Morning Report: New home sales still anemic historically

Vital Statistics:

 

Last Change
S&P futures 2821  9
Eurostoxx index 380.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.28%

 

Stocks are higher this morning on overseas strength, particularly in China and Japan. Bonds and MBS are up.

 

New Home Sales fell to 607,000 in January, according to the Census Bureau. This is down 7% MOM and 4% YOY. New Homes Sales is a notoriously volatile number, and the margin for error is generally in the mid-teens %. Still 607,000 is roughly in line with historical averages over the past 50 years. That said, population has grown since then, so it isn’t really comparable. Take a look at the chart below, which is new home sales divided by population – we are still only at levels associated with the depths of prior recessions. In other words, we are still in very early innings with the housing recovery, and you can make an argument that the recovery hasn’t even begun yet.

 

new home sales divided by population

 

Industrial Production rose 0.1% in February, and January’s initial 0.6% drop was revised upward to -0.4%. Manufacturing production fell 0.4%, while January’s 0.9% drop was revised upward to -0.5%. Capacity Utilization fell to 78.2%, while Jan was revised up again. So, Feb wasn’t great, but January wasn’t as bad as it initially appeared to be.

 

We have entered the quiet period for the Fed ahead of their meeting next week. No rate hikes are expected, although we will get new economic forecasts and a new dot plot. Sentiment regarding the Fed has changed massively over the past few months. As of now, the the Fed funds futures are estimating that there is a 75% chance the Fed does nothing this year, and a 25% chance they cut rates by 25 basis points. The fed funds futures are pricing a 0% chance of a hike. While Trump’s jawboning of the Fed was bad form, and you generally don’t want to see presidents doing that, you also can’t escape the fact that the Fed Funds futures and the markets think he was right!

 

 

Morning Report: REO-to-Rental exit time?

Vital Statistics:

 

Last Change
S&P futures 2706 1
Eurostoxx index 359.39 -0.56
Oil (WTI) 55.07 0.02
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

 

The upcoming week will be data-light, as is typical the first week of every month. Jerome Powell speaks on Wednesday, and that is about it. Productivity and costs on Wed could be interesting, but there just isn’t going to be much to move bonds.

 

The money for the government runs out on Feb 15 and we are back to a possible shutdown. Judging by the jobs report, it doesn’t appear the government shutdown had much (if any) effect on the overall economy. If we have another shutdown, we should probably see the same old situation of the inability to process VOEs for Federal employees, but that is it.

 

Rental prices for 1 bedroom apartments fell a couple of percent last year. Not sure about the methodology for the study, but it does comport with several other studies that show rental prices falling, at least in luxury areas. For the real estate sector, this is probably good news. One of the best post-crisis trades has been the REO-to-Rental trade, where professional investors and hedge funds purchased distressed foreclosures, fixed them up and rented them out. Cap rates in the aftermath of the crisis were high single digits, which were super attractive given the 0% interest rate environment. Tack on home price appreciation and you have a phenomenal trade. Unfortunately, phenomenal trades rarely stay that way, and between rising mortgage rates and falling rents, cap rates are getting squeezed, and it might be time for some of these investors to exit the trade. Ultimately that means we should see a lot more starter homes for sale which will alleviate the inventory problem we are currently experiencing.

 

Bill Gross is retiring from money management. The Bond King ruled the Great Bond Bull Market of 1982 – 2016 and is stepping out as we head into what should be a decades-long secular bear market in bonds.

 

Fannie and Fred will be released from Federal conservatorship subject to tight market-share restrictions under a new plan released by Senate Republicans. Fan and Fred would retain their role as mortgage guarantors, and would be subject to competition. “We must expeditiously fix our flawed housing finance system,” Crapo, an Idaho Republican, said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed-rate mortgage, increase competition among mortgage guarantors and promote access to affordable housing.” That is a tall order and pretty much forecloses any sort of radical change of the housing finance system. If the social engineering aspect (affordable housing) and the subsidies (30 year fixed rate mortgage) will remain, we are pretty much looking at the same system we had pre-bubble. The model that seems to have gained the most traction is putting the government in the second-loss position, with PMI taking the first loss position. It would represent a bit of a step of re-introducing free market economics in what is one of the most nationalized housing finance systems on earth.

