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.

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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%

 

Jun Mar dot plot

 

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.

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.”

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.”