Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 3139 3.25
Oil (WTI) 58.99 -0.24
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.98%

 

Stocks are flattish as we await the FOMC decision. Bonds and MBS are flat as well.

 

Mortgage applications increased 3.8% from a week earlier, according to the MBA. The purchase index dropped 0.4%, while the refi index rose 9%. Interest rates rose one basis point.

 

The FOMC decision is set for 2:00 pm EST. Given that the Fed is on the sidelines for a while, there shouldn’t be anything market moving in it.

 

Consumer prices rose 0.3% in November, according to the BLS. Higher shelter and energy prices drove the increase. The index was up 2.1% on an annualized basis. Ex-food and energy, the index was up 0.2%. These numbers were a hair higher than street expectations.

 

The first time homebuyer is returning, according to the Genworth First Time Buyer report.  The rebound in the third quarter was driven primarily by falling interest rates and increasing home affordability. Supply constraints, particularly at the affordable price points have been the issue. “The first-time homebuyer market rebounded this quarter and although the rebound was modest compared with the number of first-time homebuyers a year ago, and a quarter behind the broad rebound, it was a strong rebound from the previous quarter allowing first-time homebuyers to make up some lost ground,” said Tian Liu, Genworth Mortgage Insurance Chief Economist.

 

The report noted that repeat buyers (read move-up buyers) have increased as well. The lack of move-up buyers has depressed housing mobility, which may have been driven by lack of home equity from purchases made during the bubble years. Given the change in the house price indices over the past 10 years, negative equity is less of an issue than it was a few years ago.

 

Interestingly,  the number of first-time homebuyers this quarter was comparable to the peak of the last housing boom in 2005 and 2006, and only modestly below the peak levels of 1999 and 2000. Still, the Millennial generation is bigger than Gen X by a large margin, so there should be more room to run here.

 

quarterly sales to first time homebuyers

Morning Report: ADP reports weak payroll growth.

Vital Statistics:

 

Last Change
S&P futures 3104 13.25
Oil (WTI) 57.39 1.54
10 year government bond yield 1.75%
30 year fixed rate mortgage 3.91%

 

Stocks are higher this morning on trade optimism. Bonds and MBS are flat.

 

Mortgage Applications fell 9.2% last week, which contains an adjustment for the Thanksgiving holiday. Purchases increase 1% while refis dropped 16%. Despite the 30-year fixed rate remaining unchanged at 3.97 percent, mortgage applications fell last week, driven down by a 16 percent drop in refinances. Purchase applications were up slightly but declined 24 percent from a year ago. This week’s year-over-year comparisons were distorted by Thanksgiving being a week later this year.”

 

The economy added 67,000 jobs in November, according to the ADP Employment report. The markets are looking for 180,000 new jobs in Friday’s employment situation report, so there is a big disconnect. “In November, the labor market showed signs of slowing,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The goods producers still struggled; whereas, the service providers remained in positive territory driven by healthcare and professional services. Job creation slowed across all company sizes; however, the pattern remained largely the same, as small companies continued to
face more pressure than their larger competitors.”

 

Realtor.com forecasts the 2020 market. Punchline: more of the same, where there is strong demand for housing and supply remains low primarily because builders are reluctant and boomers are content to age in place. “After the housing crash in 2008, which wiped out quite a few builders, those who remained have largely focused on higher-end developments with bigger profit margins. Although they’re finally showing signs of a shift toward building more entry-level homes, faced with overwhelming demand, it will take a few years for a significant number to come to market.”

Morning Report: Goldman sees a break in the clouds

Vital Statistics:

 

Last Change
S&P futures 3109 5.25
Oil (WTI) 58.39 0.24
10 year government bond yield 1.76%
30 year fixed rate mortgage 3.93%

 

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

 

Existing home sales rose 1.9% in October, better than expected. Lawrence Yun, NAR’s chief economist, said this sales increase is encouraging and he expects added growth in the coming months. “Historically-low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” said Yun. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.” The recent increase in building permits is seen as a positive sign for the sector. Inventory remains tight, however at only a 3.9 month supply. Note that D.R. Horton just reported a 9% increase in units sold, so we are seeing more supply come on to the market.

