Morning Report: Oil stumbles badly, rates fall

Vital Statistics:

 

Last Change
S&P futures 2724 3
Eurostoxx index 362.85 -1.64
Oil (WTI) 55.92 0.23
10 year government bond yield 3.13%
30 year fixed rate mortgage 4.97%

 

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

 

Mortgage applications fell 3.2% last week as purchases fell 2.3% and refis fell 4.3%.  It has been a long, cold winter for the origination business over the past 6 quarters or so. You can look at the chart of the MBA mortgage application index to get an idea of just how tough it is out there right now.

 

MBA mortgage applications

 

Home prices rose 0.4% MOM and 5.6% YOY in September, according to the CoreLogic home price index. Prices rose the least in the hottest markets, as affordability issues bite. CoreLogic did a study of Millennial attitudes, and less than half think they would qualify for a mortgage, which is interesting given that FHA and GSE low down payment programs are targeted towards the first time homebuyer and are very forgiving in terms of FICO and downpayments. The industry can benefit from doing some education here.

 

30 day delinquencies fell 0.6 percentage points to 4% in August. The foreclosure rate fell 0.1% to 0.5%.  DQs are at the lowest level in 12 years. CoreLogic estimates that 1/3 of all MSAs are overvalued. Unfortunately, not all MSAs are created equal – there are a lot more people in the overvalued MSAs like San Francisco and Washington DC than there are in the some of the undervalued MSAs in the Midwest and Northeast. The overvalued MSAs will be most vulnerable to economic shocks.

 

Oil has been in a downward spiral, hitting the lowest levels in a year on fears of oversupply. It sounds like the hedge funds, CTAs and speccies have been long and wrong and are now capitulating. Note that commodity prices are often the canary in the coal mine with respect to global growth, and other cyclical commodities like lumber and copper are following suit.

 

Goldman sees unemployment falling to 3% within the next 18 months or so.  Goldman also sees another 125 basis points in Fed hikes during this cycle.

Morning Report: Getting ready for earnings season

Vital Statistics:

 

Last Change
S&P futures 2887.25 -1
Eurostoxx index 372.16 -0.77
Oil (WTI) 74.82 -0.14
10 year government bond yield 3.23%
30 year fixed rate mortgage 4.95%

 

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

 

Mortgage Applications fell 1.7% last week as purchases fell 1% and refis fell 3%. The average contract interest rate for conforming loans increased to 5.05% from 4.96% last week. This is the first print over 5% since 2011.

 

Donald Trump jawboned the Fed a little yesterday, saying “I think we don’t have to go as fast” referring to the Fed’s pace of tightening. Politicians universally love loose central banks and loathe hawkish ones. Ronald Reagan tolerated Paul Volcker’s tightening campaign, which caused the worst recession since the Great Depression only because the inflation of the 1970s was so bad that a recession was preferable. Inflation isn’t bad right now, and if we weren’t retreating from the zero bound, the Fed probably wouldn’t need to be as aggressive as it is being. Jerome Powell said we were “a long way from neutral” last week, but what “long way” means is anyone’s guess. The market thinks another 75 bps in the Fed Funds rate and then a pause.

 

Fannie Mae reported that serious delinquencies (90+) fell to 0.82% in August, down .06% from July and down from 0.99% a year ago. DQs are back to 2007 levels, and more or less are sitting at historical pre-crisis averages. DQs will probably increase due to Hurricane Florence (those loans won’t go down 90 days until the holiday period), but for now the strong labor market has DQs back to normal.

 

seriously delinquent rates

 

Venerable retailer Sears is expected to file for bankruptcy this week. Fun fact: in the late 1960s, the 5 biggest retailers in the US were the 5 geographic divisions of Sears. The company has been kept on life support by hedge fund manager Eddie Lampert, but he wants to see a bigger reorganization of the company.

 

Earnings season starts in a couple of weeks, and the banks are the first to report. Generally speaking, analysts expect the third quarter to be the strongest for the sector since the crisis, largely driven by volatility and tax effects. The bigger question is what will drive growth going forward, especially if rising rates lowers borrowing demand. We certainly see it in mortgage banking, but it could be an issue for corporate borrowers as well. Corporate borrowers took advantage of the ZIRP years to refinance existing high coupon debt and borrow at cheap rates for general corporate purposes. That may crimp borrower demand going forward. Note that the banking sector has been underperforming the market over the past 6 months or so:

 

xlf vs spy

 

Speaking of banks, HSBC reached a settlement with the Justice Department for $756 million relating to MBS issued during the bubble years. HSBC (a UK bank) bought Household Financial in the early 00s to enter the US residential real estate lending market.

