monetary policy – Page 3 – The Daily Tearsheet

Morning Report: FOMC minutes confirm no move in December

Vital Statistics:

	Last	Change
S&P futures	3110	1.25
Oil (WTI)	57.39	0.74
10 year government bond yield		1.76%
30 year fixed rate mortgage		3.93%

Stocks are flat this morning after China invited the US for trade talks in Beijing despite the resolution backing Hong Kong. Bonds and MBS are down small.

In economic data, initial jobless claims were flat at 227,000 last week and the Philadelphia Fed manufacturing survey improved.

The CFPB is conducting an assessment of the TRID rule. There doesn’t appear to be any specific issues the CFPB is looking to address, but it is part of the Trump Administration’s push to eliminate unnecessary burdens on business.

Independent mortgage banks had their best quarter in 7 years as pretax production profit rose to 74 basis points from 64 in the prior quarter. “A surge in refinance activity and a healthy purchase market led to robust mortgage volume in the third quarter, pushing up production profits to a high not seen since the fourth quarter of 2012 ($2,256 per loan),” said Marina Walsh, MBA Vice President of Industry Analysis. “The increase in profits was primarily driven by declining production expenses and higher loan balances, which mitigated the effects of lower basis-point revenue.” Interestingly, production revenue and secondary marketing income fell. The purchase share of the market fell from 74% to 60%.

Bold prediction: Within the next two years, we will see the majority of loans go through the entire process without any human involvement. It will be a much more mechanized process.

The minutes from the Fed confirmed the market’s view that the central bank will be out of the picture for a while. They removed the “act as appropriate” language in order to signal that stance. From the minutes:

In describing the monetary policy outlook, they also agreed to remove the “act as appropriate” language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee’s expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook.

Translation: We aren’t moving in December. Note the Fed Funds futures agree with that assessment, although they are predicting more cuts in 2020. FWIW, the Fed generally tires to avoid modifying policy in the months leading up to an election for fear of appearing political. That said, the March futures are pricing in about a 25% chance of a cut.

Is the REO-to-Rental trade finally done? Blackstone has finally exited its entire position in Invitation Homes, which it created in the aftermath of the financial crisis. Invitation was one of the first to buy up distressed properties and rehab them to rent. Turns out Blackstone tripled its money on the trade.

Morning Report: Retail sales strong

Vital Statistics:

	Last	Change
S&P futures	3105	8.25
Oil (WTI)	56.59	-0.14
10 year government bond yield		1.84%
30 year fixed rate mortgage		4.00%

Stocks are up this morning on optimism for a trade deal. Bonds and MBS are flat.

Retail Sales increased 0.3% MOM and 3.1% YOY. in October. The control group, which strips out the volatile auto, gas, and building materials sectors) increased 0.3%. Apparel and big-ticket items like furniture and appliances were weak, however. Regardless, it is looking like this year’s holiday shopping season will be strong.

Dallas Fed President Robert Kaplan doesn’t see a recession in 2020 as strong consumer spending and a robust labor market provide a strong foundation to keep the economy going. Numerous Fed speakers – Powell, Williams, Kaplan, Clarida – have all expressed comfort with the current level of interest rates. As a general rule, the central bank is loath to do anything during an election year for fear of appearing political and wanting to help one candidate or another. This is especially true when one of the candidates is trying to influence Fed policy publicly. This means we probably won’t see any further action out of the FOMC until 2021. Long-term rates (and mortgage rates) will therefore be more influenced by overseas rates and any sort of inflation surprises in the US. FWIW, I think the Fed is exactly where they want to be, with a positively sloped yield curve, decent growth and tame inflation.

Mortgage delinquencies fell to a 25 year low, according to the MBA. The rate for 1 – 4 unit DQs fell to 3.97% in the third quarter, which was down 59 bps from the second quarter and 50 bps from a year ago. “Mortgage delinquencies decreased in the third quarter across all loan types – conventional, VA, and in particular, FHA,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “The FHA delinquency rate dropped 100 basis points, as weather-related disruptions from the spring waned. The labor market remains healthy and economic growth has been stronger than anticipated. These two factors have contributed to the lowest level of overall delinquencies in almost 25 years.”

Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

	Last	Change
S&P futures	3088	-6.25
Oil (WTI)	57.59	0.44
10 year government bond yield		1.83%
30 year fixed rate mortgage		4.00%

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

Morning Report: Jerome Powell testifies at 11:00 am.

Vital Statistics:

	Last	Change
S&P futures	3082	-9.25
Oil (WTI)	56.59	-0.24
10 year government bond yield		1.88%
30 year fixed rate mortgage		4.03%

Stocks are lower this morning after overseas weakness due to the protests in Hong Kong. Bonds and MBS are up.

Jerome Powell will testify in front of Congress at 11:00 am today. It probably won’t be market-moving, but you never know. With the Fed in a holding pattern and the 2020 election coming up, the central bank will probably fade into the background.

