Morning Report: 30 year treasury yield near a record low

Vital Statistics:

 

Last Change
S&P futures 2871 -14.5
Oil (WTI) 54.49 -0.44
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.85%

 

Stocks are lower this morning after the Argentinian markets blew up overnight and the Hong Kong airport remains occupied by protesters. Bonds and MBS reversed their rally and are down after the Trump Administration announced they would delay the tariff increases on Chinese goods until mid-December. They were scheduled to take effect September 1.

 

The German Bund yield has hit a record low at negative 61 basis points. While the 10 year bond yield is still some 30 basis points from a record, the 30 year bond is getting close at a yield of 2.13%. Note that with the 10 year yield of 1.63% is lower than the dividend yield of the S&P 500.

 

30 year bond yield

 

Some economic data this morning: the consumer price index rose 0.2% MOM / 1.8% YOY, which was a touch higher than the Street forecast. Ex-food and energy, it rose 0.3% / 2.2%. The CPI remains pretty much where the Fed wants it, and is not going to be the driver of Fed policy, at least in the near term. Like it or not, the Fed is watching the markets and following them even if the signal-to-noise ratio is heavily distorted.

 

Small Business Optimism continued to increase as the index improved in July. Despite all of the handwringing in the business press over growth small business continues to grow and invest. Biggest headwind? Labor. The top concern of business was finding quality labor at 26%, which is a record. 57% reported capital expenditures, which means they have enough confidence to invest in infrastructure to grow their businesses. Only 3% of businesses reported not having their credit needs met, which is close to historical lows and kind of begs the question of what the Fed hopes to accomplish with lowering rates.

 

Mortgage delinquency rates continued to fall, hitting 20 year lows for most of the country. 30 day DQs fell to 3.6% and the foreclosure rate fell to 0.4%. The only areas with elevated DQ rates are in the Midwest and Southeast and are the result of flooding.

 

delinquencies

 

Fitch is out saying that GSE reform will probably not result in near-term downgrades.

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Morning Report: Reprieve from volatility

Vital Statistics:

 

Last Change
S&P futures 2891 10.5
Oil (WTI) 52.40 1.34
10 year government bond yield 1.75%
30 year fixed rate mortgage 3.83%

 

Markets are stronger this morning after China fixed the yuan stronger than expected. Bonds and MBS are down.

 

Mortgage credit availability decreased in July, according to the MBA’s Mortgage Credit Availability Index. Conventional credit increased by 0.1%, while government credit decreased. Credit increased primarily in the jumbo space. The drop in government credit availability was seen primarily in the high balance and streamline buckets.

 

Foreclosures filings are down 18% in the first six months of the year, according to ATTOM. Most MSAs fell, and it looks like any increases were concentrated in Florida. 177k properties entered the foreclosures process in the first 6 months of the year, down from 1.07 million in the first 6 months of 2009, which was the peak.

 

One strategist is out with a call for a “Lehman-like” sell off in the stock market, beginning as early as this month. Note this is a call based on market technicals, not fundamentals, which means it is looking at sentiment indicators and volatility. Note that the crash of 1987 happened in a similar environment, with trade and currency tensions between the US and Japan. Note another technical analyst is out with a call saying the US 10 year yield will eclipse the prior low of 1.36%. It is important to keep in mind that the US economy is not driving the action right now, nor is trade. This is being driven by overseas bond markets, and the actions of foreign central banks. The Fed is following the markets, not driving them.

 

Initial Jobless Claims fell to 209k last week, while consumer credit fell in June.

 

 

Morning Report: The Fed cuts rates

Vital Statistics:

 

Last Change
S&P futures 2983 0.5
Oil (WTI) 57.51 -1.04
10 year government bond yield 2.00%
30 year fixed rate mortgage 4.07%

 

Stocks are flat after the Fed cut interest rates 25 basis points. Bonds and MBS are up.

 

The Fed cut the Fed Funds rate by 25 basis points yesterday, which was in line with what the markets were expecting. Bonds sold off (rates higher) initially but eventually worked their way back to unchanged on the day and rates are lower this morning. The volatility in bonds did widen MBS spreads a little, which means that mortgage rates didn’t necessarily follow the 10 year yield lower.

 

The markets seemed to take the fact that Esther George and Eric Rosengren dissented in stride. Both voted against cutting rates. Jerome Powell’s press conference was a bit surreal given that his body language gave the impression he didn’t actually believe his “insurance cut for maintaining the recovery” narrative very much. If you watch the press conference, you’ll see him struggle with a question from Bloomberg’s Michael McKee regarding how cutting interest rates in an economy awash in capital will have any effect. Powell mentioned slowdowns in Europe and China several times, and that probably gave away the game.  This was a rate cut in response to global weakness, certainly not US economic numbers nor Trump’s jawboning. Since using monetary policy as a tool to help foreign economies is not in the Fed’s job description, he can’t come right out and say it.

