down in April, falling to a seasonally adjusted annual pace of 673,000. That said, March’s numbers were revised upwards to 732,000. The median home price was more or less flat YOY at $326,400 and the inventory of 332,000 units represents a 5.9 month supply.

Morning Report: FOMC minutes and homebuilder earnings

Vital Statistics:

	Last	Change
S&P futures	2569	-13.5
Eurostoxx index	346.51	-1.2
Oil (WTI)	51.94	-0.24
10 year government bond yield		2.70%
30 year fixed rate mortgage		4.48%

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

The FOMC minutes didn’t really contain much interesting information – the committee noted that financial conditions were tightening slightly and that the stock market was falling (we bottomed on Christmas Eve), but still decided unanimously to hike the Fed Funds rate 25 basis points. Despite fears in the market that the Fed has overshot, that possibility was not entertained by either the members or the staff. Incidentally, we will have a lot of Fed speakers throughout the day.

Homebuilder Lennar reported strong earnings for the fourth quarter, however it decided to hold off giving guidance on 2019 due to opaque market conditions. That said, new orders were up big, and margins were strong. Lennar is transitioning into a pure-play homebuilder and has been exiting businesses like asset management and real estate brokerage. This quarter should be the last with any CalAtlantic integration noise in the numbers. The Street was happy with the numbers, sending the stock up about 8%.

KB Home also reported numbers, although they saw a decrease in revenues, margins and a fall in average selling prices. KB is more of a turnaround story, however and the whole sector is so out of favor that it seems any non-disaster is taken as positive. KB was up 4% on its numbers.

Canary in the coal mine? No high-yield debt has been issued since November, according to DealLogic. This is the first December without junk issuance since 2008. This could have simply been due to the gyrations in the stock market, but this bears watching. Despite a spike at the end of 2018, credit spreads are still at historically normal levels, so it is too early to sound any alarms yet. The Fed noted tightening credit conditions in its FOMC minutes as well.

Donald Trump met with Democratic Congressional leaders yesterday on the subject of border security and the government shutdown. He characterized the meeting as a “waste of time” after being told there is basically no way Democrats will allocate funds for the wall. The government shutdown is almost 3 weeks old, and Federal workers are not getting paid. That said, unlike the Obama-era shutdowns, the Trump Administration is trying to make the shutdown as invisible as possible to the average citizen. The IRS is back issuing refunds and 4506-Ts, so for the most part there isn’t much of an effect on real estate with the exception of flood insurance. 75% of all realtors noticed no impact on buyers.

Michael Bright, who has been the interim president of Ginnie Mae for a year and a half, has resigned and will return to the private sector.

The drop in interest rates means that another half a million borrowers (total of 43 million) will find it attractive to refinance, according to Black Knight Financial Services. This is up 29% from the bottom, but still down 50% from last year.

“As recently as last month, the size of the refinanceable population fell to a 10-year low as interest rates hit multi-year highs,” said Graboske. “Rates have since pulled back, with the 30-year fixed rate falling to 4.55 percent as of the end of December. As a result, some 550,000 homeowners with mortgages who would not benefit from refinancing have now seen their interest rate incentive to refinance return. Even so, at 2.43 million, the refinanceable population is still down nearly 50 percent from last year. Still, the increase does represent a 29 percent rise from that 10-year low, which may provide some solace to a refinance market still reeling from multiple quarters of historically low – and declining – volumes.

“In fact, through the third quarter of 2018, refinances made up just 36 percent of mortgage originations, an 18-year low. And of course, as refinances decline, the purchase share of the market rises correspondingly. So now, in the most purchase-dominant market we’ve seen this century, we need to ask whether the shift in originations will have any impact on mortgage performance. The short answer, based on historical trends, is that it certainly bears close watching. Refinances have tended to perform significantly better than purchase mortgages in recent years. When we take a look back and apply today’s blend of originations to prior vintages, the impact becomes clear. A market blend matching today’s would have resulted in an increase in the number of non-current mortgages by anywhere from two percent in 2017 to more than a 30 percent rise in 2012, when refinances made up more than 70 percent of all lending. As today’s market shifts to a purchase-heavy blend of lending, Black Knight will continue to keep a close eye on the data for signs of how – or if – this impacts mortgage performance moving forward.”

Morning Report: Fed Minutes out today

Vital Statistics:

	Last	Change
S&P futures	2577	4.5
Eurostoxx index	348.5	3.89
Oil (WTI)	50.86	1.06
10 year government bond yield		2.74%
30 year fixed rate mortgage		4.48%

Stocks are higher this morning as optimism for trade talks with China is offset by pessimism over the government shutdown. Bonds and MBS are down.

