Morning Report: Bonds adjust to the prospect of no more rate cuts

Vital Statistics:

 

Last Change
S&P futures 3083 7.25
Oil (WTI) 56.97 0.64
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.92%

 

Stocks are higher this morning after Chinese President Xi Jinping committed to lowering tariffs and institutional transaction costs. Bonds and MBS are down.

 

The markets expect to see some sort of phase 1 trade deal with China in the coming weeks. The Wall Street Journal is reporting that China and the US are considering rolling back some tariffs. Separately, the Chinese central bank lowered rates to deal with a liquidity crunch.

 

There isn’t much data this week (as is typical after the jobs report) however we do have a lot of Fed-Speak so, we could see some movement in the bond markets as we adjust to the pause. For those keeping score at home, the December Fed Funds futures are signalling only a 5% chance of another rate cut this year. A month ago, they were handicapping a 44% chance of another cut.

 

fed funds futures

 

Home prices rose 3.5% YOY according to CoreLogic. By their models, 36% of the top 100 MSAs are overvalued (including the NYC area), while 23% were undervalued and 41% were fairly valued. Their model compares housing values to disposable incomes to come up with a valuation score. They are forecasting home price appreciation to accelerate to 5.6% over next year. Note that Realtor.com said that listing prices rose 4.3% in October to a high of 312,000.

 

Corelogic overvalued

 

About 0.6% of all originations went DQ within 6 months, according to Black Knight Financial Services. While this is much lower than the pre-bubble years, it has been steadily increasing since the housing market bottomed. The concentration is primarily in first time homebuyers. Foreclosures remain under control, at levels last seen in 2005.

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Morning Report: Decent jobs report

Vital Statistics:

 

Last Change
S&P futures 3049 13.25
Oil (WTI) 54.82 0.64
10 year government bond yield 1.71%
30 year fixed rate mortgage 3.92%

 

Stocks are higher after a decent jobs report. Bonds and MBS are up small.

 

Jobs report data dump:

  • Payrolls up 128,000 versus 90,000 expected
  • Unemployment rate 6.3%
  • Manufacturing payrolls – 36,000
  • Labor force participation rate 63.3%
  • Average hourly earnings up 0.2% MOM / 3.0% YOY

Overall a pretty decent report. Payrolls were depressed by the GM strike (about 46,000 workers), however the labor force participation rate ticked up and the employment-population ratio was flat at 61%. The two month revision was up 95,000 as well – September payrolls were revised upward by 44,000 and the August number was revised upward by 51,000. So, if you add back the GM strikers, and take into account the revisions, August’s number becomes 219,000, September becomes 180,000, and October becomes 174,000. Certainly nothing that would indicate any sort of major slowdown in the US economy.

 

Pennymac reported good numbers last night, with originations increasing to $35 billion in the last quarter. This was up 44% from Q2 and almost double last year. As expected, they took a hit on MSR valuations as rates fell, but they got a lot of that back on their hedges. Good times abound in origination business.

 

TRI Pointe reported numbers that beat the street, however revenues declined, as did average sales prices. That said, margins are increasing which is good news for the building sector. The S&P Homebuilder ETF (XHB) is up 54% so far this year.

Morning Report: The fed cuts rates and goes on hold.

Vital Statistics:

 

Last Change
S&P futures 3042 -5.25
Oil (WTI) 54.42 -0.64
10 year government bond yield 1.73%
30 year fixed rate mortgage 4.02%

 

Stocks are lower this morning after the Fed cut rates. Bonds and MBS are up.

 

As expected, the Fed cut rates by 25 basis points yesterday, and Jerome Powell said that “the current stance of policy is expected to remain appropriate” as long as the labor market remains strong and the economy continues to expand moderately. They also removed the language that said the Fed would “act as appropriate” to maintain the current expansion. This was the “pause” language that the markets were looking for. The vote was 8-2, with two members voting to maintain the current Fed Funds target. For some reason, the pause language put some starch in the bond market, which has sent rates lower by about 12 basis points. The December Fed Funds futures are currently handicapping a 20% chance of another 25 basis point cut. FWIW, Morgan Stanley is out with a call saying the Fed is on hold through 2020. As a general rule, the Fed tries to stay out of the picture as much as it can during an election year, so that call may end up being correct.

 

Personal Incomes and spending increased 0.3% and 0.2% respectively, which was lower than August’s torrid pace. On an annual basis, incomes rose 3.8% and consumption increased 4.4%, both strong numbers and well ahead of the weaker-than-expected inflation readings. The PCE price index (which is the Fed’s preferred inflation measure) was flat in September, and up 1.3% YOY. Ex-food and energy the PCE index was flat and up 1.7% annually. Separately, the employment cost index rose 0.7% in the third quarter and was up 2.8% YOY. Note that wages increased 0.9%, which is a quite strong number.