 

The mortgage industry is a boom and bust business, and we are seeing layoffs at places like Movement, Wells, and JP Morgan. Fannie Mae’s Chief Economist thinks this is still in the early innings. “I do believe you will see more layoffs…We are at the beginning of that I would say,” he said. “It is a cyclical business and it is driven by the cyclical behavior of interest rates. So, none of that should be a surprise to anyone. The only thing different in this cycle was that it was policy that drove rates, so they were so low for so long.” We are headed into the lean Q4 and Q1 time of year – I wouldn’t be surprised to see more announcements, especially at the banks during earnings calls.

Morning Report: Markets take down chances of 4 hikes this year

Vital Statistics:

Last Change
S&P futures 2705 4
Eurostoxx index 384.58 0.1
Oil (WTI) 67.12 0.39
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.45%

Stocks are slightly higher this morning as Italian bonds bounce. Bonds and MBS are down.

US Treasuries touched 2.76% yesterday on the flight to quality trade. The Fed Funds futures are now predicting a 81% chance of a hike in June. The biggest effect of the Italy situation can be seen in the December Fed Funds futures. A couple of weeks ago, we were looking at a coin toss for 4 hikes this year. Now it is closer to 20%. The dot plot consensus is 3, so the markets are aligning a little closer to what the Fed thinks it is going to do.

fed funds probability 2

Why is Italy worrying the markets so much? Italy has a huge amount of debt – 1.9 trillion euros worth. Its debt to GDP ratio is 130%. The fear is that the uncertainty over this issue over the summer will depress Euro growth, while the banking sector (which already has some issues) will take further hits. As of now, this is a political, not an economic issue – Italian yields are around 3%, nowhere near the 8% level they hit in 2012. Note that Spanish yields are beginning to creep up as well.

Mortgage Applications fell 3% last week as purchases fell 2% and refis fell 5%. This is the 8th consecutive decline. The refi index is down to the lowest level since December 2000. “Rates slipped slightly over the week as concerns over U.S. trade policy and global growth sent some investors back to safer U.S. Treasuries,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Minutes from the most recent Federal Open Market Committee meeting also yielded a more dovish tone, which added to the downward pressure in rates. Our 30-year fixed mortgage rate decreased two basis points over the week to 4.84 percent as a result. Both purchase and refinance activity decreased despite the drop in rates, part of which was due to slowing activity before the Memorial Day holiday.”

The second estimate for GDP came in at 2.2%, right in line with the first estimate. Inflation was revised downward a touch from 2% to 1.9% and consumption was revised downward from 1.2% to 1%. Inventories were revised downward, while business investment was revised up to 9.2% – a big number.

Whether the increase in business investment was a direct result of the tax cuts remains to be seen, but so far tax cut effects aren’t showing up in corporate profits which were more or less flat in the first quarter with last year.

The economy created 178,000 jobs in May, according to the ADP Employment Report. The Street is looking for 190,000 jobs in Friday’s report, although the ADP and BLS reports have been pretty far away the last few times around. The key number will be wage growth, not payroll growth in any case.

Interesting data points in the ABA survey of the nation’s banks. QM has actually caused banks to decrease non-QM lending (which was the opposite of the intended effect). About half retained servicing. Almost nobody lends to FICOs below 620.

The Fed is set to announce proposed changes to the Volcker Rule, which severely limits proprietary trading activities for commercial banks. The current rules are so vague that JP Morgan Jamie Dimon once quipped that traders would need a lawyer and a psychiatrist by their side to determine whether they were in compliance with the law. The Fed will probably tweak the rules only modestly, and will not usher in a return to pre-2008 rules. That would require legislation, which isn’t happening.

Morning Report: Number of unemployed equals number of job openings

Vital Statistics:

Last Change
S&P futures 2680 9.75
Eurostoxx index 390.81 0.81
Oil (WTI) 70.9 1.84
10 Year Government Bond Yield 3.00%
30 Year fixed rate mortgage 4.63%

Stocks are higher this morning after the US pulled out of the Iran deal. Bonds and MBS are down, with the 10 year trading over 3% again.

The Iran deal was never ratified by the Senate, so it never reached the level of “treaty.” It was basically a deal with the Obama Admin and Iran.

