Morning Report: Holiday sales looking strong

Vital Statistics:

 

Last Change
S&P futures 2945 -6.25
Oil (WTI) 53.63 0.84
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.84%

 

Stocks are slightly lower on trade concerns and weak European data. Bonds and MBS are flat.

 

The upcoming week should be relatively quiet, with only inflation data and a slew of Fed-speak. Since increasing inflation is no longer front and center of the Fed’s concerns, the CPI and PPI should be non-events. We will also get the minutes from the September FOMC meeting on Wednesday.

 

Interesting stat on how long it takes to build a home in different geographic areas. The Mid-Atlantic region (which contains red-tape heavyweights like NY and NJ) is the longest at 10.5 months. The West Coast is right up there as well, at 9.9 months. The Southeast has the shortest timeline at 6.6 months.

 

new construction times

 

IPOs have been a treacherous investment over the past few years, as the venture capitalists and early entry investors have been reaping the rewards, at least for some of the biggest names (Uber, Lyft, Slack). We Work recently pulled its IPO as investors balked at the corporate governance issues and cash burn. While not all IPOs have been disasters, historically they have popped about 20% on the first day of trading. Not any more.

 

The National Retail Federation sees holiday sales at 3.8% – 4.2%, citing trade concerns over holiday spending. This is the low side of the holiday forecasts, which are coming in closer to 5%. The last 5 years have been around 3.7%, so the forecast is for something between “above average” and “great.” Since consumption is about 70% of the economy, we could be looking at better GDP numbers heading into the end of the year, which would put pressure on the Fed to slow down their pace of rate cuts.

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Morning Report: Manufacturing contracts

Vital Statistics:

 

Last Change
S&P futures 2924 -14.25
Oil (WTI) 53.85 0.24
10 year government bond yield 1.64%
30 year fixed rate mortgage 3.89%

 

Stocks are lower this morning on overseas weakness. Bonds and MBS are up small.

 

Manufacturing contracted for the second month in a row, according to the ISM Manufacturing Survey. New orders, production, and employment all fell. Some of this is due to the trade wars, however overseas economic weakness is probably the dominant driver. Historically, this number on the ISM would correlate with GDP growth of 1.5%. In other words, the number isn’t signalling a recession, but it is pointing to a slowdown.

 

Mortgage Applications increased 8.1% last week as purchases increased 1% and refis increased 14%. “Mortgage rates mostly decreased last week, with the 30-year fixed rate dropping below 4 percent for the sixth time in the past nine weeks. Borrowers responded to these lower rates, leading to a 14 percent increase in refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Although refinance activity slowed in September compared to August, the months together were the strongest since October 2016. The slight changes in rates are still causing large swings in refinance volume, and we expect this sensitivity to persist.”

 

Despite the issues in the manufacturing sector, Freddie Mac expects housing to to remain strong. Overall, government spending and business investment are probably going to decelerate, but this will be offset by a strong labor market and robust consumer spending. Note the uptick in originations. Freddie was initially anticipating this year would be more like $1.6 trillion.

 

Freddie Mac forecasts

 

Freddie is forecasting 1.9% GDP growth in Q3 and 1.8% in Q4. What is the risk to these numbers? To the downside, slowing global growth and perhaps political uncertainty – though the markets seem pretty blase about the impeachment drama. To the upside? Homebuilding. Note the strength in the homebuilder ETF (XHB), which has been on a tear. We are approaching the bubble highs, and as the Millennial Generation begins to start families and head to the suburbs, the builders will be busy addressing the dire shortage of starter homes. The post-bubble “new normal” of 1.3 million housing starts a year is anything but normal and we probably need 2 million just to satisfy pent-up and incremental demand.

 

XHB

 

ADP reported 135,000 jobs were created in September, which matches the estimate for Friday’s jobs report. Construction reported an increase, while mining and natural resources declined. The service sector continued to add jobs as well.

Morning Report: Personal Incomes rise more than expected

Vital Statistics:

 

Last Change
S&P futures 2989 8.25
Oil (WTI) 55.35 -1.24
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.95%

 

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

 

Personal incomes rose 0.4% in August, while personal consumption rose 0.1%. Income surprised to the upside, while spending disappointed. Inflation remains within the Fed’s target, with the core PCE index rising 0.1% MOM and 1.8% YOY. The headline PCE, which includes food and energy, was flat MOM and up 1.4% YOY. Wages and salaries were up 0.6% MOM and up 4.8% YOY. Given that inflation is running below 2%, we are seeing real wage growth.

