monetary policy – Page 7 – The Daily Tearsheet

Morning Report: Fed decision day

Vital Statistics:

	Last	Change
S&P futures	2851	-1.25
Eurostoxx index	382.92	2.82
Oil (WTI)	58.48	0.39
10 year government bond yield		2.60%
30 year fixed rate mortgage		4.27%

Stocks are higher this morning as we begin the FOMC meeting. Bonds and MBS are flat.

The FOMC decision is set to be announced at 2:00 pm EST. Be careful locking around that time. They aren’t going to raise interest rates, but the focus will be on the dot plot and their interest rate forecast for 2019. There will also be interest in the size of the balance sheet, but it won’t be market moving.

The stock market has been rallying on hopes that the Fed will be taking 2019 off. Note that FedEx reported disappointing numbers, which is a canary in the coal mine for the global economy. The stock and bond markets have been sending different signals about the economy, with the stock market rising (signalling strength) and interest rates falling (signalling weakness). Part of this has been due to global growth concerns – especially in Europe and China. Global weakness doesn’t necessarily translate into a recession for the US, but it is a reach to think it won’t affect us at all.

Mortgage Applications rose 1.6% last week as purchases rose 0.3% and refis increased 4%. Mortgage rates drifted lower and are at the cheapest in a year.

The NAHB / Wells Fargo Housing Market Index was flat at 62 as we kick off the Spring Selling Season. Sales ticked up, but traffic is way down. Overall, the new home sales market is similar to where we left off in fall. We will get a read on existing home sales this Friday. We are seeing some evidence of cooling in housing markets, especially in the Northeast. According to the Redfin competitive numbers, places like Greenwich CT are at 9 on a scale of 1 – 100. Even erstwhile hot markets like San Diego have been cooling. The heat is in the laggard markets, with places like Harrisburg PA and Indianapolis doing very well.

Morning Report: New home sales surprise on the upside

Vital Statistics:

	Last	Change
S&P futures	2786.75	-4
Eurostoxx index	376.51	0.03
Oil (WTI)	56.07	0.4
10 year government bond yield		2.70%
30 year fixed rate mortgage		4.43%

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

The economy added 183,000 jobs in February, according to the ADP Employment Survey. The Street is looking for about 180,000 additions in Friday’s employment situation report, so the ADP numbers seem to be in line.

Mortgage applications decreased 2.5% last week as purchases fell by 2.6% and refis fell 2%. The typical mortgage rate rose by 2 basis point to 4.67%.

The ISM non-manufacturing index expanded in February, which means that the services sector is picking up momentum. The biggest issues seem to be potential trade issues, labor shortages and trucking costs.

New Home Sales rose by 621,000 in December. This is up 3.7% from the downward-revised November number, but down 1.5% from a year ago. For the full year, 622,000 homes were sold, which is slightly higher than the 613,000 sold in 2017. The median price was $318,000, while the average price was $377,000. The median sales price has been declining over the past year after peaking in November 2017 at $343,400. This demonstrates the shift from luxury to entry-level home construction to meet demand. This is a reversal of the early years of the crisis, when the luxury end of the market was the only part that was working.

Note that new home sales are about where they were during the 60s – 80s. Pretty amazing when you take into account that the US population has increased by close to 60% since 1970.

Here is a copy of the letter that NAR, MBA, and a host of other housing advocates sent to Joseph Otting, Acting Director of the FHFA regarding GSE reform. It urges FHFA to go slow, work to maintain the 30 year fixed rate mortgage, and allow the GSE’s to act as a counter-cyclical buffer.

The Fed is catching up to the markets. Boston Fed President Eric Rosengren said it could be “several meetings” before the Fed gets enough clarity on the economy to make a move in interest rates. In many ways, he is acknowledging what the Fed Funds futures have been saying for a while now – that the Fed is going to wait and see how the 2018 hikes affect the economy before making any further moves. Since monetary policy generally acts with a 9 – 15 month lag, it means that the economy still hasn’t factored in the Sep and Dec hikes from last year.

Morning Report: No revelations in Humphrey Hawkins testimony

Vital Statistics:

	Last	Change
S&P futures	2785.75	-5
Eurostoxx index	372.14	-1.55
Oil (WTI)	56.64	1.06
10 year government bond yield		2.63%
30 year fixed rate mortgage		4.34%

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

Jerome Powell’s Humphrey-Hawkins testimony didn’t really reveal much in the way of new information. Here are his prepared remarks. The Fed will be patient as it evaluates incoming data: “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.” He didn’t volunteer too much information regarding balance sheet runoff other than to say the Fed is evaluating the timing. For the most part, the bond market didn’t really react much to the testimony other than to rally somewhat on his view that he doesn’t see much in the way of wage-push inflation. The message to the bond market: don’t freak out if you start seeing wage growth with a 3 handle.

Home prices rose 1.1% in the fourth quarter, according to the FHFA House Price Index. December was up 0.3% from November. The hot markets of 2017, especially the West Coast markets, have cooled substantially and are now experiencing appreciation more in line with the rest of the country. This chart probably understates the deceleration in the hotter markets, as the index only looks at loans with a conforming mortgage, which means it is only measuring the lower price points, which is where the strength lies. The jumbo market has been struggling.

Mortgage Applications increased 5.3% last week as purchases rose 6% and refis rose 5%. Mortgage rates were little changed last week, but as we anticipated, homebuyers are responding favorably to this more stable rate environment,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Purchase applications for both conventional and government loans rose last week, with the government gain led by a 14 percent increase in applications for VA purchase loans.”