Inflation at the consumer level increased 0.4% MOM in October and 1.8% YOY, driven by increasing housing and medical costs. The core number (ex-food and energy) was up 0.2% MOM and 2.3% YOY. We will get wholesale inflation numbers tomorrow.

Mortgage applications increased 10% last week as purchases rose 5% and refis increased 13%. “Mortgage applications increased to their highest level in over a month, as both purchase and refinance activity rose despite another climb in mortgage rates,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Positive data on consumer sentiment and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate to 4.03 percent. Refinance applications jumped 13 percent to the highest level in five weeks, as conventional, FHA and VA refinances all posted weekly gains. With rates still in the 4 percent range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

Bidding wars for real estate have hit a 10 year low, driven by flattening prices on the Left Coast. Nationally, the percentage of houses with bidding wars fell to 10.1%, a drop from 38% a year ago. This was almost certainly driven by home price appreciation failing to keep up with wage inflation, along with rising interest rates. San Francisco was probably affected by a disappointing IPO market. The supply / demand imbalance is still there however, so if interest rates remain at these levels, we could see bidding wars return when the spring selling season hits.

Google is getting into the banking business by offering checking accounts. As if Google doesn’t already know enough about us…

Morning Report: The fed cuts rates and goes on hold.

Vital Statistics:

	Last	Change
S&P futures	3042	-5.25
Oil (WTI)	54.42	-0.64
10 year government bond yield		1.73%
30 year fixed rate mortgage		4.02%

Stocks are lower this morning after the Fed cut rates. Bonds and MBS are up.

As expected, the Fed cut rates by 25 basis points yesterday, and Jerome Powell said that “the current stance of policy is expected to remain appropriate” as long as the labor market remains strong and the economy continues to expand moderately. They also removed the language that said the Fed would “act as appropriate” to maintain the current expansion. This was the “pause” language that the markets were looking for. The vote was 8-2, with two members voting to maintain the current Fed Funds target. For some reason, the pause language put some starch in the bond market, which has sent rates lower by about 12 basis points. The December Fed Funds futures are currently handicapping a 20% chance of another 25 basis point cut. FWIW, Morgan Stanley is out with a call saying the Fed is on hold through 2020. As a general rule, the Fed tries to stay out of the picture as much as it can during an election year, so that call may end up being correct.

Personal Incomes and spending increased 0.3% and 0.2% respectively, which was lower than August’s torrid pace. On an annual basis, incomes rose 3.8% and consumption increased 4.4%, both strong numbers and well ahead of the weaker-than-expected inflation readings. The PCE price index (which is the Fed’s preferred inflation measure) was flat in September, and up 1.3% YOY. Ex-food and energy the PCE index was flat and up 1.7% annually. Separately, the employment cost index rose 0.7% in the third quarter and was up 2.8% YOY. Note that wages increased 0.9%, which is a quite strong number.

The Urban Institute has panned the Administration’s plan to reduce the GSE footprint in the mortgage market. Their point is that the government guarantee for Fannie MBS is so important that it will be hard for other entities to compete, unless the guarantee fee is set higher than the credit risk dictates. They also claim that it will reduce credit and slow down the economy.

The overall share of GDP attributable to housing increased to 14.6% in yesterday’s GDP report. Residential fixed investment (homebuilding, remodeling, etc) increased to 3.11%, while housing services, which is mainly rent, was about 11.5% of the economy. Historically, residential fixed investment has been closer to 5% and rent has been closer to 12% – 13%. In other words, housing is still punching below its weight economically, although it may be turning around. This represents a huge potential boost to GDP once things return to normalcy.

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.

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.

Morning Report: Reassuring jobs report.

Vital Statistics:

	Last	Change
S&P futures	2915	4.25
Oil (WTI)	52.60	0.14
10 year government bond yield		1.53%
30 year fixed rate mortgage		3.84%

Stocks are higher after the jobs report. Bonds and MBS are down.

The economy added 136,000 jobs in September, versus Street expectations of 145,000. August’s number was revised upward by 38,000 to 168,000. The unemployment rate fell to 3.5%, which is the lowest in 50 years. The labor force participation rate was flat at 63.2% and the employment-population ratio ticked up to 61%. Average hourly earnings were flat on a MOM basis and up 2.9% YOY.

Overall, it confirmed that we are seeing a bit of a deceleration in the economy, although we are nowhere near a recession. The Fed Funds futures are handicapping a 75% chance of a 25 bp rate cut at the October meeting at the end of the month.

If the unemployment rate is at a 50 year low, we can pretty much dismiss the recession talk as the press generating alarmism to capture eyeballs, right? Not necessarily. We have had recessions in the past with unemployment rates this low. Take a look at the chart below. It plots the unemployment rate and the Fed funds rate. The vertical shaded areas are recessions. You can see that we hit 3.5% unemployment in 1969 and entered a recession soon thereafter. You can see the cause of that recession however in the Fed Funds rate, which went from 4% to 9% in the two years leading up to it. Similarly, we had a recession in 1973 – 75 even though unemployment was in the mid 4% range immediately prior. That one was caused by the Arab Oil Embargo. That said, you can see that most recessions are preceded by a tightening cycle out of the Fed, and that explains why the Fed is now cutting rates – they worry they might have overshot.

