Morning Report: No changes to GDP

Vital Statistics:

 

Last Change
S&P futures 2926.25 8.25
Oil (WTI) 59.03 -.35
10 year government bond yield 2.02%
30 year fixed rate mortgage 4.02%

 

Stocks are higher this morning on news that the US and China will resume trade talks over the weekend. Bonds and MBS are flat.

 

The third revision to first quarter GDP was unchanged, coming in at 3.1%. Inflation was revised upward ever so slightly, from a core PCE rate of 1% to 1.2%. At this stage of the game, the markets are going to focus on weak economic data, not inflation data. Note the Atlanta Fed is forecasting that second quarter GDP will come in at 1.9%.

 

Initial Jobless Claims remain low, rising slightly to 227,000.

 

Donald Trump continues to criticize Fed Chairman Jerome Powell, even going as far as to tweet that ECB President Mario Draghi is better. While it is unlikely Trump would try and fire Powell (or demote him), the legal principle of Fed independence will probably make that difficult.

 

The VA will now guarantee loans that exceed the conforming loan limit. Veterans will be able to borrow above the $484,350 limit without any down payment. This impetus for this decision was to raise money for veterans who have health issues after being exposed to Agent Orange. The initial idea was to raise the VA loan fee by 15 basis points, however lawmakers decided to raise the funds by increasing the cap.

 

A new report by Barclay’s and Annaly Mortgage lays out a post-conservatorship world for the US residential real estate finance market. Lawmakers generally agree on the goals of housing reform: protect the US taxpayer, attract private capital, and create a more competitive landscape. Getting there is going to be more difficult as Democrats and Republicans have different priorities. The report looks at things the Administration could do unilaterally via executive order. The first would involve FHFA ordering the GSEs out of non-core markets, such as second homes, jumbo and investor loans. The second would involve the creation of a revolving credit risk transfer facility. A third would involve removing the “GSE patch” which allows Fannie and Fred to originate QM loans at DTI levels private lenders cannot. Finally, there is work that needs to be done at the SEC / SIFMA level that concerns private label securitizations. Ultimately the issue of what to be done with GSEs will have to be solved legislatively. Either they become converted to Federal Government utilities or they become privatized. The privatization route envisions breaking up the duopoly into much smaller guarantors.

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Morning Report: Jerome Powell explains the Fed’s thinking

Vital Statistics:

 

Last Change
S&P futures 2933.25 11.25
Oil (WTI) 58.88 1.05
10 year government bond yield 2.02%
30 year fixed rate mortgage 4.02%

 

Stocks are higher on positive news on the the trade front. Bonds and MBS are flat.

 

Durable goods orders came in lower than expected in May, and April was revised downward. The headline number fell 1.3% and the prior month was revised downward from -2.1% to -2.8%. Ex transportation, durable goods orders rose 0.3%. Capital Goods rose 0.4%, which is one bright spot in the report.

 

Mortgage applications rose 1.3% last week as purchases fell about a percent but refinances rose 3.2%. The 30 year fixed rate mortgage fell 8 basis points to 4.06%.

 

Jerome Powell spoke in NY yesterday and addressed some of the issues the Fed is dealing with.

Let me turn now from the longer-term issues that are the focus of the review to the nearer-term outlook for the economy and for monetary policy. So far this year, the economy has performed reasonably well. Solid fundamentals are supporting continued growth and strong job creation, keeping the unemployment rate near historic lows. Although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market. Along with this favorable picture, we have been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. When the FOMC met at the start of May, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate.

Since then, the picture has changed. The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy. Our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. For example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year.

Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows. Inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year. However, the risks to this favorable baseline outlook appear to have grown.

Last week, my FOMC colleagues and I held our regular meeting to assess the stance of monetary policy. We did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. Since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy change. We now state that the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation. Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.

The Fed Funds futures turned slightly less accomodative after the speech. They are now looking at something like a 70% chance of a rate cut at the July meeting, and the markets are coalescing around 75 basis points in cuts this year.

fed funds futures

 

The Trump Administration established a White House Council on Eliminating Barriers to Affordable Housing which will focus on removing burdensome regulatory barriers. The council will work to identify federal, state, and local barriers to affordable housing, and will take action to remove federal and administrative regulatory burdens. Note there is no mention of taking action to remove “state and local regulatory burdens,” which is often zoning restrictions. The Obama HUD aggressively sued local jurisdictions to force them to change their zoning laws from single family only to multi-family, but it looks like the Trump Administration won’t be going down that route.

