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

MBA refinance index

 

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%.

 

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Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 2701 -2.75
Eurostoxx index 358.09 -0.56
Oil (WTI) 53.82 0.02
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.35%

 

Stocks are flattish after the jobs report. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls up 304,000
  • Labor force participation rate 63.2%
  • Unemployment rate 4%
  • Average hourly earnings up 3.2% YOY
  • Employment-population ratio 60.7%

Overall, an exceptionally strong report. The uptick in payrolls was almost double the market expectations, and the government shutdown had no appreciable effect (Furloughed employees were counted as “employed” by the survey.  The uptick in wages probably knocked bonds down a touch, but we have been seeing real wage gains in the employment situation report and the employment cost index. Sad trombone for partisans and the business press rooting for a shutdown-depressed report.

 

The unemployment rate has been rising, but that is actually good news as it means more and more of the long-term unemployed are being drawn back into the labor force. The labor force participation rate is a bit of a nebulous number because people who have been unemployed for a long time may not count as unemployed. The employment-population ratio is a much better measure, although you have to deal with demographic noise. The employment-population ratio rose 0.1% to 60.7%. A year ago it was 60.2%. While that is much higher than the 58.5% we saw at the depths of the Great Recession, it is still lower than the 62% – 63% pre-crisis level. Retiring baby boomers are being replaced by Millennials, but there is a lag.

 

employment population ratio

 

New home sales rose to a seasonally-adjusted average of 657,000 in November. The new home sales number is extraordinarily volatile – it is up 17% from October, but down 8% from a year ago – but it is somewhat encouraging as we head into the spring selling season, which despite the polar vortex upon us, unofficially starts about now.

 

Employment compensation costs rose 0.7% in the fourth quarter, as wages and salaries rose 0.6% and benefit costs rose 0.7%. For the prior 12 months, employment compensation costs rose 2.9%, with wages and salaries rising 3.1% and benefit costs rising 2.8%. With core inflation stuck around 2%, we are seeing over 1% real wage growth, which is strong indeed.

 

Wapo published a story about Trump possibly naming erstwhile R politician Herman Cain to the Fed. Cue the snide jokes: Can’t wait for his 3-3-3 plan: 3% Fed funds rate, 3% interest on excess reserves, 3% of QE portfolio runoff per year. In all seriousness though, he ran the Kansas City Fed from 92-96. So what appears at first to be an applause line in fact might not be. That said, these jobs generally go to academics and he is not one.