Morning Report: Housing starts disappoint again

Vital Statistics:

 

Last Change
S&P futures 2999 -1.25
Oil (WTI) 54.47 0.44
10 year government bond yield 1.75%
30 year fixed rate mortgage 3.97%

 

Stocks are lower this morning on weak overseas growth. Bonds and MBS are flat.

 

Housing starts disappointed again, falling 9.4% from an upwardly revised August number to 1.26 million units. This is up slightly on a YOY basis. Building Permits came in at 1.387 million units, higher than expected but still down 2.4% on a MOM basis. Compared to last year, they are up 9.4%.

 

Despite the disappointing starts, builder confidence hit an 20 month high. “The second half of 2019 has seen steady gains in single-family construction, and this is mirrored by the gradual uptick in builder sentiment over the past few months,” said NAHB Chief Economist Robert Dietz. “However, builders continue to remain cautious due to ongoing supply side constraints and concerns about a slowing economy.”

 

Industrial production fell 0.4% in September, and manufacturing production was down 0.5%. August’s numbers were revised higher. Capacity Utilization fell to 77.5%. Tariffs are attributed to the slowdown, but overseas growth in general is weakening. Note China had the lowest GDP growth since the early 1990s. The global slowdown has increased the odds of another rate cut in two weeks, which is up to 87% compared to 28% a month ago.

 

fed funds futures

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Morning Report: The impeachment process begins

Vital Statistics:

 

Last Change
S&P futures 2968 -2.25
Oil (WTI) 56.35 -0.64
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.91%

 

Stocks are flattish this morning despite overseas weakness and Trump Impeachment news. Bonds and MBS are flat.

 

The news that Nancy Pelosi was opening an impeachment inquiry over the Trump / Ukraine situation was a non-event market-wise. Stocks and bonds didn’t budge. Supposedly Trump will release the transcript of the call today, and will make the whistleblower available to Congress. We will see where this goes, but market-wise it will take a while to play out. Check out the chart of the S&P 500 during 1998 when the whole Bill Clinton impeachment situation was played out:

 

clinton

 

Here is a chart of the bond market during the same time period (10 year yield). Looks like we saw a drop in the 10 year of about 160 basis points peak to trough during the whole process. Note that this is a classic example of the old market saw “buy the rumor, sell the fact.” The market priced in impeachment before the votes even took place. If you got short on the votes, you got your head handed to you. If you bought the Treasury flight to safety in late summer of 98, when the whole thing was coming to a head, you were too late, and were on the wrong side of the trade by that point.

 

clinton bond

 

There was some slight movement in the Fed Funds futures for December, with the current odds at 22% no cut, 52%, a 25 basis point cut, and 26% chance of 50 basis points. Note that the repo market issues has been taken by the Fed that they don’t have as much leeway to shrink the balance sheet as they had anticipated.

 

Mortgage applications fell by 10% last week as purchases fell 3% and refis fell 15%. Rates were more or less flat at 4.01% last week, so the refi number is a surprise. That said, mortgage rates had risen about 20 basis points over the past few weeks, so maybe this was a catch-up phenomenon. Despite the back up in rates, the MBA estimates that 2019 will be the best year since 2016, with originations expected to hit $1.9 trillion.

 

Consumer confidence fell in September on trade fears and darkening expectations. The present conditions index fell but it was mainly future expectations that drove the decline.

Morning Report: Housing is coming back

Vital Statistics:

 

Last Change
S&P futures 3003.75 4.25
Oil (WTI) 58.37 -0.94
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%

 

Stocks are flattish as we await the FOMC decision at 2:00 pm EST today. Bonds and MBS are up.

 

Housing starts increased 12.3% MOM and 6.6% YOY to a seasonally adjusted annual rate of 1.36 million. This is the highest in 12 years. July was revised upward as well. Building Permits rose 7.7% MOM and 12% YOY to 1.4 million, which is close to historical levels (non-population adjusted). This data seems to comport with the MBA’s 30% rise in purchase activity. Permit activity increased the most in the Northeast, while falling in the Midwest.

 

housing starts

 

Mortgage applications were flat last week despite a huge back up in rates. There was also an adjustment for Labor Day, so that will affect the numbers. Purchases rose 6%, while refis fell 4%. The average rate on a 30 year fixed rose 19 basis points to 4.01%, and government loans increased share.