 

The index of leading economic indictators fell 0.1% in October, driven by weakness in manufacturing. This points to slowing growth ahead.

 

Despite the LEI numbers, Goldman is predicting a “break in the clouds” for the economy going forward. They anticipate a 30 basis point pickup in global growth next year to 3.4%, and for the US economy to grow at a 2.3% pace. “We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade escalation,” the forecast said. “Although much could still go wrong, the news on trade policy – both US-China and issues related to Brexit – has gotten better in recent weeks.” They anticipate the 10 year bond yield will rebound to 2.25%.

Morning Report: Big jump in building permits

Vital Statistics:

 

Last Change
S&P futures 3128 6.25
Oil (WTI) 56.29 -0.74
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

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

 

Housing starts came in a little light, at 1.31 million but the big news was the permits number, which rose to 1.46 million. This is up almost 15% compared to October 2018 and is the highest print since the bubble years. The action was in the Northeast and the South. Completions were up big as well, coming in at 1.26 million, which is up double digits compared to last month and a year ago.

 

building permits

 

The MBA reported that applications for new home purchases increased by 9% from September and by 31.5% from a year ago. “The new home sales market continues to be strong and was reinforced by October’s increase in applications for new home purchases,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “At an annual pace of 791,000 units, our estimate of new sales has reached its highest level since the inception of our survey in 2012. Home builder sentiment remains close to 18-month highs, and housing starts and permits have increased for four straight months. These are promising signs for the housing market, as the rise in new and existing housing supply has led to slower home-price growth and improving affordability.”

 

While a couple data points don’t necessarily indicate a trend yet, we might finally start seeing new home construction begin to meet the pent-up demand out there. And if this is finally happening, GDP forecasts are probably too low.

 

The Home Despot reported disappointing third quarter earnings and lowered FY 2019 guidance. Comp store sales were up, but tariffs are taking a bite out of earnings. The stock is down 5% pre-open.

 

Home prices rose 5.4% in October, according to Redfin. “Low mortgage rates are propping up homebuyer demand and juicing prices, said Redfin chief economist Daryl Fairweather. “However, home sales have been slow to grow since there are so few homes for sale and not many new listings hitting the market, especially affordable ones. The market is split: It’s a seller’s market for moderately priced homes, but a buyer’s market for pricier homes.” 

 

 

Morning Report: Jerome Powell testifies at 11:00 am.

Vital Statistics:

 

Last Change
S&P futures 3082 -9.25
Oil (WTI) 56.59 -0.24
10 year government bond yield 1.88%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning after overseas weakness due to the protests in Hong Kong. Bonds and MBS are up.

 

Jerome Powell will testify in front of Congress at 11:00 am today. It probably won’t be market-moving, but you never know. With the Fed in a holding pattern and the 2020 election coming up, the central bank will probably fade into the background.

 

Inflation at the consumer level increased 0.4% MOM in October and 1.8% YOY, driven by increasing housing and medical costs. The core number (ex-food and energy) was up 0.2% MOM and 2.3% YOY. We will get wholesale inflation numbers tomorrow.

 

Mortgage applications increased 10% last week as purchases rose 5% and refis increased 13%. “Mortgage applications increased to their highest level in over a month, as both purchase and refinance activity rose despite another climb in mortgage rates,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Positive data on consumer sentiment and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate to 4.03 percent. Refinance applications jumped 13 percent to the highest level in five weeks, as conventional, FHA and VA refinances all posted weekly gains. With rates still in the 4 percent range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

 

Bidding wars for real estate have hit a 10 year low, driven by flattening prices on the Left Coast. Nationally, the percentage of houses with bidding wars fell to 10.1%, a drop from 38% a year ago. This was almost certainly driven by home price appreciation failing to keep up with wage inflation, along with rising interest rates. San Francisco was probably affected by a disappointing IPO market. The supply / demand imbalance is still there however, so if interest rates remain at these levels, we could see bidding wars return when the spring selling season hits.