 

You can’t help the feeling that global central banks have engineered a sovereign debt bubble globally and now have no idea what to do about it. Their exit strategy is to create inflation, which would send money out of bonds, but cutting rates is causing bonds to get more expensive, exacerbating the bubble. The result has been a situation that makes zero economic sense: why would anyone pay to lend money, let alone to a government with a debt to GDP ratio of 240% (Japan)? I guess it is one of those things that people will eventually wake up to en masse. In other words, “it won’t matter until it matters, and then it will be the only thing that matters.” But the #1 rule of bubbles is that they go on longer and go further than anyone expects.

 

The Fed funds futures moved marginally in response to the rate cut. The markets are now pricing in about an 85% chance of one more cut this year, and are handicapping a better than 50% chance of a cut in September.

 

fed funds futures

 

The Wall Street Journal is reporting that the FHA is going to announce a move to lower the limit for cash out refinances to 80 LTV from 85 LTV.  “The risk at 85% is more than what we think is appropriate to bear and more than what we think we should expose taxpayers to,” said Keith Becker, the FHA’s chief risk officer. This change will bring FHA loans in line with Fannie and Freddie which cap cash outs at 80%.

 

In another change, a HUD proposal has been circulated that would reverse an Obama-era standard for fair lending – the disparate impact standard – and replace it with a 5-step framework to demonstrate that discrimination occurred. In other words, it will put the burden of proof back on the regulator to prove the lender intended to discriminate. I don’t have the actual proposal, so there isn’t much to go on quite yet.

 

In other economic news today, initial jobless claims came in at 215k, construction spending fell 1.3% and the ISM Manufacturing index slipped to 51.2.

 

 

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 3017 5.5
Oil (WTI) 58.51 0.54
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.07%

 

Stocks are higher this morning after good numbers from Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. A Bloomberg piece from Ex NY Fed President William Dudley was making the rounds yesterday, which poured cold water on the idea that the Fed is entering a new easing cycle.

“All told, the case for lowering rates is less compelling now than it was when the Federal Open Market Committee last met in June. This doesn’t necessarily mean that an interest-rate decrease this week would be a mistake. But it does mean that market participants — who are expecting a series of cuts over the next year or so — might be in for an unpleasant surprise, because the Fed’s future moves will be more dependent on incoming economic data than they think. There’s a good chance that, after this week’s meeting, the central bank will be “one and done.”

If Dudley is right, and Powell’s subsequent press conference confirms this, then the Fed Funds futures market is way over its skis with respect to further rate cuts this year. The December Fed Funds futures are handicapping a 88% chance of at least 50 basis points in rate cuts this year. If the Fed disappoints, that doesn’t necessarily mean that long-term rates would increase, since the US 10 year is highly influenced by overseas bond markets. But further rate cuts are already baked in the cake, and the market will be vulnerable to a statement and / or press conference that is insufficiently dovish. Not only that, don’t be surprised if one or two members dissent (in favor of no rate cut). Might want to think about locking before the 2:00 pm release.

 

fed funds futures

 

Mortgage Applications fell 1.4% last week as purchases decreased 3% and refis were down 0.1%. Purchase activity is up 6% from a year ago, however it has been stalling out. Refinance applications for conventional mortgages were up 1.1%, however a 3% drop in government (primarily VA) offset the gain. Conventional 30 year mortgage rates were unchanged at 4.04%.

 

The economy added 156,000 jobs in July, according to the ADP Employment Report. IT and mining fell, while most other buckets increased. The Street is looking for 164,000 nonfarm payrolls this Friday.

 

The employment cost index rose 0.6% in the second quarter. On a YOY basis, they rose 2.7% as wages and salaries rose 2.9% and benefit costs rose 2.3%.

Morning Report: John Williams moves markets yesterday

Vital Statistics:

 

Last Change
S&P futures 3003 6.5
Oil (WTI) 55.74 0.54
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.08%

 

Stocks are up this morning after Mr. Softee beat earnings estimates. Bonds and MBS are up small.

 

Signs of a recession? Not really. The Conference Board’s Index of Leading Economic Indicators was flat at -.3% in June, while the markets were expecting an uptick. “The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”

 

New York Fed Head John Williams sent bond yields lower yesterday when his prepared remarks to an academic conference were released. They said: “Take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer” when you do cut rates.” The markets immediately took this as an endorsement for a 50 basis point cut when the Fed meets next week. A spokesman from the NY Fed clarified that comment later, saying that he was referring to studies based on 20 years of monetary policy and was not referring to the FOMC meeting next week. A cut next week is pretty much expected, and the only question is whether it will be 25 or 50 basis points.

 

After Williams’ comments, the Fed Funds futures actually started handicapping a 70% chance for a 50 basis point cut and only a 30% chance of a 25 basis point cut. They had previously been forecasting a 25% chance for a 50 basis point cut. They ended up settling on 40% chance. There is some more Fed-speak today, and then they will enter the quiet period ahead of next week’s meeting.

 

FHFA Director Mark Calabria says the Trump Administration should be releasing a plan to deal with Fannie and Freddie sometime in August or September.

