Morning Report: Job openings exceed unemployed by over 1 million

Vital Statistics:

 

Last Change
S&P futures 2751.25 6.5
Eurostoxx index 364.16 1.38
Oil (WTI) 53.66 0.58
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

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

 

It looks like a shutdown may be avoided, as Congress has come up with a plan to allocate some funds to a smaller, cheaper border wall than Trump was looking for. The President hasn’t committed to signing anything yet, but it looks like he will go along.

 

The labor market continues to be on fire, as the number of job openings hit 7.3 million, a series record. The number of job openings exceeds the number of unemployed by over 1 million. Construction led the increase with a jump of 88,000, some of which is probably seasonal. The quits rate was unchanged at 2.3%, although it increased for the private sector while decreasing for government. The quits rate is a leading indicator for wage growth.

 

quits rate

 

Mortgage Applications fell 3.7% last week as purchases fell 6% and refis fell .01%.

 

Ellie Mae is being taken private in a $3.7 billion transaction. Private Equity firm Thomas Bravo will pay $99 a share for the stock, and has allowed a 35 day “go-shop” provision, which permits Ellie Mae to seek higher bids.

 

Small business optimism is returning to normal levels after spiking to all time highs in 2017 and 2018 according to the National Federation of Independent Businesses. Uncertainty in Washington, exacerbated by the lengthy government shutdown is making small business worried about the future. That said, they continue to hire, though they are more cautious about expansion plans.

 

 

 

 

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: Dueling bills to end the shutdown

Vital Statistics:

 

Last Change
S&P futures 2643.25 4.75
Eurostoxx index 356.16 1.08
Oil (WTI) 52.37 -0.25
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

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

 

Dueling bills to end the shutdown will be voted on in the Senate today, with neither one having much chance of passing. The point of holding these votes is to hopefully create some avenue for compromise. Separately, Trump will postpone the State of the Union address until after the shutdown is over.

 

The government estimates that first quarter GDP could be flat if the government shutdown lasts for the whole quarter. There is always some seasonal noise that depresses Q1 GDP relative to the rest of the year, and the added effects of the shutdown would exacerbate that.

 

House prices rose 0.4% in November, according to the FHFA House Price Index. On a YOY basis, they were up 5.8%. Take a look at the chart below – you can see how much the hot markets out West have cooled down.  That said, the FHFA index is holding up better than indices like CoreLogic or Case-Shiller. This is because the index focuses on conforming loans only, which makes it a starter-home heavy index and that is where the demand is.

 

fhfa regional

 

There has been another major leak of financial data, this time affecting mortgage and loan data from Citi, HSBC, Wells, Capital One, and HUD. The data contained names, social security numbers, and bank account numbers. Much of the data was quite old, dating back to the bubble years.

 

 

Morning Report: Homebuyer sentiment softens

Vital Statistics:

 

Last Change
S&P futures 2571 20
Eurostoxx index 346.77 3.89
Oil (WTI) 49.14 0.86
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

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

 

As the shutdown drags on with no end in sight, the IRS has decided to begin issuing tax transcripts. It will probably take a few days to catch up with the backlog, but at least this headache for originators will go away.

 

Small business sentiment remains strong, according to the NFIB. “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.” Bill Dunkelberg notes the cognitive dissonance in the business press these days:  “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates,” said NFIB Chief Economist Bill Dunkelberg. “However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

 

Growth in the service sector decelerated in December, according to the ISM Non-Manufacturing Index. New Orders were the bright spot in the report while most other indicators fell. Note that we are still at historically very strong levels, so there is nothing recessionary in this report. Residential construction remains an issue. One of the respondents said: “New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases.” I found that surprising given that lumber prices have been falling steadily for the past 6 months and are down 22% YOY.

 

lumber

 

Homebuyer sentiment has been souring as well, according to the latest Fannie Mae National Housing Survey. Blame high house prices: “Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Although home price growth slowed in 2018, the cumulative impact of sustained, robust increases in home prices outpacing income growth likely helped drive the share of consumers citing high home prices as a primary reason for a bad time to buy a home to a survey high.” The net number of people who think it is a good time to buy fell from 23% to 11%. The net number of people who think home prices will rise fell slightly, but nothing as dramatic as the good time to buy statistic. Note that there was no major moves in the personal economics numbers either – the net number of people not concerned about losing their job hit 79%, a series high.

 

The Washington Post summarized the 2019 housing forecasts from the MBA, NAR, and more. The MBA is forecasting that the 30 year fixed rate mortgage will hit 5.1%. (Zillow is even more bearish – they are forecasting 5.8%) While those forecasts are certainly a possibility, they seem unlikely if the Fed is indeed done with this tightening cycle.  Despite that rate forecast the MBA does see purchase origination increasing, while refis will decline. The NAHB is predicting new home sales will be flat with 2018, around 618,000.

