Morning Report: Tariff threats push the 10 year to 2.15% overnight

Vital Statistics:

 

Last Change
S&P futures 2761 -29
Oil (WTI) 55.56 -0.6
10 year government bond yield 2.16%
30 year fixed rate mortgage 4.25%

 

Stocks are lower this morning after Trump threatened Mexico with 5% tariffs over illegal immigration. Bonds and MBS are up.

 

The 10 year bond is trading at 2.16 this morning, the lowest level in almost 2 years. We are seeing some action in the TBAs as the 3% FN coupons are all trading above par. We should see more pain in the servicing space as marks have to come in. If you were hoping for a good MSR mark to paper over an aggressive cut in margins, you are about to get a double-whammy.

 

Personal Incomes rose 0.5% in April versus Street expectations of a 0.3% increase. Personal Consumption rose 0.3%, again topping estimates. March’s consumption numbers were revised upward as well. The core PCE  price index (the Fed’s preferred measure of inflation) rose 1.6% YOY, which is well below their target. For those keeping score at home, the market is now pricing in a 90% probability of a rate cut this year. with a better-than 50% chance of 2 or more!

 

fed funds futures

 

Regardless of the strength in the economy, pending home sales dropped 1.5% in April. YOY contract signings fell 2%, making this the 16 consecutive month of YOY declines. Lawrence Yun highlighted the problem: a glut of expensive homes and a shortgage of low priced homes: “Home price appreciation has been the strongest on the lower-end as inventory conditions have been consistently tight on homes priced under $250,000. Price conditions are soft on the upper-end, especially in high tax states like Connecticut, New York and Illinois.” The supply of inventory for homes priced under $250,000 stood at 3.3 months in April, and homes priced $1 million and above recorded an inventory of 8.9 months in April.”  Given that a balanced market is usually around six and a half months, you can see the extremes of 3.3 months at the low end and 8.9 months at the high end.

 

Fed Vice Chair Richard Clarida gave some support to the bond market yesterday in a speech at the Economic Club of New York. “If the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the [Federal Open Market Committee] would take into account in assessing the appropriate stance for monetary policy…..Midway through the second quarter of 2019, the U.S. economy is in a good place…By most estimates, fiscal policy played an important role in boosting growth in 2018, and I expect that fiscal policies will continue to support growth in 2019.”

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Morning Report: New home sales still anemic historically

Vital Statistics:

 

Last Change
S&P futures 2821  9
Eurostoxx index 380.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.28%

 

Stocks are higher this morning on overseas strength, particularly in China and Japan. Bonds and MBS are up.

 

New Home Sales fell to 607,000 in January, according to the Census Bureau. This is down 7% MOM and 4% YOY. New Homes Sales is a notoriously volatile number, and the margin for error is generally in the mid-teens %. Still 607,000 is roughly in line with historical averages over the past 50 years. That said, population has grown since then, so it isn’t really comparable. Take a look at the chart below, which is new home sales divided by population – we are still only at levels associated with the depths of prior recessions. In other words, we are still in very early innings with the housing recovery, and you can make an argument that the recovery hasn’t even begun yet.

 

new home sales divided by population

 

Industrial Production rose 0.1% in February, and January’s initial 0.6% drop was revised upward to -0.4%. Manufacturing production fell 0.4%, while January’s 0.9% drop was revised upward to -0.5%. Capacity Utilization fell to 78.2%, while Jan was revised up again. So, Feb wasn’t great, but January wasn’t as bad as it initially appeared to be.

 

We have entered the quiet period for the Fed ahead of their meeting next week. No rate hikes are expected, although we will get new economic forecasts and a new dot plot. Sentiment regarding the Fed has changed massively over the past few months. As of now, the the Fed funds futures are estimating that there is a 75% chance the Fed does nothing this year, and a 25% chance they cut rates by 25 basis points. The fed funds futures are pricing a 0% chance of a hike. While Trump’s jawboning of the Fed was bad form, and you generally don’t want to see presidents doing that, you also can’t escape the fact that the Fed Funds futures and the markets think he was right!

 

 

Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 2648.75 6
Eurostoxx index 357.92 0.9
Oil (WTI) 53.82 0.51
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.59%

 

Stocks are higher after good numbers out of Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. Nobody expects the Fed to make any changes to the Fed Funds target rate, but there is talk that the Fed might announce an early end to balance sheet reduction. Note there will be a press conference after the announcement – apparently Powell will hold one after every meeting, unlike Janet Yellen who only held them after the Mar, Jun, Sep and Dec meetings.

 

Pulte reported fourth quarter numbers that disappointed the Street, but the 11% drop in orders is what got everyone’s attention. Gross margins also fell. The company said that traffic decreased YOY in October and November, but rebounded in December. That said, the company said there is less certainty about demand heading into this spring selling season than the industry has experienced in recent years. The stock was down about 6% early in Wed trading.