 

Durable goods orders rose as well, increasing 0.2%, while the Street was looking for a decrease of 1%. Ex-transportation they were up 0.5%, again above expectations. Business capital expenditures disappointed, however falling 0.2%.

 

Pending home sales rose 1.6% in August, according to NAR. “It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply.” The Western region was up 8% YOY as falling mortgage rates are improving affordability.

 

Millennials are continuing to leave the big cities, as they head to the suburbs to raise families (and also get priced out). New York City lost almost 38,000 young adults last year, which was twice the decline it had seen in the previous few years. When the Millennials were younger, urban walkable environments were all the rage and many in the industry thought this time was different. It wasn’t. The Millennial generation is getting married later and having kids later, but it seems like they are going for the same thing every generation prior to them wanted: space, good schools, etc. This is good news for the builders at the lower price points. Take a look at PulteGroup’s chart below.

 

pulte

 

The IPO market is still broken. Peloton was the most recent IPO to break price on the open. “Break Price” means to trade below the IPO price. It opened around $27 versus an IPO price of $29. This won’t help We Work’s IPO which is looking like an absolute dumpster fire as the price keeps getting cut. Historically, IPOs would trade at substantial premiums to their offering price, but those days are over. This represents the change in who pays the bills for investment banks, from the buy side to issuers.

Morning Report: Whistleblower complaint released

Vital Statistics:

 

Last Change
S&P futures 2988 1.25
Oil (WTI) 56.05 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.93%

 

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

 

The House Intelligence Committee released the whistleblower complaint. This is a developing story and I have not read the complaint carefully, but it seems to be all hearsay. In other words, the whistleblower is recounting things he heard from other people and did not hear directly. My guess is that the issue is going have a similar fate to the Russian Collusion story – it will fall down along partisan lines again, and the markets will largely ignore the story. At the margin, it should mean lower stock prices and lower interest rates, but it probably won’t be meaningful.

 

New Home Sales came in at 713,000, which was up 7.1% MOM and 18% YOY. The standard deviations on new home sales is always huge, so take it with a grain of salt. The South and the West experienced the biggest gains. Note that housing has been a drag on the economy for six consecutive quarters, and it appears that it will finally contribute to GDP.

 

Speaking of GDP, the third revision to second quarter GDP is out. Growth came in at 2%, and the inflation numbers were tweaked upward. The core PCE index rose 1.9%, up from the 1.7% previous estimate and the headline number was bumped up 0.2% to 2.4%. The uptick inflation doesn’t appear to have had any impact to the Fed Funds futures.

Morning Report: Existing home sales rise

Vital Statistics:

 

Last Change
S&P futures 2937 8.5
Oil (WTI) 56.34 0.64
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.83%

 

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

 

The Fed is at Jackson Hole today and tomorrow. There is a chance that they could say something market moving, so just be aware.

 

Initial Jobless Claims fell to 209,000 last week, while the Markit PMI showed a deceleration. Note the manufacturing PMI fell below 50, which is a sign of contraction.

 

Existing Home Sales rose 2.5% in July, according to NAR. On a year-over-year basis, sales were up about half a percent. Half a percent isn’t anything to get excited about, however it is the first annual gain in a year and a half. “Falling mortgage rates are improving housing affordability and nudging buyers into the market,” said Lawrence Yun, NAR’s chief economist. However, he added that the supply of affordable housing is severely low. “The shortage of lower-priced homes have markedly pushed up home prices.” The median home price was $280,800 an increase of 4.3% YOY. Since the market bottomed in 2012, homes in the lower-priced half rose at a considerably faster pace than those in the higher priced half. In some areas, they more than doubled off the bottom.

 

Inventory remains the biggest issue for sales, with only 1.89 million units in inventory, which represents a 4.2 month supply. This is partly why NAR is working with FHA to increase the universe of condos which would qualify for GNMA guarantees. Sales increased everywhere but the Northeast. The first time homebuyer fell to its recent average of 32%, which is lower than the pre-crisis average of about 40%. Despite the continued disappointment in housing, the homebuilder stocks are doing well and the XHB homebuilding ETF is up about 31% this year versus 19% for the S&P 500.

 

XHB

 

The FOMC minutes were non-eventful, however the statement “Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.” was a bit of a head-scratcher given they decided to cut rates. Overall, the doves based their arguments on a deceleration in manufacturing, persistently low inflation and risk management. “Several” FOMC members argued against cutting rates, judging the economy “was in a good place” and some worried that lowering the Fed Funds rate would inflate asset prices. Others worried about the signal a rate cut would send to the market’s about the Fed’s perception of the economy. Also, a couple voters wanted to cut rates by 50 basis points.