 

The Urban Institute has panned the Administration’s plan to reduce the GSE footprint in the mortgage market. Their point is that the government guarantee for Fannie MBS is so important that it will be hard for other entities to compete, unless the guarantee fee is set higher than the credit risk dictates. They also claim that it will reduce credit and slow down the economy.

 

The overall share of GDP attributable to housing increased to 14.6% in yesterday’s GDP report. Residential fixed investment (homebuilding, remodeling, etc) increased to 3.11%, while housing services, which is mainly rent, was about 11.5% of the economy. Historically, residential fixed investment has been closer to 5% and rent has been closer to 12% – 13%. In other words, housing is still punching below its weight economically, although it may be turning around. This represents a huge potential boost to GDP once things return to normalcy.

 

housing GDP

 

 

Morning Report: Third quarter GDP comes in stronger than expected

Vital Statistics:

 

Last Change
S&P futures 3036 0.25
Oil (WTI) 55.32 -0.24
10 year government bond yield 1.84%
30 year fixed rate mortgage 4.03%

 

Stocks are flat as we await the FOMC decisions and earnings from Facebook and Apple after the bell. Bonds and MBS are flat.

 

The FOMC decision is set for 2:00 pm. The big tariff-related slowdown that has been widely predicted doesn’t seem to be materializing. This means that the language of the FOMC statement and the press conference will take on more weight and we could see some volatility in the bond market as everyone reassesses the lay of the land. Be careful locking around then.

 

The advance estimate of third quarter GDP came in better than expected, at 1.9%, versus street expectations of 1.6%. Personal consumption expenditures drove the increase, rising 2.9%, while investment fell 1.5%. Residential fixed investment broke a 6 quarter losing streak, increasing 5.1% in the quarter. Inflation remains under control, with the headline PCE number rising 1.5%, and the core rising 2.2%.

 

GDP

 

ADP estimated that payrolls increased by 125,000 in October, which was above expectations. September’s estimate was revised downward however to below 100k. Note the 125,000 number is well above the Street estimate for Friday’s jobs report, which is forecasting an increase of only 85,000.

 

Mortgage applications increased by 0.6% in the latest MBA survey. Purchases increased 2% and refis fell 1%. “The 10-year Treasury rate rose slightly last week, as markets expected more progress toward a trade deal between the U.S. and China,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates increased for the second straight week as a result, with the 30-year fixed rate climbing to 4.05 percent–the highest level since the end of July. Mortgage applications were mostly unchanged, with purchase activity rising 2 percent and refinances decreasing less than 1 percent. Purchase applications continued to run at a stronger pace than last year, finishing a robust 10 percent higher than a year ago. Considering how much lower rates are compared to the end of 2018, purchase applications should continue showing solid year-over-year gains.”

 

The MBA forecasts that 2019 will be the best year for origination since 2007, at $2.06 trillion, although they expect 2020 to slip to $1.89 trillion. Although they forecast rates will remain low, they anticipate that refis will dry up in the second half and the margin pressure that bedeviled lenders in 2018 will reappear.

 

Pending home sales rose 1.5% in September, according to NAR. “Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates,” he [NAR Chief Economist Lawrence Yun] said. “Furthermore, we’ve seen increased foot traffic as more buyers are evidently eager searching to become homeowners.” The foot traffic comment is interesting since we should be seeing a drop-off heading into the seasonally slow period.

 

The homeownership rate ticked up to 64.8% in the third quarter. This is an increase of 70 basis points from the second quarter and an increase of 40 bps from a year ago.

Morning Report: Ben Carson adjusts enforcement to entice banks back into FHA lending

Vital Statistics:

 

Last Change
S&P futures 3035 -2.25
Oil (WTI) 54.91 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are flattish as earnings continue to come in and the Fed begins its two-day FOMC meeting. Bonds and MBS are flat.

 

Ben Carson has “slayed” the False Claims Act “monster” that has kept banks out of FHA lending. The False Claims Act was used as a cudgel during the Obama Administration to extract massive settlements out of the banks, often over immaterial errors.

“[Banks] were in before and obviously they were in because it was beneficial to them,” Carson told HousingWire about banks’ presence in FHA lending.

“And then the housing crisis occurred and all of the sudden, the False Claims Act became a monster that started chasing everybody around the room, making their lives miserable, causing them an inordinate amount of pain,” Carson continued. “So they got out. But now, the monster has been slayed.”

