monetary policy – Page 4 – The Daily Tearsheet

Morning Report: ECB cuts rates and bonds rally

Vital Statistics:

	Last	Change
S&P futures	3009.5	5.25
Oil (WTI)	54.37	-1.44
10 year government bond yield		1.68%
30 year fixed rate mortgage		3.89%

Stocks are higher this morning after the European Central Bank cut rates and announced new stimulus measures. Bonds and MBS are up.

The European Central Bank cut its deposit rate to -50 basis points from -40 bps and re-instated bond purchases of 20 billion euros a month. This is sending down yields, with the German Bund now trading at -62 basis points. Separately, the Bank of Japan is also looking at measures to push their negative interest rates even lower.

Inflation remained under control with the consumer price index up 0.1% MOM / 1.7% YOY. The core rate, which strips out food and energy rose 0.3% MOM / 2.4% YOY. Medical care and shelter drove the increase in the index, while lower energy costs pushed it down.

Initial Jobless Claims fell to 204,000 in the holiday shortened week.

Treasury Secretary Steve Mnuchin said that the US is “seriously considering” issuing a 50 year bond. “We would do this in a way that if there is demand it’s something that we would meet. I personally think it would be a good thing to expand the U.S.′ borrowing capabilities,” Mnuchin said. “I would say it’s obviously quite attractive for us to extend and derisk the U.S. Treasury borrowing. So we’re also looking at extending the weighted average maturity of the Treasury borrowing to derisk this for the U.S. people.” Mnuchin also pushed back against Trump’s view that we need negative interest rates in the US, as negative interest rates wreak havoc on bank earnings, and a weak banking sector does not make a foundation for a strong economy.

Separately, Mnuchin said that the Trump Administration has approved the plan to reorganize the GSEs. “We are actively negotiating an amendment try to get it done by the end of the month” What “actively negotiating an amendment” means is unclear, but it probably refers to the net worth sweep of Fannie and Freddie’s profits to Treasury. Since that was done via executive order during the Obama administration, it should be able to be undone the same way. Full legislation is probably going to be impossible heading into an election year, judging by the way testimony went in the Senate.

Morning Report: More on GSE reform

Vital Statistics:

	Last	Change
S&P futures	2990.5	9.25
Oil (WTI)	56.96	0.44
10 year government bond yield		1.59
30 year fixed rate mortgage		3.72%

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

No economic data today, and this week should be relatively data-light, with retail sales on Friday the only potential market-moving number. No Fed-speak as we are in the quiet period ahead of next week’s meeting.

Jerome Powell vowed to act “as appropriate” to maintain the current US expansion, which was largely taken as an admission the Fed will cut rates another quarter point at next week’s meeting. The Fed funds futures are pricing this in as a certainty, although there is disagreement within the Fed over whether it is necessary to cut rates given the strong consumer spending. He also threw cold water on political considerations affecting monetary policy. “Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions,” he said. “We are going to act as appropriate to sustain the expansion.” This was presumably in response to comments from ex-NY Fed president William Dudley to “consider how their decisions will affect the political outcome in 2020.”

Interesting data point: Compass Point Analytics upped their price target for Fannie Mae stock to $7.75. which is almost 3x the current trading price of $2.71. Fannie Mae stock got hit last week on disappointment with the lack of specifics in the government’s housing reform plan.

Despite the disappointment from Fannie Mae stockholders and pref holders, the housing industry generally likes what the saw in the plan. “The reports recognize the need to better coordinate the roles of FHA and the GSEs,” Mortgage Bankers Association CEO Robert Broeksmit said. “Such coordination must preserve affordable financing options for a wide range of borrowers and reflect the vital role FHA plays in the larger housing finance system.” Talks about getting rid of the GSEs altogether seem to be over: “Both in the Obama administration and during periods of bipartisan negotiations the focus was on whiteboarding a totally new system,” said David M. Dworkin, who was a senior adviser in the Treasury Department on housing finance during the Obama and Trump administrations. “It is too hard. The current system is too embedded and the unintended consequences are too unpredictable.” The GSE affordable housing goals would also go away, to be replaced by a fee paid to HUD, who would then distribute the funds themselves. This is likely to be a non-starter with Democrats.

Mortgage interest deductions fell 62% last year as tax reform encouraged most people to take the standard deduction instead of itemizing.

Morning Report: Personal incomes rise

Vital Statistics:

	Last	Change
S&P futures	2943	16.5
Oil (WTI)	56.33	-0.34
10 year government bond yield		1.51%
30 year fixed rate mortgage		3.77%

Stocks are up ahead of the 3 day weekend. Bonds and MBS are flat.

No word yet from SIFMA regarding an early close, so assume the bond market is open all day.

Personal incomes rose 0.1% in July, which was a deceleration from the previous few months. June was revised upward from 0.4% to 0.5%. Disposable personal income rose 0.3%, and spending rose 0.6%, which came in above expectations. The core PCE index (the Fed’s preferred measure of inflation) rose 0.2% MOM and 1.6% YOY, which is below their 2% target. The headline PCE rose 0.2% / 1.4%.

