FOMC – The Daily Tearsheet

Morning Report: The Fed maintains current interest rate policy

Vital Statistics:

	Last	Change
S&P futures	3140	-3.25
Oil (WTI)	58.90	-0.14
10 year government bond yield		1.79%
30 year fixed rate mortgage		3.97%

Stocks are flattish after the Fed maintained interest rates yesterday. Bonds and MBS are up.

The Fed maintained the Fed Funds rate at current levels and gave a generally upbeat assessment on the economy. The FOMC took down their future unemployment estimates by .2% and left all other projections unchanged. The biggest revelation was the dot plot, which was a bit more dovish than the September plot, but is still forecasting the possibility of a hike in 2020, along with no forecasts for a rate cut.

The Fed Funds futures, which have been (a) more dovish than the Fed’s dot plots and (b) more correct, went from forecasting a 50% chance of a cut in 2020 to a 70% chance of a cut. The bond market adjusted as well, with the 10 year bond yield falling about 4 basis points in the afternoon.

The Producer Price Index (PPI) was unchanged in November, and up 1.1% on a year-over-year basis. The PPI measures inflation at the wholesale level, and is a companion inflation index to the Consumer price index. Ex-food and energy, the index fell in November and was up 1.3% YOY.

Initial Jobless Claims jumped to 252,000 last week. This is a huge jump, and I am not sure what drove it. We have been hanging around in the low $200,000s for quite some time. FWIW, this jump in new jobless doesn’t necessarily comport with the other labor market indicators out there, but it is less of a lagging indicator than the others.

Morning Report: Fed Day

Vital Statistics:

	Last	Change
S&P futures	3139	3.25
Oil (WTI)	58.99	-0.24
10 year government bond yield		1.84%
30 year fixed rate mortgage		3.98%

Stocks are flattish as we await the FOMC decision. Bonds and MBS are flat as well.

Mortgage applications increased 3.8% from a week earlier, according to the MBA. The purchase index dropped 0.4%, while the refi index rose 9%. Interest rates rose one basis point.

The FOMC decision is set for 2:00 pm EST. Given that the Fed is on the sidelines for a while, there shouldn’t be anything market moving in it.

Consumer prices rose 0.3% in November, according to the BLS. Higher shelter and energy prices drove the increase. The index was up 2.1% on an annualized basis. Ex-food and energy, the index was up 0.2%. These numbers were a hair higher than street expectations.

The first time homebuyer is returning, according to the Genworth First Time Buyer report. The rebound in the third quarter was driven primarily by falling interest rates and increasing home affordability. Supply constraints, particularly at the affordable price points have been the issue. “The first-time homebuyer market rebounded this quarter and although the rebound was modest compared with the number of first-time homebuyers a year ago, and a quarter behind the broad rebound, it was a strong rebound from the previous quarter allowing first-time homebuyers to make up some lost ground,” said Tian Liu, Genworth Mortgage Insurance Chief Economist.

The report noted that repeat buyers (read move-up buyers) have increased as well. The lack of move-up buyers has depressed housing mobility, which may have been driven by lack of home equity from purchases made during the bubble years. Given the change in the house price indices over the past 10 years, negative equity is less of an issue than it was a few years ago.

Interestingly, the number of first-time homebuyers this quarter was comparable to the peak of the last housing boom in 2005 and 2006, and only modestly below the peak levels of 1999 and 2000. Still, the Millennial generation is bigger than Gen X by a large margin, so there should be more room to run here.

Morning Report: Fannie and Freddie are interviewing investment banks

Vital Statistics:

	Last	Change
S&P futures	3138	3.25
Oil (WTI)	58.87	-0.14
10 year government bond yield		1.82%
30 year fixed rate mortgage		3.98%

Stocks are up as we head into the FOMC meeting. Bonds and MBS are flat.

