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.

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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.

Morning Report: Bonds rally on Jerome Powell’s prepared remarks

Vital Statistics:

 

Last Change
S&P futures 2975 -6.5
Oil (WTI) 59.12 1.26
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.06%

 

Stocks are lower as we await Jerome Powell’s Humphrey-Hawkins testimony. Bonds and MBS are flat.

 

Bonds were initially lower this morning, with the 10-year touching 2.10%. They rallied back after Powell’s prepared remarks were released. Here is the paragraph that probably caused it:

 

In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.

 

Powell is scheduled to testify at 10:00 am. Note that we will also get the minutes from the June meeting at 2:00 pm today. Given how jittery the bond market is, we could see some volatility.

 

The Fed Funds futures turned slightly more dovish with the July futures predicting roughly a 80% of a 25 basis point cut and a 20% chance of a 50 basis point cut. The most likely outcome by the end of the year is a 75 basis point cut. December Fed Funds futures probabilities:

 

fed funds futures

 

Mortgage applications fell 2.4% last week as purchases rose 2.3% and refis fell 6.5%. The average contract rate on a 30 year fixed rate mortgage fell 3 basis points to 4.04%. There is some seasonal noise from the July 4 holiday baked into the numbers. Separately, the MBA’s Mortgage Credit Availability Index rose by 0.2% in June. Conventional credit expanded, while government credit contracted slightly. Jumbo credit is the easiest it has ever been, at least since the series started in 2011.

 

The House passed legislation yesterday which clarifies which VA loans are eligible to be included in Ginnie Mae Securitizations. They also passed a bill which would lower the mortgage insurance premiums for first-time homebuyers who complete a housing counseling course.

 

 

 

 

Morning Report: Small business optimism slips

Vital Statistics:

 

Last Change
S&P futures 2968 -10
Oil (WTI) 57.95 0.25
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as we await a speech from Jerome Powell. Bonds and MBS are down.

 

Jerome Powell speaks at 8:45 this morning at the Boston Fed regarding stress-testing for the banks. Here are his prepared remarks. He doesn’t address monetary policy.

 

There were 7.3 million job openings in May, down slightly from April. The quits rate, which tends to lead increases in wages, was steady at 2.3%, where it has been all year. Private sector openings were flat, while government fell by about 40,000.

 

Small Business Optimism slipped in June, according to the NFIB. This reversed May’s jump, however sentiment is still at historically high levels. Expectations eased for sales and profitability, and the outlook for capital expenditures weakened. The capital expenditure level was the lowest since May 2015. Employment also decreased, however most firms are still in hiring mode, with the availability of qualified labor the biggest issue.

 

NFIB

 

The Congressional Budget Office analyzed the probable effects of raising the Federal Minimum Wage to $15 an hour. Unsurprisingly, they concluded that it would cost jobs, with the median estimate coming in at 1.3 million. The graph below looks at how the constant dollar minimum wage has behaved relative to the bottom 10th and 25th percentile of workers over time.

 

minimum wage

 

Mortgage delinquencies are the lowest in 20 years, according to CoreLogic. 30 day DQs fell 0.7% to 3.6%, while the foreclosure rate slipped 0.1% to 0.4%. Delinquencies fell pretty much across the board, with the exception of areas that were affected by natural disasters.

Morning Report: Strong jobs report knocks stocks

Vital Statistics:

 

Last Change
S&P futures 2982.25 -8.4
Oil (WTI) 57.45 0.2
10 year government bond yield 2.02%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning after Friday’s strong jobs report stoked fears the Fed might not cut rates as much as the market expects. Bonds and MBS are up.

 

Jobs report data dump:

 

  • Payrolls up 224,000
  • Unemployment rate 3.7%
  • Labor force participation rate 62.9%
  • Employment-population rate 60.6%
  • Average hourly earnings up 3.1%

 

Overall, a strong report which should in theory argue against easing rates at the upcoming July meeting. That said, the deceleration in the labor market is being taken as a sign that the Fed needs to act, especially since inflation remains stubbornly below the Fed’s 2% target. The July Fed funds futures are pricing in a 100% chance for a cut, with a 92% chance for 25 basis points, and an 8% chance of 50 basis points.

 

We don’t have much in the way of economic data this week, however we do have Jerome Powell’s Humphrey-Hawkins testimony on Wednesday and Thursday. Humphrey-Hawkins testimony is usually more about posturing politicians than it is about useful insights, but with the markets on edge about a potential rate cut, we could see some volatility. Expect a lot of questions about Fed independence.

 

Want to get involved in the property rental business without having to actually buy a house and rent it out? Roofstock could be your answer. It allows individuals to buy into occupied rental properties and allows them to trade out of them after a 6 month lock up period. If you can’t get a bid on Roofstock’s online exchange, they will buy it back at a 7.5% discount.

 

Deutsche Bank is retreating back to Europe, as it cuts 18,000 jobs and exits a lot of overseas businesses. DB has been underperforming for years, and it looks like its decades-old attempt to become a player on Wall Street and in London are over. It would be cool to see them spin off Bankers Trust, Alex Brown and Sons and Morgan Grenfell, but it doesn’t look like that will happen.

Morning Report: Two new Fed nominees, weak payroll growth

Vital Statistics:

 

Last Change
S&P futures 2986.25 6.4
Oil (WTI) 56.75 0.9
10 year government bond yield 1.96%
30 year fixed rate mortgage 4.06%

 

Stocks are higher this morning as we are approaching detente in the US-China trade spat. Bonds and MBS are higher.

 

Bonds are rallying globally, with the German Bund yield hitting a record low of -39 basis points. Ex-IMF Chair Christine Lagarde is in the running to replace Mario Draghi as the head of the ECB. She is considered to be more of a politician, so the markets are interpreting her nomination to be bond-bullish. US rates will be influenced by overseas bond markets, so that means lower rates here at least at the margin.

 

Christopher Waller and Judy Shelton are the latest Trump picks to join the Federal Reserve Board. Judy Shelton has been vocal in criticizing the Fed’s practice of paying interest on excess reserves, and has questioned the effectiveness of the current regime of floating exchange rates versus the gold standard and the gold exchange standards of yesteryear. While there is a 0% chance we go back to some sort of hard-asset backed currency, between the serial bubbles of the past 40 years and the hyper-inflation of the 1970s, the economic record of post-Bretton Woods era (basically from when Nixon closed the gold window) has been mixed.

 

Construction spending fell 0.8% MOM and 2.3% YOY in May. Residential construction continues to be an issue, falling 0.6% MOM and 11.2% YOY.

 

Manufacturing expanded in June, according to the ISM Manufacturing report. That said, it decelerated compared to May. Tariffs remain the largest concern. New Orders were flat, while employment and production increased.

 

Mortgage Applications were more or less flat last week, as purchases increased 1% and refis fell 1%. Mortgage rates were unchanged-to-slightly lower, depending on the product. We have left the tightening-driven doldrums of 2016-2018 and approaching more normal levels. Here is the MBA Mortgage Index going back 20 years to give some perspective:

 

MBA application index

 

Private payrolls increased by 102,000, according to the ADP Employment Report. This is the second weak-ish reading in a row. Jobs were created in education and health as well as professional and business, while the construction sector lost jobs. Note the Street is looking for 160,000 new payrolls in Friday’s jobs report. Separately, initial jobless claims fell to 221k last week. You can see the drop-off in hiring in the ADP chart below:

 

ADP report

 

 

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.