 

Home price appreciation continues to slow, according to the Case-Shiller Home Price Index. Prices rose 5.2% YOY, down from 5.3% the prior month. “Home prices are still rising, but more slowly than in recent months,” says David M. Blitzer, Managing
Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The pace of price increases are being dampened by declining sales of existing homes and weaker affordability. Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year. Following a shift in Fed policy in December, mortgage rates backed off to about 4.45% from 4.95%. Housing market conditions are mixed while analysts’ comments express concerns that housing is weakening and could affect the broader economy. Current low inventories of homes for sale – about a four-month supply – are supporting home prices. New home construction trends, like sales of existing homes, peaked in late 2017 and are flat to down since then. Stable 2% inflation, continued employment growth, and rising wages are all favorable. Measures of consumer debt and debt service do not
suggest any immediate problems.”

 

The Trump Admin poured cold water on the notion that they would release Fannie and Fred from government control without Congressional involvement. Earlier in January Joseph Otting, head of the FHFA said:  “The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do.” This was taken as bullish for the stocks, sending Fannie Mae up from about $1.00 at the end of 2018 to close to $3.00. Since housing finance reform is going to be politically difficult, investors have been betting that the government would be more likely just to recapitalize and release the GSEs.

 

Freddie Mac’s survey is out for 2019. They anticipate one more Fed Funds rate hike, and think mortgage rates will average around 4.7% and GDP growth will slow to 2.5% in 2019 and 1.8% in 2020. They anticipate a slight uptick in housing starts, to 1.3 million per year, which is still well below the historical 1.5 million level. Home price appreciation is set to decelerate as well, to 4.1%. Mortgage originations are expected to finish 2018 at $1.6 trillion and increase to $17 trillion next year.

 

Home prices are falling in Silicon Valley – the first YOY declines since 2012. In San Jose, prices fell 8%, although they are so high – the median price is almost a million – that they are probably still overvalued by a wide margin. What is driving this? Believe it or not, the stock market. Many buyers rely on stock compensation to make the downpayment, and with the FAANG stocks having sold off, that is getting harder to do. Second, high house prices have made people reluctant to move there – after all a high salary is not as enticing if you end up giving it all back in rent or mortgage payments.

Morning Report: Ginnie is increasing scrutiny of non-bank lenders

Vital Statistics:

 

Last Change
S&P futures 2642 0
Eurostoxx index 357.3 2.93
Oil (WTI) 52.35 0.36
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

Stocks are flat as we begin the FOMC meeting. Bonds and MBS are up small.

 

Despite the end of the shutdown, we will have to wait for economic data. Two big reports this week – GDP and personal incomes – have been delayed.

 

Economic activity picked up in December, according to the Chicago Fed National Activity Index. Production-related indicators and employment drove the increase. Note that the CFNAI is a meta-index of a number of announced economic indices, and the government shutdown has decreased the amount of data going into the index. We’ll see the same effect next month as well, so the index won’t be as accurate as it usually is. Regardless, the CFNAI is an amalgamation of previously released data, so it doesn’t move markets.

 

Ex-Fed Head Narayana Kochlerakota thinks the Fed should consider easing at the next meeting. His argument is that the Fed has been falling short in maintaining inflation at its 2% target and that notwithstanding the latest unemployment data we are still not at full employment. He is looking at the percentage of prime age people (age 25-54) who are currently employed. We are just south of 80%, and were closer to 82% during the late 90s. Given that the number of prime age people in the US is roughly 100MM, then we have about 2 million more jobs to create in order to get to back to where we want to be. Interestingly, he not only advocates maintaining the current balance sheet, he thinks it should increase about 4% a year to grow in lockstep with the economy.

 

employment population ratio

 

Guess what has been one of the best performing assets so far this year (almost tripled in under a month). If you guessed the GSEs, you would be correct. The market is betting that shareholders won’t get wiped out when / if housing reform happens this year. Check out this chart of Fannie Mae:

 

fnma chart

 

Ginnie Mae is stepping up oversight of its partners, particularly non-bank lenders, telling some that they must improve some financial metrics before they will be granted more commitment authority, which is the ability to securitize FHA and VA loans. The government is concerned that non-bank lenders have replaced a lot of the traditional banks in servicing government loans. Indeed, they have – nonbanks now service 61% of government loans, up from 34% at the end of 2014. FHA was largely a backwater of the mortgage market pre-crisis, however post crisis, it has picked up the load that subprime left. Servicers for government loans have a lot more liquidity demands than servicers for GSE loans – and in a downturn the advances liability could take out undercapitalized mortgage bankers. VA lenders can face what is called no-bid risk, which can be a disaster for many servicers without a line of credit to cover advances and loan buyouts.

Morning Report: Is tapering behind the sell-off?

Vital Statistics:

 

Last Change
S&P futures 2651 -12
Eurostoxx index 356.08 -1.82
Oil (WTI) 52.76 -0.93
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.62%

 

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

 

We have a temporary reprieve of the government shutdown, with agencies to -re-open until Feb 15. This will allow Congress more time to work on some sort of deal on border security. Trump is willing to shut down the government again, or use emergency powers to secure funding. Note that Trump said over the weekend he is skeptical that Congress will come up with anything he would be willing to sign.