The FOMC will meet today and tomorrow, with the interest rate announcement expected Wednesday at 2:00 pm. The Fed Funds futures are predicting no change in rates. That doesn’t necessarily mean the markets will ignore what is going on, as subtle changes in language can have out-sized effects on the markets. One such word is “symmetric.” The word symmetric refers to the Fed’s 2% inflation target, and how much they will tolerate inflation above that target. The Fed desperately wants to avoid the low inflation / low growth trap that evolved in Europe and Japan, and is signalling to the markets that they will allow inflation to run above 2% for an extended period of time.

The Fed will also be watching the overnight repurchase market, to ensure we don’t have another situation like late September where overnight rates spiked over 10%. This was due to a shortage of cash in the market. While this sort of thing doesn’t affect mortgage lending directly, it does raise the cost of borrowing for MBS investors, which can cause them to sell these securities to raise cash. That flows through to rate sheets. While the shortage caught the Fed flat-footed in September, they have been discussing the issue, so hopefully we don’t see another replay at the end of this month.

Fannie and Freddie are tightening the restrictions for their Home Ready and Home Possible programs. Previously, borrowers with incomes at the Area Median Income (AMI) were qualified for these 3% down programs; now they will be limited to borrowers at 80% of the AMI. This is all part of the strategy to reduce Fan and Fred’s overall risk prior to setting them free. Note that they are currently interviewing banks to handle the IPO, which will be somewhere between $150 billion and $200 billion. This would dwarf the record for the largest IPOs in history – Saudi Aramco and Alibaba – by over 6x.

Despite a glut of McMansions in some areas, Toll Brothers beat estimates and forecasted a strong 2020. The company noted demand increased throughout the year, and the recent weeks have been stronger than the prior quarter, which is encouraging given that typically you see a slowdown this time of year. Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “Fiscal 2019 ended on a strong note. Building on steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per-community were up 10% compared to one year ago. Through the first six weeks of fiscal 2020’s first quarter, we have seen even stronger demand than the order growth of fiscal 2019’s fourth quarter. This market improvement should positively impact gross margins over the course of fiscal 2020.”

Small business optimism grew in November, according to the NFIB. Recession worries faded into the background, and impeachment remains little more than a curious albeit boring sideshow, similar to the Clinton impeachment saga which had zero effect on the markets. Improving labor conditions were a big driver, with 26% of firms planning on raising compensation in the coming months – the highest in 30 years. (BTW, this is music to the Fed’s ears). It looks like the drag from the 2017-2018 rate hikes are behind us, and the headwind has turned into a tailwind courtesy of the recent rate cuts.

Productivity declined in the third quarter as output increased 2.3% and hours worked increased 2.5%. Unit labor costs increased by 2.5%.

Morning Report: Blowout jobs report

Vital Statistics:

	Last	Change
S&P futures	3148	22.25
Oil (WTI)	57.99	-0.44
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.94%

Stocks are higher after a blowout jobs report. Bonds and MBS are down.

Jobs report data dump:

Nonfarm payrolls up 266,000
Unemployment rate 3.5%
average hourly earnings up 0.2% MOM / 3.1% YOY
Employment-population ratio 61%
Labor force participation rate 63.2%

Huge surprise in payrolls given the ADP report only had 67,000. The unemployment rate of 3.5% is the lowest in 50 years. About the only blemish was the small downtick in the labor force participation rate. Note that manufacturing payrolls increased smartly.

What does this mean for the bond markets? Nothing since the Fed is on hold, probably through the 2020 election. It also might mean that the rate cuts of earlier this year are beginning to take effect and the drag from the 2018 tightening cycle is behind us.

Note that the makeup of the 2020 FOMC voting members will be more dovish than 2019. Eric Rosengren and Esther George – two hawks that dissented against rate cuts – rotate off the board next year. In their place, we will be getting Neel Kahskari and Robert Kaplan. Neel Kashkari is considered one of the most dovish members of the FOMC. Will it make much of a difference? Probably not, although the bar for increasing interest rates will be adjusted upward accordingly.

