Morning Report: The US yield curve inverts

Vital Statistics:

 

Last Change
S&P futures 2890 -41.5
Oil (WTI) 55.49 -1.64
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.88%

 

Stocks are lower after disappointing overseas economic data. Bonds and MBS are up on the flight to safety.

 

Overnight, the US yield curve officially inverted with 2s/10s trading at negative 1.7 basis points.  This has historically been considered a recession indicator. You can see the chart below, which plots the difference between the 10 year bond yield and the 2 year bond yield, and not that the shaded grey bars (which represent recessions) have historically followed after the line goes to zero. One caveat to keep in mind however: In the past, we didn’t have the sort of activism out of central banks that we have now. Quantitative easing (where the central bank tries to directly influence long term rates) are a new phenomenon, and therefore investors should take that signal with a grain of salt. Still, it does speak to a global slowdown, and that will inevitably pass through to the US.

 

2s10s

 

The German Bund yields negative 64 basis points, which is a record low. Their economy contracted by 0.1% last quarter. This is what is driving stocks lower and bonds higher. The trade war is being blamed on their economic weakness. China reported the slowest industrial growth since 2002.

 

The FHA announced they will widen the credit box for condos, in an attempt to revive the entry-level condo market and help the first time homebuyer. “This is set to really expand homeownership,” said Ben Carson, secretary of the Department of Housing and Urban Development, which oversees the FHA. FHA will now begin insuring loans in unapproved buildings, provided no more than 10% of the units have a FHA loan.

 

Mortgage applications increased 21.7% last week as purchases increased 2% and refis increased 37%. The average contract interest rate fell from 4.01% to 3.93%, and has dropped about 80 basis points this year. The government refi index is at the highest level since 2013, driven by VA refis.

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Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 3017 5.5
Oil (WTI) 58.51 0.54
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.07%

 

Stocks are higher this morning after good numbers from Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. A Bloomberg piece from Ex NY Fed President William Dudley was making the rounds yesterday, which poured cold water on the idea that the Fed is entering a new easing cycle.

“All told, the case for lowering rates is less compelling now than it was when the Federal Open Market Committee last met in June. This doesn’t necessarily mean that an interest-rate decrease this week would be a mistake. But it does mean that market participants — who are expecting a series of cuts over the next year or so — might be in for an unpleasant surprise, because the Fed’s future moves will be more dependent on incoming economic data than they think. There’s a good chance that, after this week’s meeting, the central bank will be “one and done.”

If Dudley is right, and Powell’s subsequent press conference confirms this, then the Fed Funds futures market is way over its skis with respect to further rate cuts this year. The December Fed Funds futures are handicapping a 88% chance of at least 50 basis points in rate cuts this year. If the Fed disappoints, that doesn’t necessarily mean that long-term rates would increase, since the US 10 year is highly influenced by overseas bond markets. But further rate cuts are already baked in the cake, and the market will be vulnerable to a statement and / or press conference that is insufficiently dovish. Not only that, don’t be surprised if one or two members dissent (in favor of no rate cut). Might want to think about locking before the 2:00 pm release.

 

fed funds futures

 

Mortgage Applications fell 1.4% last week as purchases decreased 3% and refis were down 0.1%. Purchase activity is up 6% from a year ago, however it has been stalling out. Refinance applications for conventional mortgages were up 1.1%, however a 3% drop in government (primarily VA) offset the gain. Conventional 30 year mortgage rates were unchanged at 4.04%.

 

The economy added 156,000 jobs in July, according to the ADP Employment Report. IT and mining fell, while most other buckets increased. The Street is looking for 164,000 nonfarm payrolls this Friday.

 

The employment cost index rose 0.6% in the second quarter. On a YOY basis, they rose 2.7% as wages and salaries rose 2.9% and benefit costs rose 2.3%.

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: 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: New home sales surprise to the upside

Vital Statistics:

 

Last Change
S&P futures 2937.5 -0.5
Eurostoxx index 391.52 0.39
Oil (WTI) 65.92 -0.36
10 year government bond yield 2.54%
30 year fixed rate mortgage 4.34%

 

Stocks are flat as we await earnings from heavyweights like Facebook, Microsoft and Caterpillar. Bonds and MBS are up.

 

New Home Sales surprised to the upside, coming in at 692,000, indicating that lower mortgage rates are helping sales. The most interesting number in the report was the median price of $302,000, which is down 10% from a year ago. This indicates that builders are concentrating on the lower price points, or at least that is where the sales are concentrated. Still, a 10% drop in median home prices is an eye-popping number.

 

new home sales

 

Mortgage applications fell 7% last week as purchases fell 4% and refis fell 11%. Rates were up 2 basis points for the week, however the week included the Good Friday holiday so there might be some noise in there as well. “The 30-year fixed mortgage rate has risen 10 basis points in three weeks, and is now at its highest level in over a month,” said MBA Chief Economist Mike Fratantoni. “Borrowers remain extremely sensitive to rate changes, which is why there has been a 28 percent drop in refinance applications over this three-week period. Purchase activity also declined, but remains almost 3 percent higher than a year ago. Borrowing costs have recently drifted higher because of ebbing geopolitical concerns, as well as signs of strengthening in the U.S. economy, including the recent data pointing to robust retail sales.”