The minutes from the December FOMC meeting are scheduled to come out at 2:00 pm EST. Given the massive change in sentiment over the past month, they will be the most interesting in a while. Generally these are not market-moving events, but today could be an exception, especially since rates have dropped so much recently. I would be leaning towards higher rates as investors get a reality check about how strong the economy really is.

Job openings fell to 6.9 million in November, according to the JOLTS job openings report. The quits rate edged down to 2.3% from 2.4%, which is surprising given the bump in wages from Friday’s jobs report. Overall, it continues to show a strong labor market – there are almost 900k more open positions than there are unemployed people. There is a skills gap to be addressed, but the jump in the unemployment rate shows that the long – term unemployed are beginning to return to the labor force and look for a job.

The drop in rates is finally beginning to show up in mortgage applications. The MBA reported that applications increased 24% from the previous week. Refis rose 35%, and the refinance percentage of applications is the highest since February 2018. Purchases were up 17%. Rates fell anywhere from 9 to 20 basis points depending on the product. While there is some holiday noise in the numbers, they are also being depressed by the government shutdown.

Amerisave is buying the retail mortgage operations of TMS as they focus more on servicing and fintech than origination.

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: Markets fret over the FOMC minutes

Vital Statistics:

	Last	Change
S&P futures	2806	-9.75
Eurostoxx index	364.08	0.54
Oil (WTI)	68.98	-0.77
10 year government bond yield		3.22%
30 year fixed rate mortgage		4.89%

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

The minutes from the September FOMC meeting were released yesterday, and may have caused a delayed sell-off in stocks and bonds. Nothing was all that surprising in the document, although some in the business press attributed the sell-off to a surprising consensus that more tightening is needed. There was talk that rates might have to go into restrictive territory as opposed to just neutral territory. That apparently freaked out the bond market, although it didn’t really make a move until closer to the closing bell. FWIW, the dot plot envisions perhaps 2 or 3 hikes in 2019, which probably wouldn’t be characterized as “restrictive” given they just took out the term “accomodative” to characterize current policy. There was also talk about becoming more opaque, and spoon-feeding the markets a little less about what they are going to do. The economic textbooks talk about managing inflationary expectations, and part of that management means keeping markets on their toes. If the markets correctly anticipate what the Fed is going to do, their moves have less of an effect. Sort of like a monetary Heisenberg principle.

Regardless, the Fed was surprised to see how much economic strength there was in the economy (interestingly, they always overshot in their growth forecasts in 2008-2016, but now they are undershooting). Regardless, they are worried about the global economy, and the growth difference between the US and the Eurozone. The strength in the labor market is starting to bring out some cost-push inflation as well. Overall the minutes didn’t tell us anything we didn’t already know – growth is strong, inflationary pressures are building, trade wars are bad, and the Fed is going to keep raising rates.

Housing starts disappointed in September, falling 5.3% MOM to a seasonally-adjusted annual rate of 1.2 million. This number is up on a YOY basis however. Weather-related issues probably played a part in the disappointing number, however building permits were anemic as well. Most of the decline was in the volatile multi-family segment, while single family was generally up small.

Over 3/4 of Americans view renting as cheaper than owning, according to a survey from Freddie Mac. Blame higher home prices and mortgage rates. Note that 58% of renters don’t intend to buy a home, which is an increase from 54% earlier in the year. Rental supply is also a factor – it recently hit a 3 decade high. In the aftermath of the housing crisis, builders focused on urban rental properties targeted towards 20-something Millennials – which has created a glut, particularly at the higher price points. In addition, we have a shortage of starter homes, as builders concentrated on the only sector that was working at the time – luxury.

China’s stock market is down 30% this year, in stark contrast to the rest of the world. China has always marched to its own drummer, but they have a serious real estate bubble. If that is unwinding, it will reverberate in the high end West Coast markets.

Morning Report: No surprises in the FOMC minutes

Vital Statistics:

	Last	Change
S&P futures	2858	-2.75
Eurostoxx index	384.09	0.07
Oil (WTI)	67.46	-0.4
10 Year Government Bond Yield		2.81%
30 Year fixed rate mortgage		4.58%

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

The FOMC minutes didn’t offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn’t a surprise – the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the “not too distant future” monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 – 100 basis points higher on the Fed Funds rate. Bonds didn’t react to the minutes at all, and the Fed Funds futures didn’t budge either.

There wasn’t much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed ’em.

Central Bankers are meeting in Jackson Hole today. There usually isn’t much in the way of market-moving statements out of these things, but just be aware.

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads.

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter’s pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase – almost 19%. The laggards were CT, AK, ND, LA, and WV.

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger’s experience in consumer protection and also felt she “lacked empathy” for consumers and didn’t believe in the Bureau’s mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger’s nomination looks largely to fall along partisan lines now.

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month’s worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market.