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: An anticlimactic Fed decision

Vital Statistics:

 

Last Change
S&P futures 2794 -14.75
Eurostoxx index 364.5 -2.58
Oil (WTI) 59.81 -0.86
10 year government bond yield 3.21%
30 year fixed rate mortgage 4.98%

 

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

 

As expected, the Fed made no changes to monetary policy yesterday. The language in the statement was almost identical to the September release, with some small changes regarding the deceleration in business fixed investment. Bonds didn’t have much a of reaction to the decision. The December Fed Funds futures contracts are handicapping a 76% chance of another 25 basis points next month.

 

Initial Jobless Claims ticked up slightly to 214k last week. The labor economy continues to plug along.

 

A lack of housing inventory translates into a “new normal” for home sales, which is about 1 million units less per year than the pre-bubble days – in other words, the early 2000s, before the big jump in sales driven by the bubble years. The problem is that household formation has outstripped homebuilding for over a decade, and if you correct for population growth, we are still way below what is needed.

 

home sales

 

D.R. Horton reported earnings yesterday that missed street estimates and the stock was rocked to the tune of 9%. Earnings were up 41%, but on the call, DHI CEO David Auld said the market was “choppy” and noted some “momentum slipping from the market.” D.R. Horton focuses on starter homes, so this is worrisome given that luxury is already struggling a bit. The whole sector is struggling this year, with the homebuilder ETF down 25% from its high set earlier this year.