Morning Report: Existing Home Sales rise

Vital Statistics:

 

Last Change
S&P futures 2955 4.5
Oil (WTI) 57.79 0.24
10 year government bond yield 2.03%
30 year fixed rate mortgage 4.01%

 

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

 

Business sentiment in Germany hit a 5 year low, which is pushing Bund yields lower. The US Treasury market is being pulled by overseas weakness, but many are trying to interpret the US yield curve’s flattening as a recessionary indicator. Don’t buy it. Rates will probably meander lower unless we get indications of persistent 2%+ inflation. Separately, Trump tweeted that the Fed doesn’t know what it is doing, though he denied considering demoting Jerome Powell.

 

We have a lot of housing data this week, with the Case-Shiller and the FHFA Home Price indices. We will also get new home sales. The only potential market mover is personal income / personal spending on Friday. The third revision of first quarter GDP will be released on Thursday.

 

Existing home sales rose 2.5% in May, according to NAR. Total Sales came in at 5.34 million, a drop of 1% on a YOY basis. The median home price rose to $277,700 from $265,100 a year ago. Falling mortgage rates are helping home sales as the 30 year fixed rate mortgage flirts with the 4% level again. Inventory is still tight however, at only a 4.3 month supply.

 

Economic activity picked up in May, according to the Chicago Fed National Activity Index. Production-related indicators led the increase, which jumped from -.48 to -.05. This means the economy is more or less growing on trend after a weak April. The CFNAI is a meta-index of 85 economic indicators, so it really is a lagging index. It isn’t a market-mover.

 

Signs of life in the private label securitization market? Cerberus (a large private equity firm) did the first post-crisis HELOC securitization last week. HELOC securitization was only done during the bubble years, and many of these loans turned sour in the housing bust. Cerberus only issued the most senior AAA tranche, and it priced at L+105, a bit worse than the initial price talk. Cerberus did not sell any of the junior pieces.

 

Ginnie Mae has let Loan Depot out of the penalty box. Ginnie Mae has been focused on prepayment speeds for VA loans, which is an indication that a lender is churning VA loans through the IRRRL process. “The removal of such a restriction is based on the Issuer having demonstrated to Ginnie Mae’s satisfaction that (a) its prepayment speeds are substantially in-line with those of equivalent multi-Issuer cohorts, and (b) such improved performance is sustainable,” the agency said in a statement.

 

Freddie Mac is rolling out a new rehab loan: the CHOICERenovation loan. It will allow the buyers to roll the renovation costs into the loan, permit them to begin renovations after they move in, and the homeowner can act as his own contractor. “There’s a fair amount of housing with deferred maintenance,” Danny Gardner [Senior VP of single-family affordable lending at Freddie Mac] said in an interview. Cash-strapped buyers “should be very willing to undertake those issues if they can get houses at an affordable price.” The program is not available quite yet, but it should be out sometime this summer.

 

Contrary to expectations, professional investors are still buying starter homes and renting them out. Investors purchased 20% of the houses in the bottom third of the national price range in 2018, which is 5% more than the historical average. Many expected the REO-to-Rental trade to fizzle out as investors would ring the register. So far, that hasn’t happened, as home construction remains firmly mired in recessionary territory.

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2925 -0.25
Oil (WTI) 53.85 -0.35
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.15%

 

Stocks are flat as we head into the FOMC decision, which is set for 2:00 pm. Bonds and MBS are down.

 

The disconnect between the current market forecast and the last Fed dot plot are so stark that we are probably set up for some volatility in bonds after the announcement. Be careful locking around then.

 

Donald Trump looked at ways to possibly remove Fed Head Jerome Powell. While the law protects the independence of the Central Bank, Fed Chairmen have been removed before. Jimmy Carter removed G. William Miller in the late 70s after something like 11 months on the job, and kicked him upstairs to Treasury. Note the President was unhappy with the ECB and their signals of new stimulus – it strengthened the dollar against the euro and that is a negative for US exporters.

 

Mortgage Applications fell 4% last week as purchases and refis fell by 4%. Rates rose by 2 basis points to 4.14%. “After seeing a six-week streak, mortgage rates for 30-year loans increased slightly, which led to a pullback in overall refinance activity,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Borrowers were sensitive to rising rates, but the refinance share of applications was still at its highest level since January 2018, and refinance activity was at its second-highest level this year. Government refinances actually increased last week, led by a 17 percent in VA refinance applications, while conventional refinance applications decreased 7 percent.” The refi index has rebounded to the highest level in almost 3 years:

 

MBA refinance index

 

New Jersey has tightened the requirements for nonbank servicers.

Morning Report: Housing starts fall

Vital Statistics:

 

Last Change
S&P futures 2910 13.25
Oil (WTI) 51.78 -0.15
10 year government bond yield 2.03%
30 year fixed rate mortgage 4.15%

 

Stocks are higher as we begin the 2 day FOMC meeting. Bonds and MBS are up smartly on statements out of the ECB.