Interesting chart: the median age of US homebuyers since 1980. It has increased from 32 to 47 over that period. Half of that increase came from the Great Recession. Much of this is explained by the muted presence of the first time homebuyer, who has been about 30% of sales as opposed to their historical 40%.

Morning Report: Retail sales strong

Vital Statistics:

	Last	Change
S&P futures	3105	8.25
Oil (WTI)	56.59	-0.14
10 year government bond yield		1.84%
30 year fixed rate mortgage		4.00%

Stocks are up this morning on optimism for a trade deal. Bonds and MBS are flat.

Retail Sales increased 0.3% MOM and 3.1% YOY. in October. The control group, which strips out the volatile auto, gas, and building materials sectors) increased 0.3%. Apparel and big-ticket items like furniture and appliances were weak, however. Regardless, it is looking like this year’s holiday shopping season will be strong.

Dallas Fed President Robert Kaplan doesn’t see a recession in 2020 as strong consumer spending and a robust labor market provide a strong foundation to keep the economy going. Numerous Fed speakers – Powell, Williams, Kaplan, Clarida – have all expressed comfort with the current level of interest rates. As a general rule, the central bank is loath to do anything during an election year for fear of appearing political and wanting to help one candidate or another. This is especially true when one of the candidates is trying to influence Fed policy publicly. This means we probably won’t see any further action out of the FOMC until 2021. Long-term rates (and mortgage rates) will therefore be more influenced by overseas rates and any sort of inflation surprises in the US. FWIW, I think the Fed is exactly where they want to be, with a positively sloped yield curve, decent growth and tame inflation.

Mortgage delinquencies fell to a 25 year low, according to the MBA. The rate for 1 – 4 unit DQs fell to 3.97% in the third quarter, which was down 59 bps from the second quarter and 50 bps from a year ago. “Mortgage delinquencies decreased in the third quarter across all loan types – conventional, VA, and in particular, FHA,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “The FHA delinquency rate dropped 100 basis points, as weather-related disruptions from the spring waned. The labor market remains healthy and economic growth has been stronger than anticipated. These two factors have contributed to the lowest level of overall delinquencies in almost 25 years.”

Morning Report: The fed cuts rates and goes on hold.

Vital Statistics:

	Last	Change
S&P futures	3042	-5.25
Oil (WTI)	54.42	-0.64
10 year government bond yield		1.73%
30 year fixed rate mortgage		4.02%

Stocks are lower this morning after the Fed cut rates. Bonds and MBS are up.

As expected, the Fed cut rates by 25 basis points yesterday, and Jerome Powell said that “the current stance of policy is expected to remain appropriate” as long as the labor market remains strong and the economy continues to expand moderately. They also removed the language that said the Fed would “act as appropriate” to maintain the current expansion. This was the “pause” language that the markets were looking for. The vote was 8-2, with two members voting to maintain the current Fed Funds target. For some reason, the pause language put some starch in the bond market, which has sent rates lower by about 12 basis points. The December Fed Funds futures are currently handicapping a 20% chance of another 25 basis point cut. FWIW, Morgan Stanley is out with a call saying the Fed is on hold through 2020. As a general rule, the Fed tries to stay out of the picture as much as it can during an election year, so that call may end up being correct.

Personal Incomes and spending increased 0.3% and 0.2% respectively, which was lower than August’s torrid pace. On an annual basis, incomes rose 3.8% and consumption increased 4.4%, both strong numbers and well ahead of the weaker-than-expected inflation readings. The PCE price index (which is the Fed’s preferred inflation measure) was flat in September, and up 1.3% YOY. Ex-food and energy the PCE index was flat and up 1.7% annually. Separately, the employment cost index rose 0.7% in the third quarter and was up 2.8% YOY. Note that wages increased 0.9%, which is a quite strong number.

