Morning Report: 2019 housing forecasts are similar to 2018

Vital Statistics:

 

Last Change
S&P futures 2901.75 -8.75
Eurostoxx index 390.46 0.87
Oil (WTI) 65.29 1.29
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.27%

 

Stocks are lower this morning as investors return from the long weekend. Bonds and MBS are flat.

 

There isn’t much in the way of market-moving data this week, although we will get some housing data with existing home sales, the FHFA House Price Index, and New Home Sales.

 

President Trump plans on ending the practice of allowing waivers for countries that import oil from Iran. Oil is up over a buck this morning on the news. China, India, and Turkey are Iran’s biggest customers.

 

The economy looks like it exited the first quarter with a pickup in growth, according to the Chicago Fed National Activity Index. The first quarter has been weak for the past several years, and it looks like that pattern repeated this year. Employment-related indicators drove the improvement in the index.

 

Fannie Mae is forecasting 2.2% GDP for 2019. On one hand, Fannie Mae expects to see growth impacted by the fading effects of the 2018 tax cuts and slowing corporate capital expenditures. On the other hand, they are forecasting a pickup in housing. Falling interest rates have been a pleasant surprise, and refinance activity is expected to be a bit higher than previously forecast. That said, prepayment burnout is pretty high at this point, and home price appreciation is probably going to drive refi activity more than interest rates.

 

“On housing, the recent dip in mortgage rates to their lowest level in over a year – combined with wage gains and home price deceleration – supports our contention that home sales will stabilize in 2019,” Duncan continued. “The greatest impediment to both sales and affordability continues to be on the supply side, as new inventory, particularly among existing homes, is being met quickly by strong demand – as evidenced by the already thin months’ supply hitting a new one-year low.”

 

Grant Thornton believes that a shortage of entry-level homes will be a constraint on the housing industry this year. “The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor – immigrants – that once made new housing affordable has all but disappeared.” They expect the median home price to rise 3.5% this year, compared to 4.8% in 2018. Existing home sales are expected to be unchanged at 5.9 million.

Morning Report: Bank earnings come in

Vital Statistics:

 

Last Change
S&P futures 2915 6.25
Eurostoxx index 388.92 0.82
Oil (WTI) 63.31 -0.09
10 year government bond yield 2.57%
30 year fixed rate mortgage 4.23%

 

Stocks are higher as bank earnings come in. Bonds and MBS are down.

 

Earnings season has begun, and the banks are all reporting.

 

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

 

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

 

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

 

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

 

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

 

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

 

fed funds futures

 

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: Goldilocks jobs report

Vital Statistics:

 

Last Change
S&P futures 2891 6.75
Eurostoxx index 387.8 -1
Oil (WTI) 62.72 0.26
10 year government bond yield 2.54%
30 year fixed rate mortgage 4.20%

 

Stocks are higher this morning after the payroll number. Bonds and MBS are down small.

 

Jobs report data dump:

 

  • Nonfarm payrolls up 196,000 (expectation 180,000)
  • Average hourly earnings up 0.1% MOM / 3.2% YOY (expectation 0.3% / 3.4%)
  • Labor force particpation rate 63%
  • Unemployment rate 3.8%

 

Overall, it was a bit of a Goldilocks jobs report: enough strength to quell fears of a slowdown, but tame enough wage growth to keep the Fed from tightening more. January and February’s payroll numbers were revised upward by 14,000.

 

Trump will nominate Herman Cain for the Federal Reserve Board. While many find the idea of nominating a pizza chain executive strange, he did run the Kansas City Fed so he does have monetary policy experience. Certainly with Steve Moore and Herman Cain, there will be a different voice from the predominantly academic / salt water view on things.

 

The Senate confirmed Mark Calabria to run FHFA.

Morning Report: New home sales increase

Vital Statistics:

 

Last Change
S&P futures 2857 20
Eurostoxx index 382.42 3.33
Oil (WTI) 60.79 0.65
10 year government bond yield 2.44%
30 year fixed rate mortgage 4.10%

 

Stocks are higher this morning as we kick off the second quarter. Bonds and MBS are down.

 

We have a lot of data this week, and some could be market-moving. The biggest report will be the employment situation report on Friday, however we will get durable goods, construction spending, and ISM data.

 

Retail Sales in February fell 0.4%, which was well below the Street expectations of a 0.4% gain. That said, January’s numbers were revised upward from 0.9% to 1.4%. Separately, personal incomes increased 0.2% in February, while personal expenditures rose 0.1%. Inflation remained below the Fed’s target with the PCE index down 0.1% on a MOM basis and up 1.4% on a yearly basis. Ex-food and energy, the PCE index was up 1.8%. For 2018, personal incomes rose 4.5%, while personal spending rose 4.4%.

 

New Home Sales came in at a seasonally adjusted level of 667,000, which beat the Street estimate of 615,000. This is up 4.3% from the revised January number and about flat on a YOY basis. New Home Sales is a notoriously volatile series, and the margin for error is generally huge. While new home sales have recovered from the bottom, we are still at 50% of peak levels, and when you take into account population growth, we are still well below what is needed.

