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.