 

The CFPB is becoming a little more creditor-friendly, by giving firms under investigation information about what they did that was wrong. “Consistent with the updated policy, CIDs [civil investigative demands] will provide more information about the potentially applicable provisions of law that may have been violated,” the Bureau said in a news release. “CIDs will also typically specify the business activities subject to the Bureau’s authority. In investigations where determining the extent of the Bureau’s authority over the relevant activity is one of the significant purposes of the investigation, staff may specifically include that issue in the CID in the interests of further transparency.”

 

Flagstar reported a 30% drop in originations in the first quarter, falling from $7.9 million in the first quarter of 2018 to $5.5 million in the first quarter of 2019. On a QOQ basis, originations were down 13% as well. Gain on sale margins rebounded from the fourth quarter, increasing to 72 basis points from 60, although they are down from 77 in the first quarter of last year.

 

The NY Fed asks the question whether tax reform has inhibited home sales. Spoiler alert: it looks like that is the case.

Morning Report: Job openings exceed unemployed by over 1 million

Vital Statistics:

 

Last Change
S&P futures 2751.25 6.5
Eurostoxx index 364.16 1.38
Oil (WTI) 53.66 0.58
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

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

 

It looks like a shutdown may be avoided, as Congress has come up with a plan to allocate some funds to a smaller, cheaper border wall than Trump was looking for. The President hasn’t committed to signing anything yet, but it looks like he will go along.

 

The labor market continues to be on fire, as the number of job openings hit 7.3 million, a series record. The number of job openings exceeds the number of unemployed by over 1 million. Construction led the increase with a jump of 88,000, some of which is probably seasonal. The quits rate was unchanged at 2.3%, although it increased for the private sector while decreasing for government. The quits rate is a leading indicator for wage growth.

 

quits rate

 

Mortgage Applications fell 3.7% last week as purchases fell 6% and refis fell .01%.

 

Ellie Mae is being taken private in a $3.7 billion transaction. Private Equity firm Thomas Bravo will pay $99 a share for the stock, and has allowed a 35 day “go-shop” provision, which permits Ellie Mae to seek higher bids.

 

Small business optimism is returning to normal levels after spiking to all time highs in 2017 and 2018 according to the National Federation of Independent Businesses. Uncertainty in Washington, exacerbated by the lengthy government shutdown is making small business worried about the future. That said, they continue to hire, though they are more cautious about expansion plans.

 

 

 

 

Morning Report: Existing home sales fall

Vital Statistics:

 

Last Change
S&P futures 2641 9.75
Eurostoxx index 356.16 1.08
Oil (WTI) 52.77 -1.03
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.48%

 

Stocks are higher this morning as earnings reports continue to come in. Bonds and MBS are flat.

 

Mortgage applications fell 2.7% last week as purchases fell 2% and refis fell 5%. This was a bit of a give-back after a torrid start to the year. Rates were more or less unchanged, and the unadjusted purchase index was close to a 9 year high. Still, it is encouraging to see activity picking up ahead of the Spring Selling Season, which is just around the corner.

 

Existing Home Sales fell 6.4% in December according to NAR. The seasonally adjusted annual number comes out to 5 million, which is down 10% YOY. The median house price rose 3% to $253,600 and inventory fell to 1.55 million units, down from 1.74 million in November. At current rates, it represents a 3.6 month supply, which is an increase from 3.2 month’s worth in November. Days on market increased to 46 days, up from 42 in November and 40 a year ago. While the 30 year fixed rate mortgage fell from 4.87% in November to 4.64% in December, these sales would represent transactions done under a higher interest rate regime – the drop in rates will probably be reflected in January data. There is still quite the mismatch between what is available for sale – largely luxury properties – and what is needed, which is entry-level housing. The first time homebuyer still represents about 32% of all sales – historically that number has been closer to 40%. The Northeast and the Midwest experienced the biggest drops in sales.

 

The Senate will vote on a plan to open government – wall funding in exchange for temporary protection for Dreamers. The Democrats have declared this a non-starter, but we’ll see how close this comes to passing. The Democrats have their own bill in the Senate which doesn’t include wall funding and is also unlikely to pass. The big question concerns what Trump will actually sign.

 

Non-traditional mortgages are making a comeback, after a long slumber. Originations for these types of products – bank statement loans and the like – increased 24% in 2018, however their share of the total mortgage market is still extremely small, around 3%. Investor demand for these products is picking up as well – securitizations quadrupled last year to $12 billion. While these loans are a far cry from the neg-am NINJA loans of the bubble years, regulators and affordable housing advocates are fretting over these loans.

 

New home sales fell 16% in 4 of the largest markets to close out the year, according to Redfin. Higher mortgage rates and tax issues are depressing sales in some of the pricier markets. Look for homebuilders to face a squeeze as well as rising input prices and slower price growth depress margins. Builders may have to concentrate on building lots of lower-priced entry level units, which is exactly where the demand is.

 

new home sales redfin