Morning Report: The Fed cuts rates

Vital Statistics:

 

Last Change
S&P futures 2983 0.5
Oil (WTI) 57.51 -1.04
10 year government bond yield 2.00%
30 year fixed rate mortgage 4.07%

 

Stocks are flat after the Fed cut interest rates 25 basis points. Bonds and MBS are up.

 

The Fed cut the Fed Funds rate by 25 basis points yesterday, which was in line with what the markets were expecting. Bonds sold off (rates higher) initially but eventually worked their way back to unchanged on the day and rates are lower this morning. The volatility in bonds did widen MBS spreads a little, which means that mortgage rates didn’t necessarily follow the 10 year yield lower.

 

The markets seemed to take the fact that Esther George and Eric Rosengren dissented in stride. Both voted against cutting rates. Jerome Powell’s press conference was a bit surreal given that his body language gave the impression he didn’t actually believe his “insurance cut for maintaining the recovery” narrative very much. If you watch the press conference, you’ll see him struggle with a question from Bloomberg’s Michael McKee regarding how cutting interest rates in an economy awash in capital will have any effect. Powell mentioned slowdowns in Europe and China several times, and that probably gave away the game.  This was a rate cut in response to global weakness, certainly not US economic numbers nor Trump’s jawboning. Since using monetary policy as a tool to help foreign economies is not in the Fed’s job description, he can’t come right out and say it.

 

You can’t help the feeling that global central banks have engineered a sovereign debt bubble globally and now have no idea what to do about it. Their exit strategy is to create inflation, which would send money out of bonds, but cutting rates is causing bonds to get more expensive, exacerbating the bubble. The result has been a situation that makes zero economic sense: why would anyone pay to lend money, let alone to a government with a debt to GDP ratio of 240% (Japan)? I guess it is one of those things that people will eventually wake up to en masse. In other words, “it won’t matter until it matters, and then it will be the only thing that matters.” But the #1 rule of bubbles is that they go on longer and go further than anyone expects.

 

The Fed funds futures moved marginally in response to the rate cut. The markets are now pricing in about an 85% chance of one more cut this year, and are handicapping a better than 50% chance of a cut in September.

 

fed funds futures

 

The Wall Street Journal is reporting that the FHA is going to announce a move to lower the limit for cash out refinances to 80 LTV from 85 LTV.  “The risk at 85% is more than what we think is appropriate to bear and more than what we think we should expose taxpayers to,” said Keith Becker, the FHA’s chief risk officer. This change will bring FHA loans in line with Fannie and Freddie which cap cash outs at 80%.

 

In another change, a HUD proposal has been circulated that would reverse an Obama-era standard for fair lending – the disparate impact standard – and replace it with a 5-step framework to demonstrate that discrimination occurred. In other words, it will put the burden of proof back on the regulator to prove the lender intended to discriminate. I don’t have the actual proposal, so there isn’t much to go on quite yet.

 

In other economic news today, initial jobless claims came in at 215k, construction spending fell 1.3% and the ISM Manufacturing index slipped to 51.2.

 

 

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Morning Report; GDP comes in better than expected

Vital Statistics:

 

Last Change
S&P futures 3014 7.5
Oil (WTI) 56.51 0.84
10 year government bond yield 2.08%
30 year fixed rate mortgage 4.05%

 

Stocks are higher this morning after good numbers from Google, sorry Alphabet, and Q1 GDP came in better than expectations. Bonds and MBS are flat.

 

The US economy grew at 2.1% in the second quarter, a deceleration from the 3.1% recorded in the first quarter, but higher than the Street estimate of 1.8%. Note that the Atlanta Fed’s GDP Now model was predicting only 1.3% growth as of yesterday, which is a big miss, so perhaps this number will eventually get revised down.

 

In terms of the internals, consumption rebounded rising 4.3%, compared to only 1.1% in the first quarter. Inflation rose 2.3% on the headline number, while the core PCE rose 1.8%. Disposable income rose 4.4%, or 2.5% after inflation and the savings rate fell from 8.5% to 8.1%. Trade was a drag on growth, with exports falling 5.2% and imports flat. Investment was disappointing, falling 5.5% however the first quarter was revised upward from 1% to 3.1%. The economy’s old bugaboo, housing, fell 1.5%. It is strange to think we have a such pent-up demand for housing yet it remains a headwind but here we are. Inventories fell as well.

 

GDP

 

The Fed Funds futures moved slightly. A rate cut next week is more or less a sure thing, and the futures are predicting an 80% chance of a 25 bp cut and a 20% chance of a 50 bp cut. This is realistically the last data point before the Fed meets next week, although consumption and PCE will be released on the day the meeting begins.