A Senate Panel voted to advance Mark Calabria to a full vote on the Senate floor. The vote was 13-12, straight along party lines. The industry applauded the appointment.

Both Zillow and Redfin have models to value homes – which one is more accurate? It turns out that if you look at listed homes, Redfin is the winner, with an error rate of 1.8%. However, for homes off the market, it rises to 6%. Zillow, who doesn’t break out on the market / off the market for its error estimates comes in around 4%. FWIW, appraisers consider an error range of 4% about accurate. Note though that these are median error rates. In newer subdivisions, where square footage and lot sizes are similar, the estimates will be pretty predictive of final sales prices. As the properties become more diverse the error ranges increase. Note that in MSAs like Chicago, the median error is 4%, but over 40% of all home sales are not within 5% of the final sales price.

Morning Report: Homebuilder sentiment improves

Vital Statistics:

	Last	Change
S&P futures	2783.25	-3
Eurostoxx index	370.68	-0.04
Oil (WTI)	56.9	0.81
10 year government bond yield		2.67%
30 year fixed rate mortgage		4.43%

Stocks are flattish on no major news. Bonds and MBS are flat as well.

Homebuilder sentiment improved markedly in February according to the NAHB / Wells Fargo Homebuilder Sentiment Index. Expectations for future sales drove the increase. The index touched a 3 year low in late 2018, so things are still disappointing compared to 2016-2017, but well above historical numbers. Challenges remain for the building industry however. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5% in November to 4.4% this week,” Dietz continued. “However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

The FOMC minutes didn’t really contain much in the way of new information. They see the balance sheet reduction ending sooner than anticipated, which means the Fed will no longer have a $800 billion balance sheet like it had pre-crisis – it will now probably be in the $3 – $4 trillion range. Second, there is uncertainty whether there will be more hikes in 2019. The Fed Funds futures have been predicting no further hikes this year for several months now, so perhaps this is simply the members catching up with what the markets are saying. Note Cleveland Fed President Loretta Mester thinks we may need to still hike rates this year and end tapering.

MBA mortgage applications increased 3.6% from the previous week as refis increased 6% and purchases increased 2%. Rates actually increased by 8 basis points to 4.56%. While refi activity has been increasing from the dismal levels at the end of 2018, they are still well below historically anemic. A combination of prepayment burnout and rising rates are driving the decrease. Going forward, home price appreciation, not interest rates will be the impetus for refinance activity as cash-outs will inevitably rise to pay off credit card debt and FHA borrowers with sufficient equity will want to refinance into conventional loans with no MI.

Chart: MBA Refinance index 1998 = Present

Move over Rocket Mortgage, here comes mello smartloan, which is loanDepot’s new 100% digital mortgage loan experience. They claim this loan can reduce time to close by 75%.

Morning Report: Ginnie is increasing scrutiny of non-bank lenders

Vital Statistics:

	Last	Change
S&P futures	2642	0
Eurostoxx index	357.3	2.93
Oil (WTI)	52.35	0.36
10 year government bond yield		2.73%
30 year fixed rate mortgage		4.62%

Stocks are flat as we begin the FOMC meeting. Bonds and MBS are up small.

Despite the end of the shutdown, we will have to wait for economic data. Two big reports this week – GDP and personal incomes – have been delayed.

Economic activity picked up in December, according to the Chicago Fed National Activity Index. Production-related indicators and employment drove the increase. Note that the CFNAI is a meta-index of a number of announced economic indices, and the government shutdown has decreased the amount of data going into the index. We’ll see the same effect next month as well, so the index won’t be as accurate as it usually is. Regardless, the CFNAI is an amalgamation of previously released data, so it doesn’t move markets.

Ex-Fed Head Narayana Kochlerakota thinks the Fed should consider easing at the next meeting. His argument is that the Fed has been falling short in maintaining inflation at its 2% target and that notwithstanding the latest unemployment data we are still not at full employment. He is looking at the percentage of prime age people (age 25-54) who are currently employed. We are just south of 80%, and were closer to 82% during the late 90s. Given that the number of prime age people in the US is roughly 100MM, then we have about 2 million more jobs to create in order to get to back to where we want to be. Interestingly, he not only advocates maintaining the current balance sheet, he thinks it should increase about 4% a year to grow in lockstep with the economy.

Guess what has been one of the best performing assets so far this year (almost tripled in under a month). If you guessed the GSEs, you would be correct. The market is betting that shareholders won’t get wiped out when / if housing reform happens this year. Check out this chart of Fannie Mae:

Ginnie Mae is stepping up oversight of its partners, particularly non-bank lenders, telling some that they must improve some financial metrics before they will be granted more commitment authority, which is the ability to securitize FHA and VA loans. The government is concerned that non-bank lenders have replaced a lot of the traditional banks in servicing government loans. Indeed, they have – nonbanks now service 61% of government loans, up from 34% at the end of 2014. FHA was largely a backwater of the mortgage market pre-crisis, however post crisis, it has picked up the load that subprime left. Servicers for government loans have a lot more liquidity demands than servicers for GSE loans – and in a downturn the advances liability could take out undercapitalized mortgage bankers. VA lenders can face what is called no-bid risk, which can be a disaster for many servicers without a line of credit to cover advances and loan buyouts.