Since 2010, the banking share of FHA origination has fallen from about 50% to 15%, and FHFA lays the blame at the feet of the False Claims Act. The DOJ will have its footprint in the enforcement process reduced, getting involved only when the Mortgagee Review Board deems it necessary.

 

Home Prices rose 0.3% MOM and 3.2% YOY in August, according to the Case Shiller Home Price Index. The hottest markets (San Francisco, Denver, and Seattle) are cooling off, and San Fran was down on a monthly and annual basis. The leading market was Phoenix.

 

The FOMC decision will come out tomorrow, and it looks like market participants will be taking a close look at the language for signs of a pause. If the rate cuts were merely an insurance policy to maintain the expansion, then they probably should take a break and see how the economy develops.

Morning Report: 2019 best year since 2006?

Vital Statistics:

 

Last Change
S&P futures 3033 12.25
Oil (WTI) 56.61 0.04
10 year government bond yield 1.84%
30 year fixed rate mortgage 4.00%

 

There is definitely a risk-on feel to the tape as strong earnings continue to come in, and some positive trade developments over the weekend. Bonds and MBS are down after the UK was granted an extension to achieve an orderly Brexit.

 

We have a big week ahead, with a lot of important data and the Fed meeting. We will get the advance estimate for Q3 GDP on Wednesday, the FOMC decision on Wed afternoon, the jobs report on Friday, along with construction spending and the manufacturing ISM. We will also get Case-Shiller and pending home sales on Tuesday, and personal income / spending on Thursday. So definitely, a big week.

 

In other economic data, the Chicago Fed National Activity Index fell to -.45 on weakness in the manufacturing sector. Retail inventories rose 0.3%, while wholesale inventories fell 0.3%. Not sure how the inventory numbers will affect Q3 GDP, but it can be sensitive to inventory builds and liquidations. The forecasts for Q3 GDP seem to be in a range of +1.5% to +1.9%.

 

What a difference a year makes. Lenders extended $700 billion in mortgage loans in the second quarter as falling rates improved refinance activity. This was the highest quarter since the bubble years, and 2019 could be the best year since 2006. I think many people imagined 2019 was going to be good, but not that good. Note that HELOCs have lagged.

 

mortgage originations

 

Ellie Mae has agreed to acquire Capsilon, which makes AI-powered automation software. “With the delivery of our next generation lending platform, we are accelerating our mission to automate everything automatable for the residential mortgage market. This includes making strategic acquisitions of best-in-class solutions to bring more value to the platform and the ecosystem faster,” said Jonathan Corr, president and CEO of Ellie Mae. “This is a significant day for the mortgage industry, as with the acquisition of Capsilon we are bringing together two market-leading companies and adding to our platform the pioneer of AI-powered intelligent automation leveraged by some of the largest lenders and servicers in the industry. As lenders and servicers continue to shift toward data-driven automation, we are excited to provide automated document recognition, classification and data extraction to further drive down costs and time of loan origination, acquisition and servicing.”

Morning Report: Durable goods disappoint

Vital Statistics:

 

Last Change
S&P futures 3010 7.25
Oil (WTI) 56.09 0.04
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.03%

 

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down small.

 

Durable goods orders disappointed as trade fears and global economic weakness weighs on the manufacturing sector. The headline number was down 1.1%, versus expectation of a 70 basis point drop. Much of the weakness was driven by a drop in aircraft, probably related to the issues with the Boeing 737 Max.  Ex-transportation, orders were down .3%. Most worrisome was the drop in core capital goods, which is a proxy for business capital expenditures and signals that business is concerned about future growth. You can see the deceleration in growth in the chart below:

 

capex

 

Initial Jobless claims fell to 212,000, which is a historically strong number. So despite the weakness in the manufacturing sector, the labor market remains relatively robust.

 

Delinquencies ticked up marginally in September to 3.53%, but are down 11.2% from a year ago. Foreclosure starts came in at 39,400 which is up about 9%, but still down a YOY basis. Prepay speeds are still elevated, up 121% from a year ago. With high prepay speeds, you can expect to see weakness in the higher coupon MBS, which is why increasing the loan rate doesn’t buy the borrower much in terms of adding lender credits. It also makes loans with lots of Fannie Mae adjustments (investment, cash out etc) almost impossible to get a par rate.

 

The Fed is increasing the amount of liquidity in the system, possibly as a result of the cash crunch last month in the repo markets. “It’s just more evidence the Fed will not back off as year-end gets closer,” said Mike Schumacher, global head of rate strategy at Wells Fargo Securities. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.” Separately, the Fed funds futures are pricing in a 94% chance of a rate cut next week.