Oil had a volatile day yesterday and is rallying again. China is the biggest customer of Iranian oil, so in theory it shouldn’t affect the US all that much, but WTI will follow Brent on the relative value trade. Note that a sustained oil price over $70 is estimated to be about a 0.7% drag on GDP growth.

Inflation at the wholesale level moderated last month, with the producer price index rising 0.1% MOM and 2.6% YOY. Ex-food and energy, the index rose 0.1% / 2.3% and the core rate rose 0.1% / 2.5%.

Job openings hit 6.6 million last month, which is a new record for the index, which goes back to early 2000. The quits rate increased to 2.3%. The quits rate has been stuck in a 2.2% – 2.3% range for what seems like forever. Fun fact: The number of job openings has hit the number of unemployed for the first time.

JOLTs vs unemployed

The labor shortage is particularly acute in construction, which is part of the reason why housing starts have been short of demand. This shortage has extended to home remodeling as well.

While everyone seems to focus on the CPI / PPI / PCE inflation measures and imagines that a single point estimate accurately reflects the cost of living, it doesn’t. First the relative weights of different goods and services differ. For example, PCE and CPI will weight healthcare differently, as well as owner-equivalent rent. The St. Louis Fed notes that the differences in inflation between regions of the US can be substantial as well.

Mortgage Applications fell 0.4% last week as purchases fell 0.2% and refis fell 1%. Tough times for the smaller originators.

Despite the slim pickings out there, mortgage credit has contracted a bit this year. Overall, it was a mixed bag, as government credit contracted on less streamlines while conventional increased as jumbos rose. Government credit has been tightening since early 2017, when the government began to crack down on serial VA IRRRL shops.

How have things changed at the CFPB or the (BCFP) under Mick Mulvaney? Despite the ululating in the press, not that much. One of the panelists warned industry lawyers not to advise their clients that the CFPB is relaxing its enforcement activities. So far, the biggest change we have seen is that the name has been changed back to the Bureau of Consumer Financial Protection, which was the way it was written into Dodd-Frank.

Fair Housing groups are suing HUD over Ben Carson’s delay of the Obama-era re-interpretation of AFFH – affirmatively furthering fair housing. Their complaint is that HUD didn’t provide advance notice before suspending the rule,. which would have required communities to “examine and address barriers to racial integration and to draft plans to desegregate their communities.” HUD delayed the compliance deadline until 2024. In practice, this means that HUD wants communities to change or eliminate their zoning ordinances to include more multi-family housing in wealthier neighborhoods.

Morning Report: Awaiting the Fed

Vital Statistics:

Last Change
S&P futures 2652 0.25
Eurostoxx index 387.17 2.14
Oil (WTI) 67.45 0.19
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.55%

Stocks are flat as we await the FOMC decision. Bonds and MBS are down small.

Mortgage Applications fell 2.5% last week as purchases fell 2% and refis fell 4%.

The economy added 204,000 jobs last month according to the ADP Employment Report. This was higher than expectations and is above the Street estimate for Friday’s jobs report. Medium sized firms (50-500 employees) added the most jobs, and Professional and Business Services sector had the most growth. Construction added a lot of jobs as well.

ADP by sector

The FOMC announcement is scheduled for 2:00 pm EST today. No changes in rates are expected, but investors will be looking to see if the Fed changes its language about inflation running below target. The latest PCE index came in at 2%, which is the Fed’s target. The second-order question will be to see whether the Fed changes their 2% rate from a symmetric target to a ceiling. The most likely outcome will be a “steady as she goes” statement and any changes will be communicated at the June meeting with a fresh set of economic forecasts. Today’s announcement should be a nonevent.

The Fed Funds futures are predicting a 6% chance of a hike at the May meeting and a 94% chance of a 25 basis point hike at the June meeting.

The labor shortage is so acute in the Rust Belt that some towns are paying people to move there. Most of these small towns have a major demographic problem – younger workers moved to the cities in response to the Great Recession, leaving only the older workers who are now retiring. The fear is that labor shortages will prompt employers to leave, which will create a downward spiral.

Consumer advocates worry that Mick Mulvaney is not going to blow up the CFPB, but will neuter it with a thousand cuts. That said, the rhetoric from the left is a bit overblown. Mick Mulvaney said: “When I took over, we had roughly 26 lawsuits ongoing,” he told the House Appropriations Committee on April 18. “I dismissed one, because the other 25 I thought were pretty good lawsuits.”