 

CFPB Chair Kathy Kraninger believes her job security is unconstitutional and supports a Supreme Court review of a case pending before the 9th Circuit. Essentially, Dodd-Frank made the head of the CFPB basically untouchable – the President can only fire “for cause” and not at the discretion of the White House. “From the Bureau’s earliest days, many have used the uncertainty regarding this provision’s constitutionality to challenge legal actions taken by the Bureau in pursuit of our mission,” Kraninger wrote to staff. “Litigation over this question has caused significant delays to some of our enforcement and regulatory actions. I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.” Given that the case is currently in front of the liberal 9th Circuit (aka the Nutty Ninth) the current structure will almost certainly be upheld and it will go to SCOTUS.

 

Some inside-baseball stuff: Despite the bet that the Fed will cut rates to a range of 175-200 basis points today, the Fed had to intervene yesterday to prevent the Fed Funds rate from breaching the top of the current 200-225 basis point range. The cause was a shortage of dollars in the money markets ahead of Q3 interim tax payments and a big Treasury bond issue. This caused overnight repo rates to surge to 500 basis points on Monday, and the punch line is that this problem might push the Fed to increase the size of its balance sheet, which means more QE. This stems from a change in how the Fed mechanically manages the Fed Funds rate in the immediate aftermath of the financial crisis. How will it affect mortgage markets? Not directly, however issues with financing / hedging and rate volatility will negatively impact mortgage rates, at least at the margin.

 

repo rates

Morning Report: New Home purchase activity up 33%

Vital Statistics:

 

Last Change
S&P futures 2995.5 -6.25
Oil (WTI) 62.07 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as the markets continue to digest the Saudi oil situation. Bonds and MBS are up.

 

The FOMC begins its two day meeting today. The Fed funds futures further discounted the chance of a rate cut announcement tomorrow to 63% from 73% a day earlier.

 

Industrial Production rose 0.6% in August, and manufacturing production rose 0.5%. Both estimates were well in excess of street expectations. Capacity utilization rose to 77.9%. Pretty healthy numbers, and certainly don’t demonstrate that trade wars are killing the manufacturing economy.

 

New home purchase activity was up 33% on a YOY basis in August. “New home purchase activity was robust in August, as both mortgage applications and estimated home sales increased from a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent increases in new residential housing permits and housing starts, lower mortgage rates, and a still-strong job market all bode well for the new home sales outlook.” This is a bullish sign for the economy, as we have underbuilt for years. New Home Sales has been in the 600k – 700k range recently, which is at levels last seen in the mid 90s.

 

new home sales

 

That said, the population has grown, so mid-90s levels doesn’t really support the demand out there. Adjusting for population, the historical average would equate to about 900k new homes sold, or about 30% higher than here.

 

FHFA Director Mark Calabria was interviewed on Bloomberg TV on the GSEs. It looks like they will hit the market to raise capital by the end of 2020. The first order of business is to end the net worth sweep, which will allow them to build capital. FHFA and Treasury haven’t settled on a number for the capital increase yet. Fannie Mae stock was up a touch on the interview.

Morning Report: Bonds down on trade progress with China

Vital Statistics:

 

Last Change
S&P futures 3017.5 5.25
Oil (WTI) 55.37 0.44
10 year government bond yield 1.83%
30 year fixed rate mortgage 3.90%

 

Stocks are higher this morning after further progress on trade talks with China. Bonds and MBS are down.

 

China walked back some proposed tariffs on US agricultural products after Trump agreed to delay some additional tariffs. Commodities in general are up on the news.

 

Retail Sales rose 0.4% MOM in August, according to Census. July was revised upward to an increase of 0.8% from an increase of 0.7%. This was the back-to-school shopping season, so it gives a good indication that this year’s holiday shopping season will be strong as well. Given that consumption accounts for 70% of GDP, we might see some upward revisions in Q3 and Q4 estimates.

 

Mortgage credit availability declined in August, according to the MBA. “Credit supply declined across the board in August, even as mortgage rates fell and application activity picked up, particularly for refinances,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Last month’s decrease was the largest since December 2018, and also the first tightening we have seen for conventional loans all year. We anticipate some weakening of the job market in the year ahead as economic growth cools. It’s possible some lenders may be tightening credit in expectation of a slowdown.” Some contraction was expected for VA due to the new rules, but it is surprising to see it in the other buckets.

 

MCAI

 

The Trump Admin is working to end Fannie and Freddie’s net profits sweep in September. “We expect a deal prior to Sept. 30 in which Fannie and Freddie will stop paying a quarterly dividend to Treasury,” Cowen Managing Director Jaret Seiberg wrote in the note. “Instead, they will pay a commitment fee for the outstanding preferred capital line. This means they can retain the rest of their profits in order to rebuild capital.”

Morning Report: More on GSE reform

Vital Statistics:

 

Last Change
S&P futures 2990.5 9.25
Oil (WTI) 56.96 0.44
10 year government bond yield 1.59
30 year fixed rate mortgage 3.72%

 

Stocks are higher this morning on no real news. Bonds and MBS are down small.