As home prices increase, many homeowners are considering renovation loans (like 203k or HomeStyle) to increase the value of their house. What are the best renovations, in terms of return on investment? Hint: not a swimming pool. It is a new roof. What about kitchen renovations? Homeowners can expect to recoup about 50% – 60% of the cost in increased home value. Same with bathroom upgrades and master bedrooms. It turns out that mundane upgrades (wood flooring, insulation, roofing) provide more bang for the buck than the more dramatic ones.

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 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.

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: James Bullard explains his dissent

Vital Statistics:

	Last	Change
S&P futures	3012.25	5.25
Oil (WTI)	58.67	0.54
10 year government bond yield		1.78%
30 year fixed rate mortgage		4.00%

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

Existing home sales rose 1.3% in August, according to NAR. Sales are up 2.6% from a year ago to a seasonally adjusted annual rate of 5.49 million units. The median existing home price rose to $278,200, which was up 4.7%. “Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” said Yun. “Homebuilders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.” Inventory did fall to 1.86 million units, which represents a 4.1 month supply. In the “every dog has its day” category, the Northeast led the pack with a 7.6% increase in sales although the median home prices was flat. The Northeast still has a glut of higher priced inventory it needs to work through.

In other economic news, the index of leading economic indicators was flat in August, and initial jobless claims came in at 205,000. The Fed’s balance sheet increased to $3.845 trillion in assets.

St. Louis Fed President James Bullard explained his dissent on Wednesday’s FOMC vote. While the Committee ended up easing by 25 basis points, Bullard wanted to cut rates by 50 basis points.

First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.

Second, core and headline personal consumption expenditures (PCE) inflation measures continue to run some 40 to 60 basis points, respectively, below the FOMC’s 2% inflation target. Market-based measures of inflation expectations continue to indicate expected longer-term inflation rates substantially below the Committee’s target. This is occurring despite the 25 basis point cut in July and the 25 basis point cut that was expected for the September meeting. While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.

The quote about manufacturing is interesting. Industrial production rose 60 basis points last month and manufacturing production was up 50 bps. Capacity utilization rose 40 basis points as well. We had one reading on the ISM that came in at 49.1, which was technically below 50, where manufacturing is neither contracting nor expanding. For all intents and purposes, it was flat given the inherent error built into these sentiment surveys. Historically, a manufacturing ISM reading of 42 corresponds with an overall recession. FWIW, the ISM reading of 49.1 usually corresponds with a GDP growth rate of 1.8%. In other words, hardly recessionary, and manufacturing represents only about 13% of the US economy to begin with. The statement about G7 rates is probably what is driving things – the Fed is simply following the markets.

Home equity rose 4.8% in the second quarter, or about 428 billion. Negative equity fell by 9%, or about 151,000 homes. The home equity number is a new record, and home equity has doubled since the depths of the housing recession. You can see below which parts of the country still have a negative equity issue to work through.

Morning Report: The Fed cuts rates

Vital Statistics:

	Last	Change
S&P futures	3007.75	0.25
Oil (WTI)	59.37	1.24
10 year government bond yield		1.77%
30 year fixed rate mortgage		4.00%

Stocks are flat after the Fed cut rates yesterday. Bonds and MBS are up small.

As expected, the Fed cut rates 25 basis points amidst concerns about capital expenditures and investment. The decision was 7 to 3, with one dissenter (Bullard) who wanted a 50 basis point cut and two dissenters (George and Rosengren) preferring to maintain current policy. The economic projections were largely unchanged, with a few upward tweaks to 2019 and 2021 GDP estimates, and a slight change to unemployment. Inflation measures were unchanged. The Fed Funds estimates were revised downward anywhere from 25 – 37 basis points compared to the June dot plot.

Powell was noncommittal on future moves: “There will come a time, I suspect, when we think we’ve done enough. But there may also come a time when the economy worsens and we would then have to cut more aggressively. We don’t know.” In other words, we are data-dependent. The German Bund has sold off a touch, with the yield moving from negative 70 basis points a couple of weeks ago to negative 50 basis points now. FWIW, the Bund seems to be leading the dance.

Bonds initially sold off on the move, with the 10 year rising 4 basis points to 1.8%. This morning, we are back down to where we started. The December Fed Funds futures are predicting a 14% chance of another 50 basis points in cuts, a 49% of a 25 bp cut and a 37% probability of no further changes. Trump weighed in on the cut as well tweeting: “A terrible communicator. Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision!”

The spike in overnight repo rates (which got as high as 10% at one point) has raised an interesting question: The overnight repo rate is supposed to be the index that replaces LIBOR. While the complaint about LIBOR was the presence of some jiggery-pokery by the big banks, is the the cure (an index that can spike 800 bps in a day) really better than the disease? Note this flows through the whole mortgage ecosystem, with MBS repo rates, ARM pricing, warehouse line pricing, etc. It might not yet be ready for prime time.