 

Google is getting into the banking business by offering checking accounts. As if Google doesn’t already know enough about us…

Morning Report: NAR predicts 750,000 new homes in 2020

Vital Statistics:

 

Last Change
S&P futures 3078 -12.25
Oil (WTI) 56.72 -0.54
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

Stocks are lower this morning on overseas weakness. The bond market is closed for Veteran’s Day.

 

The upcoming week doesn’t have much in the way of data, with the exception of CPI and PPI. Given that the Fed is in a holding patters, these numbers shouldn’t have much of an effect on the bond market unless they are way out of line with expectations. Donald Trump will speak to the NY Economic Club on Tuesday, and investors will be looking for information regarding progress on trade with China. Jerome Powell will speak to Congress on Wednesday and Thursday. And while it will probably not be market-moving, the House will televise impeachment hearings on Wednesday and Friday. So far the markets have ignored the whole kerfuffle.  Unless the Democrats drop something earth-shattering it probably will remain a sideshow. Given the silo-ization of information sources, it will probably turn out that only the converted will be watching the sermon. The consensus seems to be that the House will impeach and the Senate will not convict, with the voting falling strictly down party lines.

 

NAR is predicting that new home sales will jump 11% in 2020 to 750,000 units, the highest since 2007. Existing home sales should increase to 5.56 million units. Median existing home prices are expected to rise in the low 4% range, while new home prices should fall as builders focus on starter homes. While 750,000 may be a large number compared to recent history, it is only at historical averages, which doesn’t really take into account the increasing population.

 

new home sales

 

Consumer credit growth decelerated in September, according to the Fed. Credit card debt fell, although non-revolving debt credit flows dropped as well. The Fed’s Senior Loan Officer Opinion Survey noted that lenders may be tightening standards, which explains the drop in credit card debt.  Note the collateralized loan obligations have been hit recently, which is a potential warning on credit.

 

The early estimates for Q4 GDP are rolling in, and they range anywhere from 0.7% to 2.1%. The Fed estimates are on the low side (surprising since they just cut rates 3 times) and Goldman is out with the 2.1% call. Q4 GDP is going to be all about consumer spending, and so far the consumer confidence numbers are holding up well.

 

 

Morning Report: What caused yesterday’s carnage in the bond market?

Vital Statistics:

 

Last Change
S&P futures 3082 -2.25
Oil (WTI) 56.27 -0.94
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

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

 

There was no catalyst I can see for why bond yields rose so dramatically yesterday. There wasn’t any economic data (initial jobless claims aren’t market movers) and there was no Fed testimony or anything. The 10 year bond yield rose from 1.81% to 1.97% intraday in what was a complete wash-out for the bond market. If anything, it felt like a major asset allocation trade was happening, where investors sell bonds and buy stocks. Many funds will use a strategy comparing the earnings yield or dividend yield on the S&P 500 versus the yield on government bonds. That said, this was a global phenomenon, as the German Bund and UK bond yields have also been heading lower. It is almost as if we went from fretting about a recession to fretting about inflation. Maybe the China deal caused it, and maybe it was exacerbated by convexity selling, but there really isn’t a good explanation out there of what was going on. You can see the dramatic move intraday yesterday. Note that the move started late in Asian trading before the European markets opened and carried on throughout the day.

 

11-7 bond chart

 

JP Morgan just did a credit risk transfer deal on portfolio of jumbo mortgages. In these sorts of deals, investors get a above market interest rate in exchange for bearing first losses on the portfolio. It works essentially like an insurance policy. This means two things: first, banks may be the first step in taking some of the burden off Fannie and Fred, and second we may see better jumbo pricing as a result.

 

Zillow says that its house-flipping business will generate as much as $1.25 billion in revenues. The company reported a loss last night that beat expectations, and the stock was sent up 9% after hours.