Consumer sentiment fell in August according to the University of Michigan Consumer Sentiment Survey.

Pending Home Sales fell 2.5% in July, according to NAR. “Super-low mortgage rates have not yet consistently pulled buyers back into the market,” said Lawrence Yun, NAR chief economist. “Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Regionally, they declined 1.6% in the Northeast and fell 3.4% on the Left Coast.

As bond yields have fallen, mortgage rates have not kept up as investors have been sweating prepayment speeds in the MBS market. The biggest issues have been rate volatility, which negatively impacts mortgage backed security pricing, along with fears we are entering a new refinance cycle. Also, many mortgage bankers set their staffing levels for the year back in late 2018, when it looked like we were in a tightening cycle and volumes would be much lower. “Do not expect much, if any of a drop in mortgage rates in the coming weeks,” said Mitch Ohlbaum, president, Macoy Capital Partners in Los Angeles. “It’s not because they shouldn’t, it’s because the lenders are already beyond capacity with refinances and frankly do not want any more volume.” There is probably some truth to that, but that is fixable. The volatility in the Treasury market and convexity risk is killing MBS investors. The classic example of a MBS investor is Annaly, a mortgage REIT, which has gotten clocked this year and cut its dividend.

PIMCO is advising the Fed to “aggressively cut rates” given the recent economic data suggests a slowdown. Their point is that recent data is “understating” the extent of the slowdown. They raise the point that labor market momentum has decelerated more than forecasters were predicting. Of course, at 3.7% unemployment, we are pretty much at or close to full employment. Wages are generally a lagging indicator, but this morning’s personal income disappointment was partially driven by a decrease in asset income, which probably just reflects falling interest rates.

Morning Report: Adjustable rate mortgages becoming less attractive

Vital Statistics:

	Last	Change
S&P futures	2875	19.5
Oil (WTI)	55.05	0.84
10 year government bond yield		1.53%
30 year fixed rate mortgage		3.84%

Stocks are higher after Trump toned down the rhetoric with China at the G7. Bonds and MBS are flat.

Both the US and China made statements intended to de-escalate the trade war, which is adding a spring in the step of the S&P futures. China supposedly wants to get back to “calm” negotiations, while Trump has mused over canceling the recent new tariffs. On Friday, Trump ordered US companies to start looking for alternatives to China, which he doesn’t really have the power to do. S&P futures sold off on Friday afternoon, and bond yields fell. That said, the market do seem to be adjusting to Trump thinking aloud on Twitter.

Durable Goods orders increased 2.1% in July, which was way more than expectations. Nondefense capital spending ex aircraft (which is a proxy for corporate capital expenditures) rose 0.4%, much higher than the decrease the Street was looking for. For all the handwringing in the business press over the state of the economy and trade, it isn’t showing up in the numbers, at least not yet.

The upcoming week looks to be relatively non-eventful, with only some meaningful data late in the week – the second revision to Q2 GDP on Thursday, and personal income / spending data on Friday. Another rate cut seems baked into the cake for September, so a strong number probably won’t have that big of an impact on markets.

The spread between adjustable-rate mortgages and fixed rate mortgages has been contracting as the yield curve has flattened. This is because the difference in long term rates and short term rates has fallen. Currently the difference between a 30 year fixed and a 5/1 ARM is about 55 basis points, whereas it was closer to 100 basis points during the post-bubble era. If you only plan on living in your home for 5 years or so, ARMs generally make sense, however if you can lock in your rate for 30 years at a similar rate to an ARM, it doesn’t make sense to go adjustable.

Regulators are thinking about raising the threshold where homes require an appraisal, from 250,000 to 400,000. This would be the first increase in the threshold since 1994. About a year ago, the FDIC, OCC and Fed released a proposal which would make the change, and the FDIC just published the final rule.

SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are adopting a final rule to amend the agencies’ regulations requiring appraisals of real estate for certain transactions. The final rule increases the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000. The final rule defines a residential real estate transaction as a real estate-related financial transaction that is secured by a single 1-to-4 family residential property. For residential real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.

Morning Report: New home sales fall.

Vital Statistics:

	Last	Change
S&P futures	2907	-14.5
Oil (WTI)	53.79	-1.64
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.86%

Stocks are lower as we await Jerome Powell’s speech in Jackson Hole. Bonds and MBS are flat.

Jerome Powell speaks at 10:00 am, while the markets are looking to see if the Fed trims its sails to what the Fed Funds futures are saying. Some at the Fed have been throwing cold water on the idea that we have entered an easing cycle, but in an era of negative sovereign yields worldwide the die is probably cast for lower rates regardless of what the Fed does.

New Home Sales fell to 635,000 from an upwardly-revised 728,000 in June. They are up over 4% from a year ago.