Morning Report: Fed at Jackson Hole this week

Vital Statistics:

 

Last Change
S&P futures 2923 32.5
Oil (WTI) 55.32 0.44
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.78%

 

Stocks are higher on optimism of a trade deal with China. Bonds and MBS are down.

 

The upcoming week will be dominated by Fed-speak as they head to Jackson Hole. Economic data will be sparse, with leading economic indicators, and new home sales the only potential market-moving numbers. Jerome Powell is scheduled to speak on Friday where he is pretty much expected to hint at another rate cut at the September meeting. Note the Fed funds futures are pricing in a 93% chance of a 25 basis point cut, and a 7% chance of a 50 basis point cut.

 

fed funds futures

 

Homebuilder KB Home notes that consumer confidence took a hit in August, and this translates into lower home sales more than interest rates do. “I’ve always maintained over the years that consumer confidence means more than rates to the home buying decision,” said Jeff Mezger, CEO of Los Angeles, CA-based KB Home. “We’ve had some great years where interest rates were 8, 9,10%—because people find a way when they feel confident about the future.” Of course interest rates were way higher during the 80s and 90s and people still bought homes. Nominal wage growth was higher too. Further, he talks about why housing starts are weak: “Frankly, as an industry, that’s what is holding us back from getting to normalized levels,” said Mezger. “We’re only going to invest and build if we can get a return, and it’s difficult to find the combination of land, the cost to produce, the fee structure in that city and then what you can sell a home for based on the incomes in that submarket. So that is the challenge.” So, it is land, labor, and regulations that are the issue. Income growth might be what ends up squaring the circle.

 

Speaking of sentiment, the University of Michigan preliminary survey showed that confidence has dropped. Trade concerns and Fed policy increased fears of a recession, which translated into the numbers.

 

The Administration is set to introduce a new rule to codify lending discrimination and move away from the disparate impact standard that began during the Obama Administration. It appears that lenders will have protection if they use ” – third party systems” – i.e. algorithms – to make lending decisions. The actual guidance (from a leaked memo) is supposedly here.  While they don’t mention any algorithms by name, they are probably proposing that if you use DU or LP for lending decisions, you will have safe harbor from lending discrimination charges. If it turns out that DU or LP are biased, that is on the provider of these algorithms, not the lender. All of this is in response to a disparate impact lawsuit (Texas vs. Inclusive Communities), which allowed disparate impact theory to be used, however it did institute some restrictions on its use. The updated guidance from HUD will be to align current policy with that decision.

Morning Report: Housing starts disappoint

Vital Statistics:

 

Last Change
S&P futures 3009 0.35
Oil (WTI) 59.54 -0.07
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.12%

 

Stocks are flat as bank earnings continue to come in. Bonds and MBS are up.

 

Another month, another disappointing housing starts number. Starts fell from an annualized pace of 1.3 million to 1.22 million in June, according to Census. Building permits were a mixed bag, falling to 1.25 million, however May’s numbers were revised upwards. Both starts and permits were below street expectations.

 

Despite the disappointing housing starts number, builder confidence rose one point to 65 in July. Demand remains strong, however labor shortages, few buildable lots and rising construction costs are making it difficult to build at the lower price points, where the demand is particularly acute.

 

Mortgage applications fell 1.1% last week as purchases fell by 3.8% and refis rose 1.5%. Rates increased, with the 30 year fixed rate mortgage rising by 8 basis points to 4.12%.  “Mortgage rates increased across the board, with the 30-year fixed rate mortgage rising to its highest level in a month to 4.12 percent, which is still below this year’s average of 4.45 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Coming out of the July 4 holiday, applications were lower overall, with purchase activity slipping almost 4 percent. Refinance applications increased, with activity reaching its highest level in a month, driven mainly by FHA refinance applications. Historically, government refinance activity lags slightly in response to rate changes.”

 

Bank of America reported strong earnings this morning. Mortgage origination volume was up 56% YOY to $18.2 billion.  Separately, Quicken announced they originated $32 billion in the second quarter.

 

Second quarter growth in China fell to 6.2%, the lowest level in 27 years. The implications for this will revolve primarily around inflation and Fed policy. The Chinese economy has a real estate bubble of epic proportions, and once that bursts it will have ramifications in the urban high-end market, but it will also be felt in lower inflation numbers. China will probably try and export its way out of the slowdown, although tariffs will make it difficult. That said, a slowdown in emerging Asia and Europe will usher in even lower interest rates.