 

No economic data today, and this week should be relatively data-light, with retail sales on Friday the only potential market-moving number. No Fed-speak as we are in the quiet period ahead of next week’s meeting.

 

Jerome Powell vowed to act “as appropriate” to maintain the current US expansion, which was largely taken as an admission the Fed will cut rates another quarter point at next week’s meeting. The Fed funds futures are pricing this in as a certainty, although there is disagreement within the Fed over whether it is necessary to cut rates given the strong consumer spending. He also threw cold water on political considerations affecting monetary policy. “Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions,” he said. “We are going to act as appropriate to sustain the expansion.” This was presumably in response to comments from ex-NY Fed president William Dudley to  “consider how their decisions will affect the political outcome in 2020.”

 

Interesting data point: Compass Point Analytics upped their price target for Fannie Mae stock to $7.75. which is almost 3x the current trading price of $2.71. Fannie Mae stock got hit last week on disappointment with the lack of specifics in the government’s housing reform plan.

 

Despite the disappointment from Fannie Mae stockholders and pref holders, the housing industry generally likes what the saw in the plan. “The reports recognize the need to better coordinate the roles of FHA and the GSEs,” Mortgage Bankers Association CEO Robert Broeksmit said. “Such coordination must preserve affordable financing options for a wide range of borrowers and reflect the vital role FHA plays in the larger housing finance system.” Talks about getting rid of the GSEs altogether seem to be over: “Both in the Obama administration and during periods of bipartisan negotiations the focus was on whiteboarding a totally new system,” said David M. Dworkin, who was a senior adviser in the Treasury Department on housing finance during the Obama and Trump administrations. “It is too hard. The current system is too embedded and the unintended consequences are too unpredictable.” The GSE affordable housing goals would also go away, to be replaced by a fee paid to HUD, who would then distribute the funds themselves. This is likely to be a non-starter with Democrats.

 

Mortgage interest deductions fell 62% last year as tax reform encouraged most people to take the standard deduction instead of itemizing.

 

 

Morning Report: Personal incomes rise

Vital Statistics:

 

Last Change
S&P futures 2943 16.5
Oil (WTI) 56.33 -0.34
10 year government bond yield 1.51%
30 year fixed rate mortgage 3.77%

 

Stocks are up ahead of the 3 day weekend. Bonds and MBS are flat.

 

No word yet from SIFMA regarding an early close, so assume the bond market is open all day.

 

Personal incomes rose 0.1% in July, which was a deceleration from the previous few months. June was revised upward from 0.4% to 0.5%. Disposable personal income rose 0.3%, and spending rose 0.6%, which came in above expectations. The core PCE index (the Fed’s preferred measure of inflation) rose 0.2% MOM and 1.6% YOY, which is below their 2% target. The headline PCE rose 0.2% / 1.4%.

 

Consumer sentiment fell in August according to the University of Michigan Consumer Sentiment Survey.

 

Pending Home Sales fell 2.5% in July, according to NAR. “Super-low mortgage rates have not yet consistently pulled buyers back into the market,” said Lawrence Yun, NAR chief economist. “Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Regionally, they declined 1.6% in the Northeast and fell 3.4% on the Left Coast.

 

As bond yields have fallen, mortgage rates have not kept up as investors have been sweating prepayment speeds in the MBS market. The biggest issues have been rate volatility, which negatively impacts mortgage backed security pricing, along with fears we are entering a new refinance cycle. Also, many mortgage bankers set their staffing levels for the year back in late 2018, when it looked like we were in a tightening cycle and volumes would be much lower. “Do not expect much, if any of a drop in mortgage rates in the coming weeks,” said Mitch Ohlbaum, president, Macoy Capital Partners in Los Angeles. “It’s not because they shouldn’t, it’s because the lenders are already beyond capacity with refinances and frankly do not want any more volume.” There is probably some truth to that, but that is fixable. The volatility in the Treasury market and convexity risk is killing MBS investors. The classic example of a MBS investor is Annaly, a mortgage REIT, which has gotten clocked this year and cut its dividend.

 

NLY chart

 

PIMCO is advising the Fed to “aggressively cut rates” given the recent economic data suggests a slowdown. Their point is that recent data is “understating” the extent of the slowdown. They raise the point that labor market momentum has decelerated more than forecasters were predicting. Of course, at 3.7% unemployment, we are pretty much at or close to full employment. Wages are generally a lagging indicator, but this morning’s personal income disappointment was partially driven by a decrease in asset income, which probably just reflects falling interest rates.