Morning Report: James Bullard explains his dissent

Vital Statistics:

 

Last Change
S&P futures 3012.25 5.25
Oil (WTI) 58.67 0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%

 

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

 

Existing home sales rose 1.3% in August, according to NAR. Sales are up 2.6% from a year ago to a seasonally adjusted annual rate of 5.49 million units. The median existing home price rose to $278,200, which was up 4.7%. “Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” said Yun. “Homebuilders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.” Inventory did fall to 1.86 million units, which represents a 4.1 month supply. In the “every dog has its day” category, the Northeast led the pack with a 7.6% increase in sales although the median home prices was flat. The Northeast still has a glut of higher priced inventory it needs to work through.

 

In other economic news, the index of leading economic indicators was flat in August, and initial jobless claims came in at 205,000. The Fed’s balance sheet increased to $3.845 trillion in assets.

 

St. Louis Fed President James Bullard explained his dissent on Wednesday’s FOMC vote. While the Committee ended up easing by 25 basis points, Bullard wanted to cut rates by 50 basis points.

 

First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.

Second, core and headline personal consumption expenditures (PCE) inflation measures continue to run some 40 to 60 basis points, respectively, below the FOMC’s 2% inflation target. Market-based measures of inflation expectations continue to indicate expected longer-term inflation rates substantially below the Committee’s target. This is occurring despite the 25 basis point cut in July and the 25 basis point cut that was expected for the September meeting. While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.

 

The quote about manufacturing is interesting. Industrial production rose 60 basis points last month and manufacturing production was up 50 bps. Capacity utilization rose 40 basis points as well. We had one reading on the ISM that came in at 49.1, which was technically below 50, where manufacturing is neither contracting nor expanding. For all intents and purposes, it was flat given the inherent error built into these sentiment surveys. Historically, a manufacturing ISM reading of 42 corresponds with an overall recession. FWIW, the ISM reading of 49.1 usually corresponds with a GDP growth rate of 1.8%. In other words, hardly recessionary, and manufacturing represents only about 13% of the US economy to begin with. The statement about G7 rates is probably what is driving things – the Fed is simply following the markets.

 

Home equity rose 4.8% in the second quarter, or about 428 billion. Negative equity fell by 9%, or about 151,000 homes. The home equity number is a new record, and home equity has doubled since the depths of the housing recession. You can see below which parts of the country still have a negative equity issue to work through.

 

corelogic home equity

Morning Report: Existing home sales flat

Vital Statistics:

Last Change
S&P futures 2926 11.5
Eurostoxx index 382.7 2.72
Oil (WTI) 71.58 0.46
10 year government bond yield 3.09%
30 year fixed rate mortgage 4.86%

Stocks are higher this morning after China agreed to cut some tariffs. Bonds and MBS are getting slammed.

Bond yields are up 27 basis points over the past month. Not sure what is driving that (at least nothing specific), but it is a worldwide phenomenon. Bunds and JGBs have also been selling off, though not as dramatically. The Fed funds futures have become more hawkish over the same period, raising the probability of a Dec hike from 63% to 87%. This has certainly stopped the flood of hand-wringing stories in the business press about the flattening yield curve.

Initial Jobless Claims hit a 50 year low, and are within striking distance of the 200,000 level. Meanwhile, the Index of Leading Economic Indicators took a step back in August, rising 0.4% after July’s torrid 0.6% growth. Still strong numbers, however.

Consumer comfort rose to a 17 year high, according to the Bloomberg Consumer Comfort Index (highest since Jan 2001).

One reason why consumption has been strong is growing home equity, which rose almost a trillion YOY in the second quarter. This is an increase of 12.3%. The number of homes with negative equity fell by half a million to 2.2 million, or about 4.3% of all mortgaged homes. On average, the typical homeowner saw a $16,200 increase in housing wealth. Only 3 states: North Dakota, Connecticut, and Louisiana saw declines.

Existing home sales remained flat in August, according to NAR.  Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.” The median house price was $264,800, up 4.6% YOY. Inventory is still tight, at 4.1 month’s worth, and days on market ticked up slightly to 29 days. First time homebuyers accounted for 31% of sales. Historically, that number has been closer to 40%.

Closing rates jumped across the board to 71.7%, according to Ellie Mae’s Origination Insight Report. Average FICOs were 724, and average LTV was 79%. Both those numbers are more or less unchanged YOY. It typically took 43 days to close a loan.

When is the best time of year to buy a home? It depends. Prices do decline however during the winter, with purchases in January and February 8.5% cheaper than the peak summer months. Even in Autumn, they fall 3%. So, don’t get too depressed about your Z-scores during the winter months. It could be just seasonality.