Morning Report: Are we heading for a shutdown?

Vital Statistics:

 

Last Change
S&P futures 2478 -8
Eurostoxx index 335.75 -0.92
Oil (WTI) 45.53 -0.35
10 year government bond yield 2.79%
30 year fixed rate mortgage 4.60%

 

Markets are lower this morning ahead of what will be a 4 day weekend for most. Bonds and MBS are flat.

 

Hopes for a deal to avoid a government shutdown were dealt a blow yesterday when President Trump said he would veto any budget that does not include funding for the wall. The Wall is a political non-starter for Democrats, which means we have a problem in the Senate. That said, unless Santa needs FAA approval for his Christmas Eve run, I suspect not too many people are going to notice if the government shuts down over the weekend.

 

Separately, Trump abruptly announced a withdrawal from Syria, and General Mattis has retired in protest.

 

The VA adopted new policies regarding refinancing and the required net tangible benefit to veterans. The biggest change will concern seasoning of loans before refinancing. A loan is considered seasoned after 6 monthly payments have been made, or 210 days since the first payment. Under previous guidance, loans which did not meet these requirements were ineligible for traditional Ginnie Mae pooling. Now they are uninsurable.

 

We have some economic data out this morning. The third revision to Q3 GDP was unchanged at 3.5%, while consumption was taken down very slightly from 3.6% to 3.5%. Durable Goods orders rose 0.8%, while the Index of Leading Economic indicators came in stronger than expected. October’s LEI were revised downward however. Economic growth definitely is slowing from its midyear pace, and Q4 forecasts are around 3%.

 

Home Affordability hit a 10 year low, as rising rates and home prices are not being offset quickly enough by rising wages. “Home affordability is getting worse nationwide,” says Daren Blomquist, senior vice president at ATTOM. But buyers shouldn’t lose hope. “We’re going to hit an affordability tipping point in 2019, where it becomes more affordable to buy. Buyers will have more inventory to choose from and they will be running against fewer multiple-offer situations.” Of course all real estate is local, and not all areas are overvalued or undervalued. You can see that big parts of FL, TX and the Pacific Northwest are overvalued, while the Midwest remains affordable. The chart is courtesy of CoreLogic.

 

Corelogic overvalued

 

 

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.

 

 

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2560 22.25
Eurostoxx index 342.07 1.61
Oil (WTI) 46.54 0.3
10 year government bond yield 2.82%
30 year fixed rate mortgage 4.62%

 

Stocks are higher this morning ahead of the FOMC decision. Bonds and MBS are flat.

 

The FOMC decision will be announced at 2:00 pm EST. While the actual decision will be important, the focus will be on the dot plot, which will feed 2019 forecasts. The Fed Funds futures have been a bit more dovish than the previous Fed forecasts, so the market will be expecting a bit of a downward shift in forecasts. The Fed will also release its forecasts for GDP, unemployment, and inflation as well. The Fed has been consistently low in its GDP estimates and consistently high in its inflation and unemployment forecasts since 2016, which is the mirror image of its pre-2016 forecasts. Powell will have a press conference after the release, so the 2:00 pm – 3:00 pm EST timeframe could see some market volatility.

 

Speaking of inflation, we are in some ways going back to the 1970s. Manufacturers (especially in food) are coming up with ways to raise prices while not “officially” raising prices, by offering new products. For example, Nabisco’s new “thin” Oreos cost almost double per ounce than traditional Oreos. We saw this in the 1970s, when potato chip bags were mainly air, and companies would keep packaging sizes (and costs) the same while reducing the amount in the package.

 

Housing starts came in at 1.26 million, a bit higher than what the Street was looking for. Building permits rose 1.33 million, which was an upside surprise as well. The increases were driven by multi-fam, which can be extremely volatile. SFR was more or less unchanged.

 

Mortgage applications fell 5.8% last week despite a big drop in rates. Purchases fell 2% while refis fell 7%. We are in the seasonally slow period, so seasonal adjustments can lead to surprising results. Perhaps the volatility in the stock market was leaving people on the sidelines, but it appears lower rates didn’t have an impact.

 

There is talk that the Senate might be able to scrape together enough votes for a short term funding bill that will take us into the new year. Trump appears to be softening his stance on the wall, so a deal is a possibility. Otherwise, we are in store for a partial shutdown, whatever that means. No word on how it will or will not affect markets / origination.