 

US rates are pushing towards 2% this morning after ECB President Mario Draghi signaled that the central bank could roll out further stimulus if inflation fails to materialize. The German Bund yields -32 basis points this morning (a record low), and US interest rates will have a hard time rising in this sort of environment. Simply put, bond investors will rotate out of bonds paying nothing into bonds paying something, even if they have to bear currency risk. It is preferable to locking in a sure loss by holding Bunds.

 

Housing starts fell to 1.24 million units in May, which was below expectations, but the prior two months were revised upward. Starts were down on a month-over-month and a year-over-year basis. Building Permits cam in at 1.29 million, which was more or less flat MOM and YOY.

 

Homebuilder sentiment slipped in June, primarily due to weakness in the Northeast and the West. That said, the index is solidly in the mid-60s, which is an overall strong level. Home prices have become stretched relative to incomes, but falling interest rates are offsetting that slightly. Rising costs for land and labor are making starter homes unaffordable for many first time homebuyers.

 

30 day delinquencies fell by 0.3% in March to a rate of 4.0%. Delinquencies are still being driven by hurricane-related issues. The foreclosure rate fell from 0.6% in March 2018 to 0.4% in March of 2019. Separately, ATTOM reported that there were 56,152 foreclosure filings in May, up 1% YOY, but down 22% from a year ago. Completed foreclosures were down 50%. The states with the highest foreclosure inventory are New Jersey, Florida, Delaware, Illinois.

 

 

 

 

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.”

Morning Report: The Fed maintains rates

Vital Statistics:

 

Last Change
S&P futures 2928 4
Eurostoxx index 390.26 -0.72
Oil (WTI) 62.94 -0.66
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are up this morning after the Fed maintained rates. Bonds and MBS are down.

 

As expected, the Fed maintained the Fed Funds rate at current levels, although they did tweak the rate on overnight reserves. During the press conference, Jerome Powell pushed back against the idea that the Fed’s next move will be a cut. Rates initially fell down the 2.46% level, but overnight retraced that move and we are back at levels we saw before the meeting. The Fed was surprised by the strength in both the job market and the overall economy and the fact that inflation remains lower than they would like to see.

 

At the press conference, a number of journalists asked about the market’s forecast for another rate cut. Powell stressed that the Committee’s view is that the current level of interest rates is “appropriate” and that core inflation was running close to the Fed’s target of 2% for most of 2018. The Fed Funds futures trimmed their estimates for a 2019 rate cut, from a 2/3 chance to more 50/50.  MBS spreads are slightly wider (meaning mortgage rates are a touch higher relative to the 10 year than they were yesterday).

 

Fed fund futures dec 2019

 

Construction spending fell 0.9% MOM and 0.8% YOY in March, according to the Census Bureau. Residential construction drove the decrease, falling 1.8% MOM and 8.4% YOY. Ex-residential construction, spending was solid, but we could see a downward revision in Q1 GDP estimates due to the resi numbers.

 

Productivity rose 3.6% in the first quarter as unit labor costs fell 0.9%. Q4’s productivity number was revised upward to 1.3%. Not sure what drove the decrease in unit labor costs – wages have been rising – but the problems with measuring productivity in this economy have been noted before. Regardless, the drop in labor costs and higher output mean inflation should remain below the Fed’s 2% target.

 

Initial jobless claims rose to 230k last week.

 

Lumber prices have been falling after spiking at record levels last year. Given that this is the time of year we should see more demand, this is surprising. The driver has been weather and continued weakness in homebuilding. Lower commodity prices should increase the margins for homebuilders and hopefully incent more homebuilding. Note that the S&P homebuilder ETF is up 25% this year.

 

What would happen to mortgage rates if we release Fannie and Freddie from conservatorship? Currently, Fannie and Freddie debt is treated as sovereign debt by investors, in other words, they believe the government will stand behind the debt if the GSEs run into trouble. This lowers their cost of funds, which gets passed on to borrowers in lower mortgage rates. If Fannie and Freddie are released from conservatorship, and the government no longer backs their debt, it will increase mortgage rates overall (their debt will definitely NOT be AAA), and will probably impact their ability to do perform the affordable housing part of their mandate. It is important to remember the reason why Fannie and Freddie were privatized in the first place – it was done in the 1970s to paper over the debt being issued to fund the Vietnam war. In a way, the government was using off-balance sheet financing, similar to the special purpose vehicles banks were using in the mid 00s. If there is more than 20% outside ownership in the subsidiary, then the parent is no longer required to consolidate the subsidiary’s debt on its balance sheet. In other words, they don’t have to claim that debt on their books, even if they are guaranteeing it. This accounting sleight of hand lowered the US debt numbers in the 1970s and it was hoped that this would help fight rising inflation (obviously that did not work). It may turn out that there would not be a bid for new Fannie Mae and Freddie Mac stock without a government credit wrapper, which means that hopes for a fully privatized Fannie and Freddie might turn out to be impossible to achieve.