The Urban Institute has panned the Administration’s plan to reduce the GSE footprint in the mortgage market. Their point is that the government guarantee for Fannie MBS is so important that it will be hard for other entities to compete, unless the guarantee fee is set higher than the credit risk dictates. They also claim that it will reduce credit and slow down the economy.

The overall share of GDP attributable to housing increased to 14.6% in yesterday’s GDP report. Residential fixed investment (homebuilding, remodeling, etc) increased to 3.11%, while housing services, which is mainly rent, was about 11.5% of the economy. Historically, residential fixed investment has been closer to 5% and rent has been closer to 12% – 13%. In other words, housing is still punching below its weight economically, although it may be turning around. This represents a huge potential boost to GDP once things return to normalcy.

Morning Report: Housing is coming back

Vital Statistics:

	Last	Change
S&P futures	3003.75	4.25
Oil (WTI)	58.37	-0.94
10 year government bond yield		1.78%
30 year fixed rate mortgage		4.00%

Stocks are flattish as we await the FOMC decision at 2:00 pm EST today. Bonds and MBS are up.

Housing starts increased 12.3% MOM and 6.6% YOY to a seasonally adjusted annual rate of 1.36 million. This is the highest in 12 years. July was revised upward as well. Building Permits rose 7.7% MOM and 12% YOY to 1.4 million, which is close to historical levels (non-population adjusted). This data seems to comport with the MBA’s 30% rise in purchase activity. Permit activity increased the most in the Northeast, while falling in the Midwest.

Mortgage applications were flat last week despite a huge back up in rates. There was also an adjustment for Labor Day, so that will affect the numbers. Purchases rose 6%, while refis fell 4%. The average rate on a 30 year fixed rose 19 basis points to 4.01%, and government loans increased share.

CFPB Chair Kathy Kraninger believes her job security is unconstitutional and supports a Supreme Court review of a case pending before the 9th Circuit. Essentially, Dodd-Frank made the head of the CFPB basically untouchable – the President can only fire “for cause” and not at the discretion of the White House. “From the Bureau’s earliest days, many have used the uncertainty regarding this provision’s constitutionality to challenge legal actions taken by the Bureau in pursuit of our mission,” Kraninger wrote to staff. “Litigation over this question has caused significant delays to some of our enforcement and regulatory actions. I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.” Given that the case is currently in front of the liberal 9th Circuit (aka the Nutty Ninth) the current structure will almost certainly be upheld and it will go to SCOTUS.

Some inside-baseball stuff: Despite the bet that the Fed will cut rates to a range of 175-200 basis points today, the Fed had to intervene yesterday to prevent the Fed Funds rate from breaching the top of the current 200-225 basis point range. The cause was a shortage of dollars in the money markets ahead of Q3 interim tax payments and a big Treasury bond issue. This caused overnight repo rates to surge to 500 basis points on Monday, and the punch line is that this problem might push the Fed to increase the size of its balance sheet, which means more QE. This stems from a change in how the Fed mechanically manages the Fed Funds rate in the immediate aftermath of the financial crisis. How will it affect mortgage markets? Not directly, however issues with financing / hedging and rate volatility will negatively impact mortgage rates, at least at the margin.

Morning Report: Oil market jitters and the Fed.

Vital Statistics:

	Last	Change
S&P futures	3000.5	-9.25
Oil (WTI)	60.57	5.44
10 year government bond yield		1.85%
30 year fixed rate mortgage		3.98%

Stocks are lower this morning after an attack on a Saudi Aramco oil facility sent oil prices up nearly 20%. Bonds and MBS are up.

A Saudi Aramco facility that represents about 5% of global oil output was attacked, which caused the biggest spike in oil prices since the 1991 Gulf War. Saudi Aramco estimates that it will take months to bring that capacity back on line. A Yemeni movement aligned with Iran is claiming responsibility for the attack. President Trump has announced that the US Strategic Petroleum Reserve could be used to mitigate the effect on oil prices, and the US stands “locked and loaded” to prevent future attacks. While Iran has denied responsibility, cruise missiles may have been involved in the attack, which means Iranian technology. Iran and Saudi Arabia have been enemies for years and have been fighting a war by proxy.