Morning Report: Jerome Powell stresses flexibility

Vital Statistics:

 

Last Change
S&P futures 2587.75 -6.75
Eurostoxx index 348.54 -0.31
Oil (WTI) 52.94 0.34
10 year government bond yield 2.72%
30 year fixed rate mortgage 4.48%

 

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

 

Initial Jobless Claims fell to 216,000 last week.

 

Jerome Powell stressed that the Fed has the flexibility to be patient in raising rates and will react to new data as appropriate. “Especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we … figure out which of these two narratives [slowdown or inflation] is going to be the story of 2019,” Powell said at the Economic Club of Washington. Separately, St. Louis Fed President James Bullard said that the Fed had “reached the end of the road” in this tightening cycle.

 

The Fed Funds futures have retraced some of their December move and are now forecasting that the Fed will do nothing in 2019. In November, they were forecasting another hike in 2019, and then swung to forecasting a cut in December. They are now more or less agreeing with James Bullard that this tightening cycle is in the books.

 

fed funds futures

 

Bonds largely ignored the Fed Speak and stocks were more focused on punishing the mall based retailers and department stores, many of which had a difficult holiday shopping season.

 

Fannie Mae reported another drop in delinquencies, as the SDQ percent fell to .76% of their portfolio from .79% a month ago and 1.12% a year ago. The DQ rate for loans originated during the bubble years is 4.5%. The DQ rate for loans originated since is .33%.

 

It is looking more and more likely that Trump will declare a national emergency to allocate funds to the wall and to re-open the government. It will then be up to the courts to decide if such a move is legal, which opens up a new can of worms as the executive branch continues its decades-long path of power consolidation.

Morning Report: Lousy new home sales print

Vital Statistics:

 

Last Change
S&P futures 2932.25 -9
Eurostoxx index 357.94 0.56
Oil (WTI) 50.06 -0.15
10 year government bond yield 3.02%
30 year fixed rate mortgage 3.85%

 

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

 

Jerome Powell spoke yesterday and said that rates are “just below” the neutral range. These comments pushed up bond prices (rates fell) and contributed to a rally in the stock market. He may have been walking back an earlier unscripted statement which said that the Fed had a “ways to go” before hitting neutral. He also said that there were no financial bubbles in the US and that the stock market was near its long term valuation average. This put a bid under stocks and other risk assets.

 

The Fed Funds futures didn’t really react all that much, however a consensus seems to be building that we are looking at a hike in December, and probably one more in 2019.

 

TBAs have spent the last couple of days catching up with the move lower in the bond market. MBS were up a good 6 ticks or so in a flat Treasury market. Note we will get the minutes from the November FOMC meeting at 2:00 pm EST. It probably should be a nonevent, but just be aware.

 

GDP came in at 3.5% for the third quarter. This was the second revision out of BEA and there were few changes. This is a deceleration from Q2’s torrid 4.2% growth rate. The PCE price index rose 1.5%, which is slower than the second quarter’s 2.0% pace, and below the Fed’s target or 2%.

 

GDP

 

Mortgage applications increased 5.5% last week as purchases rose 9% and refis rose 1%. Last week contained the Thanksgiving day holiday, so there were all sorts of adjustments to these numbers. Still it is encouraging.

 

New Home sales came in much weaker than expected, and we saw major, major declines in the Midwest and Northeast (which dropped around 20%). New Home Sales is a notoriously volatile number, and is often subject to major revisions. That said, there is no way to put a positive spin on that number – it was simply lousy.

 

new home sales

 

 

Morning Report: October was hard on MBS investors

Vital Statistics:

 

Last Change
S&P futures 2728 4
Eurostoxx index 364.84 0.76
Oil (WTI) 62.92 -0.35
10 year government bond yield 3.21%
30 year fixed rate mortgage 4.96%

 

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

 

The highlight of this week will be the FOMC meeting on Wednesday and Thursday. Typically they fall on Tuesday and Wednesday, but I guess they moved it for election day this year. No changes in monetary policy are expected and the Fed Funds futures market is assigning a 93% probability of no change in rates. Aside from the FOMC meeting, the only other market moving news will be PPI on Friday. Whatever happens Tuesday is probably not going to be market-moving. Best bet: Ds narrowly take the House, Rs retain the Senate, gridlock rules Washington.

