Morning Report: The Fed catches up with the markets

Vital Statistics:

 

Last Change
S&P futures 2817 -10
Eurostoxx index 380.22 -0.62
Oil (WTI) 60.12 1.09
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.22%

 

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

 

As expected, the Fed maintained the Fed Funds rate at current levels and took down their forecast for the end of year. The December dot plot showed a central tendency in the 2.72% (using the lower bound of the range) and the March plot showed a central tendency of 2.37%. The forecast for 2019 GDP was lowered from 2.3% to 2.1%, while the unemployment rate was increased from 3.5% to 3.7%. PCE inflation was more or less unchanged at 2%.  The Fed Funds futures increased their probability of a 2019 rate cut from about 25% to about 40%.

 

dot plot

 

The Fed also tweaked their balance sheet runoff plan, increasing the amount they reinvest each month by $15 billion. This only affects Treasuries – MBS will continue to run off.

 

Stocks initially rallied on the Fed announcement, but then sold off on fears the Fed sees something the markets don’t. Bonds rallied on the Fed announcement, with the 10 year yield falling to 2.53%. MBS were slow to follow, but we did see some reprices towards the end of the day. With rates even lower this morning, expect to see a big move down in mortgage rates. FWIW, Fannie Mae has taken down their prediction for the 30 year fixed rate mortgage from 4.8% to 4.4%.

 

What does some of this mean for mortgage bankers? 2019 won’t necessarily be as bad as people feared for origination, and if you have been aggressively marking your servicing portfolio in order to paper over a price war, you might have a problem.

 

Banks that refocused their mortgage lending towards high-end buyers in the aftermath of the financial crisis are seeing the winds shift. Jumbo origination has been falling as prices at the high end have been peaking out and tax reform has limited the value of the mortgage interest deduction. Many non-banks focused on the first time and moderate income buyer. Many banks were offering amazing jumbo terms, presumably in an attempt to cross sell the more lucrative asset management business.

 

 

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Morning Report: New home sales still anemic historically

Vital Statistics:

 

Last Change
S&P futures 2821  9
Eurostoxx index 380.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.28%

 

Stocks are higher this morning on overseas strength, particularly in China and Japan. Bonds and MBS are up.

 

New Home Sales fell to 607,000 in January, according to the Census Bureau. This is down 7% MOM and 4% YOY. New Homes Sales is a notoriously volatile number, and the margin for error is generally in the mid-teens %. Still 607,000 is roughly in line with historical averages over the past 50 years. That said, population has grown since then, so it isn’t really comparable. Take a look at the chart below, which is new home sales divided by population – we are still only at levels associated with the depths of prior recessions. In other words, we are still in very early innings with the housing recovery, and you can make an argument that the recovery hasn’t even begun yet.

 

new home sales divided by population

 

Industrial Production rose 0.1% in February, and January’s initial 0.6% drop was revised upward to -0.4%. Manufacturing production fell 0.4%, while January’s 0.9% drop was revised upward to -0.5%. Capacity Utilization fell to 78.2%, while Jan was revised up again. So, Feb wasn’t great, but January wasn’t as bad as it initially appeared to be.

 

We have entered the quiet period for the Fed ahead of their meeting next week. No rate hikes are expected, although we will get new economic forecasts and a new dot plot. Sentiment regarding the Fed has changed massively over the past few months. As of now, the the Fed funds futures are estimating that there is a 75% chance the Fed does nothing this year, and a 25% chance they cut rates by 25 basis points. The fed funds futures are pricing a 0% chance of a hike. While Trump’s jawboning of the Fed was bad form, and you generally don’t want to see presidents doing that, you also can’t escape the fact that the Fed Funds futures and the markets think he was right!