A spike in oil prices has the potential to be inflationary, however it would more likely depress growth since it would act as a tax. This will probably push the Fed to cut rates as opposed to raise them to fight potential inflation. US consumers will be somewhat insulated, since most of the country gets its supply from US West Texas Intermediate which is a US-only market. Consumers on the East Coast will feel an effect since they get their oil from the North Sea Brent market, and many in the Northeast rely on heating oil. Front month heating oil contracts are up 8% pre-open.

Aside from the issues in the energy space, the big even this week is the FOMC meeting on Tuesday and Wednesday. The Sep fed funds futures have made quite the reversal over the past month, going from a 100% chance of a rate cut (the only uncertainty was over whether it would be 25 or 50 basis points) to a roughly 25% chance they do nothing and a 75% chance they cut by 25 basis points.

The action in the Fed announcement Wednesday will undoubtedly be in the dot plot (which is the Fed Funds forecast) and the GDP forecast. A potential war in the Middle East has got to affect the numbers, and it will be interesting to see whether they bump up the inflation numbers and / or take down the GDP estimates. Regardless, political uncertainty tends to be negative for business, so I would expect to see more dovishness in the Fed Funds futures.

Last week was brutal for mortgage rates, as the average rate on the 30 year fixed rate mortgage rose 20 basis points last week. It probably represents a technical reaction to the massive rally we have seen in rates this year already. “These sorts of bad performances are most often seen in the wake of stellar performances,” said Matthew Graham, chief operating officer of Mortgage News Daily. “August was the best month for mortgage rates, and 2019 has been the best year since 2011. And that’s precisely why this terrible week is possible: It’s largely a technical correction to the feverish strength in August.” In other words, markets don’t go straight up and they don’t go straight down. Volatility begets volatility and you will see massive rallies in the context of a bear market and vice versa. Remember that volatility in rates is bad for MBS investors in general and that will flow through to rates.

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: The Fed prepares the markets for a rate cut

Vital Statistics:

	Last	Change
S&P futures	2957.5	24.1
Oil (WTI)	55.54	1.78
10 year government bond yield		2.01%
30 year fixed rate mortgage		4.10%

Stocks are higher this morning as interest rates fall globally. Bonds and MBS are up.

The Fed maintained interest rates at current levels, but signaled the willingness to cut rates if necessary:

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

The dot plot showed a 30 basis point decline in the fed funds expectations. You can see the plots side by side below. The central tendency for 2019 fell by 32 basis points to 2.17%

FWIW, the Fed upped their forecast for GDP, and cut their forecast for unemployment and inflation. Why that would be consistent with a potential rate cut is beyond me, but such is life in our era of Calvinball monetary policy. The decision was nearly unanimous, with only Bullard dissenting, preferring to see a 25 basis point cut. The Fed funds futures are pricing in 100% chance of a rate cut at the July meeting.

Bonds rallied on the announcement, although mortgage backed securities were slow to follow. We did see some reprices for the better late in the day, but nothing too dramatic. Expect mortgage rates to lag the move in bonds, as usual.

Initial Jobless Claims fell from 220,000 to 216,000 last week.

Home prices rose 3.6% YOY, the strongest acceleration in 7 months, according to Redfin. Interestingly, the only areas that dropped were the markets that rallied the most over the past few years: San Jose, New York, Los Angeles, where inventory is up smartly. Where was the fastest growth? Knoxville TN at 15%, Milwaukee WI at 15% and Camden NJ at 11%.

Judy Shelton is the latest potential nominee to the Fed. She is an advocate for much lower interest rates. She also favors ending the Fed’s policy of paying interest on excess reserves, which encourages banks to park money at the Fed versus lending it out.

Fannie and Fred are trying to do more to increase lending for manufactured homes.