Morning Report: Foreign investment in US real estate falls

Vital Statistics:

 

Last Change
S&P futures 2984 -0.5
Oil (WTI) 57.04 0.24
10 year government bond yield 2.07%
30 year fixed rate mortgage 4.09%

 

Stocks are flattish after erstwhile market darling Netflix stunk up the joint with lousy earnings. Bonds and MBS are up small.

 

Initial Jobless Claims were flat at around 219k last week.

 

Negotiations continue over spending and the debt ceiling, which will probably be hit in September. Treasury Secretary Steve Mnuchin cited “progress” in negotiations, and there is general agreement on the “top line” which includes spending increases from the previous year. That said, Republicans want some spending cuts elsewhere to offset the increase, and Democrats are against cuts. We’ll see if this goes to the mat (and another shutdown), but in the end, we’ll probably just raise the ceiling again and things will go on their merry way. Remember the last time we had a long shutdown, lenders were unable to get tax transcripts out of the IRS so it is something to keep in mind.

 

The Fed’s Beige Book of economic activity showed that the economy continued to expand at a “modest” pace, with slightly higher sales and flat manufacturing. Employment grew at a modest pace, and appears to be decelerating somewhat, especially as the slack in the labor market gets taken up. The Boston Fed noted that tariffs are having a negative effect, and at least one company is moving some production overseas to escape them. The proposed 5% tariff on Mexican goods was mentioned as a significant shock.

 

Canary in the coal mine for international asset markets, particularly China? International buyers of US residential real estate fell by 36% over the past year, following a 20% decrease in the prior year. China has been dealing with a real estate bubble for years, and prices are way out of whack compared to incomes – you can see just how bad it is here. This may explain some of the emerging weakness at the high end, especially in the big West Coast markets like San Francisco, Vancouver, and Seattle. The first step in any bursting bubble is a “buyer’s strike,” followed by rising inventory, and then finally a market-clearing event. We may be at the first stage right now.

 

Macroeconomically, a downturn in China means several things. First, they are going to try and export their way out of it, which means more trade tensions especially if they go the currency devaluation route. Second, it will mean a global growth slowdown, which will act as an anchor on global interest rates. Don’t worry about inflation, the world is awash in capacity. Finally, it could mean a return to a time like the 1990s, where the US was able to have its cake and eat it too, with fast growth but little to no inflation. I wonder if the Fed sees the same thing (after all central bankers do coordinate policy somewhat) and that is part of the reason why they are planning on easing when there is absolutely zero evidence the US is entering a recession.

Morning Report: Powell soothes US stock indices

Vital Statistics:

 

Last Change
S&P futures 3002 6.5
Oil (WTI) 60.62 0.26
10 year government bond yield 2.08%
30 year fixed rate mortgage 4.08%

 

Stocks are higher this morning after Jerome Powell hinted strongly that the Fed would cut rates at the July meeting. The S&P 500 is at record levels and is flirting with the 3000 level. Bonds and MBS are down small.

 

Oil prices are rallying as tensions rise in the Strait of Hormuz. Iranian considers the Strait to be its territorial waters, and has been hassling warships going through the area for decades. The latest incident involves a British oil tanker. Persian Gulf tensions largely impact North Sea Brent prices more than West Texas Prices (which most of the US uses).

 

If the Fed is cutting rates, why aren’t yields going lower? Bond yields are higher across the board globally, with the German Bund yielding -26 basis points on hints that the ECB could launch further stimulus plans. The Bund yielded -38 bp last week, so perhaps US bond yields are simply following what international bonds are doing. Don’t forget, the last time the Fed Funds rate was in the 150 – 175 basis point range (May of 2018) the 10 year was about 2.9%. So, the Fed could cut rates 75 bp by the end of the year and we could see yields go nowhere. Look at the chart below, which plots the 10 year bond yield versus the Fed Funds rate:

 

10 year vs Fed Funds rate

 

Initial Jobless Claims came in at 209k last week, which was a touch below expectations. Regardless, the last time we were at similar levels was during the Vietnam War when we had a military draft.

 

Consumer prices rose 0.1% in June, according to the Consumer Price Index. The core CPI, which excludes food and energy rose 0.3%. On a YOY basis, the headline number rose 1.6% and the core index rose 2.1%. That said, the Fed prefers to use the PCE index, which shows inflation to be lower. The CPI overweights housing compared to the PCE, which is why it shows higher levels.

 

Jerome Powell’s Humphrey-Hawkins testimony dominated the headlines, but the FOMC minutes also confirmed his outlook.

Participants judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks. While they continued to view
a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, many participants attached significant odds to scenarios with less favorable outcomes. Moreover, nearly all participants in their submissions to the Summary of Economic Projections (SEP), had revised down their assessment of the appropriate path of the federal funds rate over the projection period that would be consistent with their modal economic outlook.

 

Separately, Larry Kudlow emphasized that Trump has no plans to fire Powell. The Fed’s independence from politics makes it highly unlikely he could do so in the first place, however Jimmy Carter did do it to G William Miller, kicking him upstairs to Treasury and hiring Paul Volcker to run the Fed.

 

The first hurricane of the 2019 Atlantic season looks like it will hit Louisiana.