 

new home sales

 

Pending home sales slipped in February, according to NAR. Lawrence Yun, NAR chief economist, said February’s pending home sales decline is coming off a solid gain in the prior month. “In January, pending contracts were up close to 5 percent, so this month’s 1 percent drop is not a significant concern,” he said. “As a whole, these numbers indicate that a cyclical low in sales is in the past but activity is not matching the frenzied pace of last spring.”

 

Wells Fargo CEO Tim Sloan is out. The bank was unable to put its scandals behind it, and Democrats like Elizabeth Warren were calling for the Board to fire him. He decided to retire at age 58. “This was my decision based on what I thought and believe is the best for Wells Fargo, because there has just been too much focus on me,” Sloan said. “And it’s impacting our ability to move forward. I just care so much about this company and so much about our team that I could not keep myself in a position where I was becoming a distraction.”

 

Despite the action in the Federal Funds market and the dot plot, the Fed doesn’t seem to be ready to start cutting rates. Even dovish Minneapolis President Neel Kashkari is reluctant to ease monetary policy. For the most part, the Fed seems to view the recent economic weakness as influenced by the partial government shutdown and is anticipating a recovery.

Morning Report: Final estimate for fourth quarter GDP

Vital Statistics:

 

Last Change
S&P futures 2811.75 1.25
Eurostoxx index 375.78 -1.45
Oil (WTI) 59.49 -0.45
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.08%

 

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

 

Fourth quarter GDP was revised downward to 2.2% in the third and final estimate. Inflation came in at 1.5%. This is more ammo for the Fed to possibly cut rates this year.

 

GDP

 

Initial Jobless Claims came in at 211k last week. Despite the slowdown in economic activity, employers are hanging on to their workers. Speaking of labor, McDonalds will no longer lobby against minimum wage hikes. It probably is safe for McDonalds – their franchisees bear the brunt of labor costs not corporate. At any rate, I’m not sure that Republicans really need a lobbyist to tell them to oppose minimum wage hikes, but companies seem more interested in placating the social justice mob these days than delivering shareholder returns.

 

Facebook has been charged with housing discrimination based on algorithms that target housing-related ads. “Facebook is discriminating against people based upon who they are and where they live,” HUD Secretary Ben Carson said in a statement announcing the charges of violating the Fair Housing Act. “Using a computer to limit a person’s housing choices can be just as discriminatory as slamming a door in someone’s face.”

 

The White House has released a memorandum on housing reform. There were no discernible policy changes in it – the government would like to decrease the GSE’s footprint in the mortgage market while maintain the 30 year fixed rate mortgage and affordable housing goals. They did mention the goal of getting more banks doing FHA loans, although the capital treatment of servicing rights probably makes that tough. Fannie Mae stock liked the release, rallying 9%.

 

The Washington Post has run something like 4 anti Steven Moore editorials in the past few days. The economics establishment really doesn’t like the nomination. Don’t forget one thing, though. While it is generally not a good thing when politicians criticize monetary policy (and Trump / Moore were pretty outspoken about it), the action in the Fed Funds futures and the change in the dot plot shows they were right.

Morning Report: Fed decision day

Vital Statistics:

 

Last Change
S&P futures 2851 -1.25
Eurostoxx index 382.92 2.82
Oil (WTI) 58.48 0.39
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.27%

 

Stocks are higher this morning as we begin the FOMC meeting. Bonds and MBS are flat.

 

The FOMC decision is set to be announced at 2:00 pm EST. Be careful locking around that time. They aren’t going to raise interest rates, but the focus will be on the dot plot and their interest rate forecast for 2019. There will also be interest in the size of the balance sheet, but it won’t be market moving.

 

The stock market has been rallying on hopes that the Fed will be taking 2019 off. Note that FedEx reported disappointing numbers, which is a canary in the coal mine for the global economy. The stock and bond markets have been sending different signals about the economy, with the stock market rising (signalling strength) and interest rates falling (signalling weakness). Part of this has been due to global growth concerns – especially in Europe and China. Global weakness doesn’t necessarily translate into a recession for the US, but it is a reach to think it won’t affect us at all.

 

Mortgage Applications rose 1.6% last week as purchases rose 0.3% and refis increased 4%. Mortgage rates drifted lower and are at the cheapest in a year.

 

The NAHB / Wells Fargo Housing Market Index was flat at 62 as we kick off the Spring Selling Season. Sales ticked up, but traffic is way down. Overall, the new home sales market is similar to where we left off in fall. We will get a read on existing home sales this Friday. We are seeing some evidence of cooling in housing markets, especially in the Northeast. According to the Redfin competitive numbers, places like Greenwich CT are at 9 on a scale of 1 – 100. Even erstwhile hot markets like San Diego have been cooling. The heat is in the laggard markets, with places like Harrisburg PA and Indianapolis doing very well.

 

greenwich

Indianapolis

 

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!