 

October was a rough month for MBS investors, the kind folks who set our rate sheets. MBS underperformed Treasuries by 37 basis points, the worst since immediately after the election. Yes, the Fed is reducing the size of its MBS holdings, but that isn’t what makes MBS outperform and underperform. Volatility in the Treasury markets can be great for bond investors, but is is toxic for MBS investors.  You can see we October was a period of high volatility in the bond market (shown below with a “VIX” for Treasuries). Volatility causes losses losses for MBS investors and makes them less likely to “bid up” securities, which translates into a phenomenon where rates don’t improve as much as you would think when rates fall, and negative reprices happen frequently.  The Fed’s reduction of its balance sheet has been going on for years, and it isn’t all of a sudden going to manifest itself in rates.

TYVIX

 

Fannie and Freddie reported strong numbers and paid about $6.6 billion to Treasury between them. Fannie Mae has paid in total about $172 billion to Treasury since the bailout.

 

Jerome Powell thinks the current period of low inflation and low unemployment could last “indefinitely.” Historically, inflation usually increased as unemployment fell (which was measured by the Phillips Curve). He thinks that relationship has broken down over time. He notes that the last two booms were not ended by goods and services inflation, they were ended by burst asset bubbles. Since we don’t seem to have any asset bubbles brewing at the moment, this set of affairs could last a while. I wonder how much of the historical unemployment / inflation was due to union contracts which included explicit inflation cost of living increases. Regardless, he is correct that we don’t have anything resembling a stock market bubble or real estate bubble, and changes in inventory management have probably done a lot to get rid of the historical cause of recessions, which is an inventory glut.

 

Isn’t this a perfect encapsulation of the cognitive dissonance in the business press right now? They don’t like the guy in office, so they constantly feel like the economy is awful (Consumer confidence is definitely a partisan phenomenon). Classic example of why you always have to take consumer confidence numbers (and the business press) with a grain of salt….

Cognitive DIssonance

 

Morning Report: The MBA addresses LO comp

Vital Statistics:

 

Last Change
S&P futures 2730 -15
Eurostoxx index 356.25 0.66
Oil (WTI) 66.47 0.03
10 year government bond yield 3.15%
30 year fixed rate mortgage 4.93%

 

US stock index futures are lower despite a rally overnight in Asia and Europe. Bonds and MBS are up.

 

We have a lot of Fed-speak today, which could translate into some volatility in the bond market, but I suspect bonds are just going to be driven by stocks and the risk on / risk off trade.

 

The 10 year bond touched 3.11% yesterday around noon, and then sold off as stocks recouped some of their losses. One thing to keep in mind, especially during overseas-led sell offs: First, the European markets close around 11:30 EST. Often times, the best prices (ie lowest rates) can be found right around / after the European close. Second, TBAs (which determine mortgage rates) are slow to react to big moves in the 10 year. So even though the 10 year bond might be up a half a point, it doesn’t mean the scenario you just ran will be half a point better than yesterday.

 

Mortgage Applications rebounded 5% last week as purchases rose 2% and refis rose 10%. Rates increased by a basis point to 5.11% – the highest since Feb 2011.

 

The MBA sent a letter to the CFPB asking them to address LO comp, and in particular the inflexibility of it. During the crisis, loan officers were accused of steering consumers into the loans that paid LOs the most and weren’t often the best for the consumer. In response, Dodd Frank made LO comp insensitive to product – in other words the LO makes the same on every product. While this sounds great in theory, it ignores competitive realities, the fact that LOs sometimes screw up on an application, and that state housing programs can become unprofitable for the lender if the LO makes a full commission. The MBA is asking for clearer, bright line rules from the CFPB.