 

With the government shutdown over, we should start getting economic data again. We will have a big week for data, with GDP on Wednesday and the jobs report on Friday. Not sure what is going to happen with the missed data from the shutdown.

 

The FOMC meets Tuesday and Wednesday, however no change in the Fed Funds rate is expected. Jerome Powell will hold a press conference after the meeting, which is unusual for January meeting. The Fed Funds futures are pricing in only a 1% chance of a hike, so the press conference will be about something else – probably balance sheet runoff and the idea that the Fed’s balance sheet will probably end up closer to current levels than it will be to pre-crisis levels.

 

Note there has been some criticism that the Fed’s balance sheet reduction is behind the sell-off in the market. They believe that the Fed’s reduction in Treasury purchases, combined with higher borrowing amounts is causing rates to rise and that is spooking investors. The idea is that government borrowing is crowding out other investments by soaking up all of that excess liquidity in the market. The Fed isn’t buying that argument: “It’s hard to fathom the [Fed] balance sheet is having some dramatic effect,” Minneapolis Fed President Neel Kashkari said in a Jan. 17 interview. FWIW, if Fed buying was the catalyst for the sell-off, we should be seeing a steepening of the yield curve (in other words higher long term rates). In fact, we are seeing the opposite. IMO, the biggest reason for the sell off has been the re-introduction of money market instruments to the investment menu. For the past 10 years, they have paid nothing and therefore money market investors have been forced to invest in stocks and longer term bonds. Now that short term rates are rising again that money is returning to its natural home, which means some selling in the stock and bond markets as the trade is unwound.

 

D.R. Horton reported fourth quarter net income increased 52% YOY, although that was partially driven by a tax charge in Q4 last year. Orders were up 3% in units and flat on a dollar basis. Donald Horton, Chairman of the Board said: “Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across our markets, and economic fundamentals and financing availability remain solid. We are pleased with our product offerings and positioning for the upcoming spring selling season, and we will adjust to future changes in market conditions as necessary.”

Morning Report: What does 2019 look like if the Fed is out of the way?

Vital Statistics:

 

Last Change
S&P futures 2510 24
Eurostoxx index 337.45 1.25
Oil (WTI) 46.4 1.01
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.60%

 

Stocks are higher as close the books on 2018. Bonds and MBS are down small.

 

Today should be relatively quiet as we have an early close in the bond market and no economic data to speak of. Economic data has been delayed due to the government shutdown, but so far it looks like BLS is still working so we should get the jobs report on Friday.

 

Pending home sales dropped 0.7% in November, according to NAR. YOY, activity was down 7.7%. Lawrence Yun, NAR chief economist, said the current sales numbers don’t fully take into account other data. “The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates.” The government shutdown is not going to help things going forward, as the inability to get flood insurance will probably affect some 40,000 home sales.

 

People are looking at 2019 and largely assuming that it will be a carbon copy of 2018 with respect to the mortgage business. That is probably a safe bet, however there is one big difference: if you believe the Fed Funds futures are correct, the Fed is out of the way. For example, Freddie Mac anticipates that the 30 year fixed rate mortgage is going to be 5.1% and originations are going to increase slightly to 1.69MM. When that forecast was made (in August of 2018), people were thinking we would probably have two more hikes in 2019. I suspect that the forecasts for 2019 have yet to factor in a Fed that does nothing further.

 

Where will rates go, then? I suspect that unless the data changes markedly, they probably go nowhere. If we see a dramatic drop in GDP (say Q1 GDP drops to 1%) then rates are going lower as the yield curve will probably invert. If we see a dramatic jump in inflation (say Q1 core PCE hits 3%) then the Fed might hike again and we should see higher mortgage rates. However, the most likely bet is that they kind of meander around in the mid 4%s for the year.

 

Where will home prices go? Most forecasts assume that home price appreciation will slow this year, and that is probably a solid bet. Home prices have become largely untethered from incomes again and will probably lack much impetus to move higher unless wages get a strong boost. There is a housing shortage that needs to be addressed, but that doesn’t necessarily mean SFR construction – the needs are at the lower price points, and that means more multi-fam, not necessarily SFR. There is a glut of high priced properties as well.

 

I suspect that even if rates do move lower, there has been enough prepayment burnout to prevent any sort of meaningful refi boom. Volume is going to have to come from additional products (non-QM etc) and new construction. Volume probably won’t be as bad as 2018, but it won’t be better than 2017 either. Margin compression will probably ease up as competition decreases and marginal players exit the business.

Morning Report: The Fed raises rates

Vital Statistics:

 

Last Change
S&P futures 2511 6.5
Eurostoxx index 339.04 -2.44
Oil (WTI) 47.96 1.72
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

 

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

FOMC dot plot

 

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

 

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

 

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.