 

The homeownership rate fell in the second quarter, falling to 64.1% from 64.2% in the previous quarter. This rate of 64% was more or less the norm prior to the big homeownership push from the government in the mid 90s. It topped 69% during the bubble years and then fell below 63% during the bust. The rental vacancy rate was flat at 6.8%, which again is consistent with historical norms. It is an interesting series the vacancy rate was quite low during the high interest rate 1970s and quite high during the bubble years.

 

vacancy rate

Morning Report: John Williams moves markets yesterday

Vital Statistics:

 

Last Change
S&P futures 3003 6.5
Oil (WTI) 55.74 0.54
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.08%

 

Stocks are up this morning after Mr. Softee beat earnings estimates. Bonds and MBS are up small.

 

Signs of a recession? Not really. The Conference Board’s Index of Leading Economic Indicators was flat at -.3% in June, while the markets were expecting an uptick. “The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”

 

New York Fed Head John Williams sent bond yields lower yesterday when his prepared remarks to an academic conference were released. They said: “Take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer” when you do cut rates.” The markets immediately took this as an endorsement for a 50 basis point cut when the Fed meets next week. A spokesman from the NY Fed clarified that comment later, saying that he was referring to studies based on 20 years of monetary policy and was not referring to the FOMC meeting next week. A cut next week is pretty much expected, and the only question is whether it will be 25 or 50 basis points.

 

After Williams’ comments, the Fed Funds futures actually started handicapping a 70% chance for a 50 basis point cut and only a 30% chance of a 25 basis point cut. They had previously been forecasting a 25% chance for a 50 basis point cut. They ended up settling on 40% chance. There is some more Fed-speak today, and then they will enter the quiet period ahead of next week’s meeting.

 

FHFA Director Mark Calabria says the Trump Administration should be releasing a plan to deal with Fannie and Freddie sometime in August or September.

Morning Report: Housing starts disappoint

Vital Statistics:

 

Last Change
S&P futures 3009 0.35
Oil (WTI) 59.54 -0.07
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.12%

 

Stocks are flat as bank earnings continue to come in. Bonds and MBS are up.

 

Another month, another disappointing housing starts number. Starts fell from an annualized pace of 1.3 million to 1.22 million in June, according to Census. Building permits were a mixed bag, falling to 1.25 million, however May’s numbers were revised upwards. Both starts and permits were below street expectations.

 

Despite the disappointing housing starts number, builder confidence rose one point to 65 in July. Demand remains strong, however labor shortages, few buildable lots and rising construction costs are making it difficult to build at the lower price points, where the demand is particularly acute.

 

Mortgage applications fell 1.1% last week as purchases fell by 3.8% and refis rose 1.5%. Rates increased, with the 30 year fixed rate mortgage rising by 8 basis points to 4.12%.  “Mortgage rates increased across the board, with the 30-year fixed rate mortgage rising to its highest level in a month to 4.12 percent, which is still below this year’s average of 4.45 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Coming out of the July 4 holiday, applications were lower overall, with purchase activity slipping almost 4 percent. Refinance applications increased, with activity reaching its highest level in a month, driven mainly by FHA refinance applications. Historically, government refinance activity lags slightly in response to rate changes.”

 

Bank of America reported strong earnings this morning. Mortgage origination volume was up 56% YOY to $18.2 billion.  Separately, Quicken announced they originated $32 billion in the second quarter.

 

Second quarter growth in China fell to 6.2%, the lowest level in 27 years. The implications for this will revolve primarily around inflation and Fed policy. The Chinese economy has a real estate bubble of epic proportions, and once that bursts it will have ramifications in the urban high-end market, but it will also be felt in lower inflation numbers. China will probably try and export its way out of the slowdown, although tariffs will make it difficult. That said, a slowdown in emerging Asia and Europe will usher in even lower interest rates.

 

 

Morning Report: Retail Sales strong

Vital Statistics:

 

Last Change
S&P futures 3019 5.35
Oil (WTI) 59.54 -0.07
10 year government bond yield 2.13%
30 year fixed rate mortgage 4.10%

 

Stocks are flattish as earnings season kicks off. Bonds and MBS are down.

 

June Retail Sales came in much higher than expectations. The headline number was up 0.4% MOM and 3.4% YOY. The control group, which excludes volatile products like autos, gas, and food was up 0.7%, well above the 0.3% Street estimate. May’s numbers were revised upwards as well. The upside surprise in retail sales pushed up the 10 year from 2.09% before the number to 2.13% after. Since consumption is such a big component of the economy, expect to see Q2 GDP estimates to be revised upwards.

 

Despite the strong retail sales numbers, the street is still handicapping a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut at the July FOMC meeting. I can’t believe we are talking about rate cuts when the economy is this strong, but here we are…

 

fed funds futures

 

In bank earnings, JP Morgan reported an increase in net income, but mortgage banking revenue was down 17% QOQ and YOY, driven by an unfavorable mark on the MSR portfolio. Volume increased 14% YOY to 24.5 billion. Wells also reported stronger earnings, with origination volume increasing to $33 billion. Margins fell from 105 basis points to 98, and it looks like they took a hit to their servicing portfolio as well.