 

In the sea of red yesterday, the homebuilders were a bright spot after Pulte released earnings pre-open.  Revenues were up 74%, but new orders and backlog were up only single digits. Gross margins increased to 24%. The homebuilder ETF (which hasn’t been able to get out of its own way lately) was up smartly.

 

Donald Trump escalated his attacks on Jerome Powell, the Fed Chairman yesterday in an interview with the Wall Street Journal. “Every time we do something great, he raises the interest rates,” Mr. Trump said, adding that Mr. Powell “almost looks like he’s happy raising interest rates.” While Trump acknowledged the independence of the Fed, he would prefer low rates (as would every politician on the planet). BTW, I think Powell is happy the economy is in a strong enough state that he can put some distance between the Fed Funds rate and the zero bound. Monetary policy can become completely ineffective when rates are around zero.

Morning Report: Global bond rout on

Vital Statistics:

 

Last Change
S&P futures 2919.25 -12.25
Eurostoxx index 381.23 -2.61
Oil (WTI) 76.03 -0.38
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.87%

 

Stocks are lower this morning in the face of a global government bond rout. Bonds and MBS are down.

 

Global bond yields are sharply higher this morning. There doesn’t appear to be any particular catalyst, but it is affecting Japanese and German bonds as well as the US. The 10 year yields 3.2% this morning after starting yesterday at 3.08%. Interestingly, the Fed Funds futures haven’t changed at all, so this doesn’t seem to be driven by a re-assessment of Fed policy. If you look at the TIPS market (Treasuries that forecast the change in CPI), there is no change in the market’s assessment of inflation. So this has been largely confined to the long end. The short Treasury trade is one of the biggest trades on the Street, and maybe some big funds put more money to work shorting / underweighting global bonds going into the 4th quarter. 2s-10s are trading at 31 bps.

 

Jerome Powell was interviewed on CNBC yesterday, and signaled that more hikes are on the horizon.  “Interest rates are still acommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.” Interesting to see him characterizing current policy as “accomodative” when the word was taken out of the September FOMC statement. The “may go past neutral” comment has been cited by some in the press as the catalyst for yesterday sell-off, but the Fed Funds futures don’t reflect that.

 

Job cuts rose to 55,000 in September, according to outplacement firm Challenger, Gray and Christmas. This was driven primarily by announced layoffs at Wells Fargo. “As the job market remains near full employment and companies struggle to find workers, large-scale job cut announcements like the one from Wells Fargo will actually provide the workers necessary for companies to gain momentum and sustain growth,” said John Challenger, Chief Executive Officer of Challenger, Gray & Christmas, Inc.

 

Hurricane Florence appears to have had little impact on initial Jobless Claims which fell to 207,000 last week. As companies ramp up for the fourth quarter, qualified workers are hard to find. That might have been part of the reason for Amazon’s announcement on wages – they have to compete with everyone else for seasonal workers. Note that Fed-Ex is paying pilots bonuses of $40-$110k to keep them from retiring.

 

Lennar reported 3rd quarter earnings yesterday, which were decent, but forward guidance (partially driven by Hurricane Florence) was disappointing, and the stock sold off 2%. Orders increased, but its Q4 forecast was below estimates. The whole sector was hit yesterday as well, as a combination of higher mortgage rates and input costs are creating affordability problems. Most of the metrics were hard to compare YOY because of the CalAtlantic transaction.

 

Factory orders increased 2.3% in August driven by transportation orders. This is the fastest pace since September last year.

 

Investors are bailing on high-yield debt, as spreads to Treasuries are at post-crisis lows and rates are going up. With bond-like upside and stock-like downside, the risk-reward for the asset class is deteriorating. IMO, some of the action we are seeing in the stock and bond markets may simply be a re-emergence of money market investment vehicles which paid so little during the ZIRP years that investors didn’t bother with them. With short term rates pushing 3%, the asset class is making sense again.

 

high yield bond spreads

 

Of course the other asset class that has been moribund since the crisis has been the private label MBS market. While there are governance issues left be sorted out, higher absolute rates will go a long way towards bringing back that sector (and the type of lending that accompanies it). Mortgage REITs who have feasted on MBS thrown overboard in 2009 and 2010 will have to replace that paper with new issuance.