The Conference Board Index of Leading Economic Indicators improved last month. “The US LEI increased in July, following back-to-back modest declines. Housing permits, unemployment insurance claims, stock prices and the Leading Credit Index were the major drivers of the improvement,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, the manufacturing sector continues exhibiting signs of weakness and the yield spread was negative for a second consecutive month. While the LEI suggests the US economy will continue to expand in the second half of 2019, it is likely to do so at a moderate pace.”

Note that China imposed additional tariffs on $75 billion of US goods overnight. The tariffs would apply to soybeans, small aircraft, and crude oil.

Morning Report: Existing home sales rise

Vital Statistics:

	Last	Change
S&P futures	2937	8.5
Oil (WTI)	56.34	0.64
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.83%

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

The Fed is at Jackson Hole today and tomorrow. There is a chance that they could say something market moving, so just be aware.

Initial Jobless Claims fell to 209,000 last week, while the Markit PMI showed a deceleration. Note the manufacturing PMI fell below 50, which is a sign of contraction.

Existing Home Sales rose 2.5% in July, according to NAR. On a year-over-year basis, sales were up about half a percent. Half a percent isn’t anything to get excited about, however it is the first annual gain in a year and a half. “Falling mortgage rates are improving housing affordability and nudging buyers into the market,” said Lawrence Yun, NAR’s chief economist. However, he added that the supply of affordable housing is severely low. “The shortage of lower-priced homes have markedly pushed up home prices.” The median home price was $280,800 an increase of 4.3% YOY. Since the market bottomed in 2012, homes in the lower-priced half rose at a considerably faster pace than those in the higher priced half. In some areas, they more than doubled off the bottom.

Inventory remains the biggest issue for sales, with only 1.89 million units in inventory, which represents a 4.2 month supply. This is partly why NAR is working with FHA to increase the universe of condos which would qualify for GNMA guarantees. Sales increased everywhere but the Northeast. The first time homebuyer fell to its recent average of 32%, which is lower than the pre-crisis average of about 40%. Despite the continued disappointment in housing, the homebuilder stocks are doing well and the XHB homebuilding ETF is up about 31% this year versus 19% for the S&P 500.

The FOMC minutes were non-eventful, however the statement “Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.” was a bit of a head-scratcher given they decided to cut rates. Overall, the doves based their arguments on a deceleration in manufacturing, persistently low inflation and risk management. “Several” FOMC members argued against cutting rates, judging the economy “was in a good place” and some worried that lowering the Fed Funds rate would inflate asset prices. Others worried about the signal a rate cut would send to the market’s about the Fed’s perception of the economy. Also, a couple voters wanted to cut rates by 50 basis points.

Morning Report: Fed at Jackson Hole this week

Vital Statistics:

	Last	Change
S&P futures	2923	32.5
Oil (WTI)	55.32	0.44
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.78%

Stocks are higher on optimism of a trade deal with China. Bonds and MBS are down.

The upcoming week will be dominated by Fed-speak as they head to Jackson Hole. Economic data will be sparse, with leading economic indicators, and new home sales the only potential market-moving numbers. Jerome Powell is scheduled to speak on Friday where he is pretty much expected to hint at another rate cut at the September meeting. Note the Fed funds futures are pricing in a 93% chance of a 25 basis point cut, and a 7% chance of a 50 basis point cut.

Homebuilder KB Home notes that consumer confidence took a hit in August, and this translates into lower home sales more than interest rates do. “I’ve always maintained over the years that consumer confidence means more than rates to the home buying decision,” said Jeff Mezger, CEO of Los Angeles, CA-based KB Home. “We’ve had some great years where interest rates were 8, 9,10%—because people find a way when they feel confident about the future.” Of course interest rates were way higher during the 80s and 90s and people still bought homes. Nominal wage growth was higher too. Further, he talks about why housing starts are weak: “Frankly, as an industry, that’s what is holding us back from getting to normalized levels,” said Mezger. “We’re only going to invest and build if we can get a return, and it’s difficult to find the combination of land, the cost to produce, the fee structure in that city and then what you can sell a home for based on the incomes in that submarket. So that is the challenge.” So, it is land, labor, and regulations that are the issue. Income growth might be what ends up squaring the circle.

Speaking of sentiment, the University of Michigan preliminary survey showed that confidence has dropped. Trade concerns and Fed policy increased fears of a recession, which translated into the numbers.

The Administration is set to introduce a new rule to codify lending discrimination and move away from the disparate impact standard that began during the Obama Administration. It appears that lenders will have protection if they use ” – third party systems” – i.e. algorithms – to make lending decisions. The actual guidance (from a leaked memo) is supposedly here. While they don’t mention any algorithms by name, they are probably proposing that if you use DU or LP for lending decisions, you will have safe harbor from lending discrimination charges. If it turns out that DU or LP are biased, that is on the provider of these algorithms, not the lender. All of this is in response to a disparate impact lawsuit (Texas vs. Inclusive Communities), which allowed disparate impact theory to be used, however it did institute some restrictions on its use. The updated guidance from HUD will be to align current policy with that decision.

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.

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.

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

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.

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.