 

Industrial Production was flat in June, driven by a drop in utility output. Manufacturing production was up 0.4%. Capacity Utilization increased as well, from 75.6% to 75.9%. So, despite all the concern about tariffs, we aren’t seeing it flow through to the numbers yet.

 

The FHA has been trying to figure out a way to bring more lenders back into the program after many exited in the aftermath of the housing crisis. The Obama administration aggressively fined lenders for minor errors which pushed banks largely out of FHA lending. The Trump Administration is changing enforcement policies and is working to bring more clarity to to the program. A number of trade groups however have argued that the reforms don’t go far enough, and don’t provide enough certainty to encourage banks to re-enter the business.

 

30 day delinquencies fell 0.7% YOY to 3.6%, according to CoreLogic. The only places that saw increases were due to hurricane-related issues. Flooding in the Midwest could boost these numbers in the future however. The foreclosure rate fell from 0.5% to 0.4% as well.

Morning Report: New Home Sales disappoint

Vital Statistics:

 

Last Change
S&P futures 2955 4.5
Oil (WTI) 57.89 -0.03
10 year government bond yield 2.01%
30 year fixed rate mortgage 4.03%

 

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

 

Fed Chairman Jerome Powell is scheduled to speak at 1:00 pm. These are generally not market-moving events, however given the expectations gulf between the Fed and the markets, it is possible that something could spook investors.

 

Home prices rose 3.5% in April, according to the Case-Shiller Home Price Index. This is down from a 3.7% annual gain in the prior month. “Home price gains continued in a trend of broad-based moderation,” says Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices. “Year-over-year price gains
remain positive in most cities, though at diminishing rates of change. Seattle is a notable exception, where the YOY change has decreased from 13.1% in April 2018 to 0.0% in April 2019.

Mortgage rates are driving the deceleration in home price appreciation. That said, these are April numbers, which correspond with a 10 year bond yield about 50 basis points higher than today. It will be interesting to see if home price appreciation starts picking up.

 

Compare the Case-Shiller numbers to the FHFA House Price Index. In April, home prices rose 5.2% according to that index. The FHFA index ignores cash transactions and jumbos, so it is more weighted towards starter homes. It shows that there is still plenty of strength at the lower price points. Note as well the deceleration in the previously hot markets, especially Left Coast.

 

FHFA regional

 

New Home sales fell to an annualized pace of 680,000 in May, according to Census. This is down 7.8% MOM and 3.7% YOY. New Home Sales is a notoriously volatile number, with a wide margin for error, but it looks like builders are still sitting on their hands.

 

Bernie Sanders promises to forgive student loan debt paid for with a transaction tax. He expects the tax to raise $2.4 trillion. No details on the tax are available, but it will make mortgages more expensive as it would probably increase hedging costs. Also, it will never raise that kind of money since the immediate effect will be to kill high frequency trading, which is more than half the volume on the US stock exchanges. Many of these high frequency traders are liquidity providers who have automated the role of the specialist and market maker of yesteryear. The net effect will be widen bid-ask spreads and increase the market reaction to orders.

Morning Report: Weak data sends yields lower

Vital Statistics:

 

Last Change
S&P futures 2832.5 -6
Oil (WTI) 61.11 -0.59
10 year government bond yield 2.36%
30 year fixed rate mortgage 4.17%

 

Stocks are lower after weak economic data out of China. Bonds and MBS are up.

 

Some weak economic data this morning, which is pushing bond yields lower. The 10 year is trading at 2.63%, which is the lowest level since December 2017.

 

Mortgage Applications fell 0.6% last week as rates were more or less steady. Purchases fell 0.6%, while refis fell 0.5%. The typical 30 year fixed rate mortgage came in at 4.24%. “Purchase applications declined slightly last week but still remained almost 7 percent higher than a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Despite the third straight decline in mortgage rates, refinance applications decreased for the fifth time in six weeks, albeit by less than 1 percent.”

 

Separately, 30-day and 60-day delinquencies did tick up in the first quarter, however foreclosure inventory is at the lowest level since 1995.

 

Retail sales disappointed, with the headline number coming in -0.2%. Ex autos, they rose 0.1% and the control group was flat. YOY, they were up 3.1%

 

Industrial Production and manufacturing production both fell 0.5% in April, while capacity utilization fell to 77.9%.

 

After the weak data, the December Fed Funds futures are forecasting a 76% chance of a rate cut this year, and the June futures are factoring in a 1 in 5 chance of a 25 basis point cut. 1 month ago, the markets were handicapping a 40% chance of a cut this year, so there has been a big change in sentiment. While that seems aggressive given the language out of the Fed, it is hard to ignore what the markets are saying.

 

fed funds futures