Morning Report: Markets now predicting a 50% chance of 4 hikes this year

Vital Statistics:

Last Change
S&P futures 2724 -6.25
Eurostoxx index 393.28 1.09
Oil (WTI) 71.74 0.78
10 Year Government Bond Yield 3.04%
30 Year fixed rate mortgage 4.57%

Stocks are lower this morning on earnings and retail sales. Bonds and MBS are down on hawkish comments out of Europe.

Retail Sales rose 0.3% in April, according to Census. The control group rose 0.4%. Both numbers were in line with consensus estimates. There is a push-pull effect in the numbers as tax cuts will encourage spending, while higher gas prices will depress it.

Speaking of retail sales, comps at the Home Despot came in lower than expected, although some of that was weather-related. The company noted that traffic in May has been strong. As home affordability gets worse, home improvement projects generally increase as people renovate instead of moving to a nicer home. The builders (and mortgage originators) have noted that the Spring Selling Season has been a dud this year.

The Empire State Manufacturing Survey came in at 20, higher than expected, while homebuilder sentiment improved to 70. Strong pricing is being offset by weak traffic, particularly among the first time homebuyer. Separately, inventories were flat in March, which will probably cause some houses to take down their estimate for first quarter GDP growth.

What would happen if you listed your home at $1? Would the subsequent bidding war get you to the correct price? It certainly would create a huge buzz around your home and that will probably help. That said, there are problems associated with that tactic. First, you will get all sorts of low-ballers who will only clog up the process. More importantly, the sites like Realtor.com, Zillow etc generally have searches with price ranges. In other words, if you expect your house to be worth $500,000 and you list it for $1, it won’t show up if the buyer sets a $400,000 – $600,000 search range.

HUD is seeking comment on the Supreme Court’s Disparate Impact ruling and whether HUD’s current policy is consistent with the ruling. Disparate Impact means that you can get slammed for discrimination even if you didn’t intend to discriminate, but your numbers are not consistent with the population.

The Fed Funds futures now are handicapping a 50% chance of 4 rate hikes this year.

Fed Funds probability CME

A combination of higher budget deficits and low unemployment has Goldman predicting a 3.6% 10 year yield by the end of 2019. This is the first time since WWII when we have had a combination of increasing deficits and falling unemployment. “”The sizeable demand boost provided by the recent deficit-increasing tax cuts and spending cap increases at a time when the economy is already somewhat beyond full employment is a striking departure from historical norms that is likely to contribute to further overheating this year and next and tighter monetary policy in response.” Of course the labor force participation rate is quite low, as is the employment-population ratio, two numbers that are not captured by the unemployment rate. Until you start to see wage inflation, the Fed will be content to go slow.

Morning Report: Zillow gets slammed after changing its business model

Vital Statistics:

Last Change
S&P futures 2672 14
Eurostoxx index 378.3 -0.91
Oil (WTI) 66.56 -0.84
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.44%

Stocks are higher despite coordinated strike in Syria over the weekend. Bonds and MBS are down.

Watch the oil markets. North Sea Brent crude is rising on tensions in the Middle East, but West Texas Intermediate (which is the main oil used in the US) is shrugging off the news. Bullish bets on Brent oil have hit record highs.

The 2 year hit 2.4%, the highest level since 2008. The flattening of the US yield curve continues.

There isn’t much in the way of market-moving data this week, although we will get a lot of Fed-speak. Probably the biggest one will be housing starts tomorrow.

Retail sales rose 0.6% in March, which was better than the Street 0.4% consensus. The control group increased by 0.4%, a touch below the 0.5% consensus estimate. Gasoline sales were up on higher prices. Revisions were lower, however.

Business activity in New York State decelerated last month according to the Empire State Manufacturing Survey. New Orders and Production slowed down somewhat, but employment remained firm and the workweek increased. Future sentiment declined to the lowest level in 2 years.

The NAHB / Wells Fargo Housing Market Index slipped last month, but builder sentiment remains strong.

Wells Fargo faces $1 billion in fines due to force-placed auto insurance and improper charges for lock extensions. The big banks have all reported strong earnings, and the tax law changes are certainly helping.

Zillow shares fell 9% on news they plan to get into the house flipping business. “We’re entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers,” Zillow CEO Spencer Rascoff said on CNBC’s “Squawk Alley.” “After testing for a year in a marketplace model, we’re ready to be an investor in our own marketplace.” Investors are understandably skeptical, as the multiple for a fintech company is much higher than one for a property company, and it puts Zillow in direct competition with the realtors who utilize the site. Investors are not wild about changing focus from an ad model with high margins and low balance sheet usage to one that is low margin and uses a lot of balance sheet. Another issue: will people trust Z-scores if the company has a financial interest in the value of real estate in a particular area?

Want to know how acute the housing shortage is in California? From 2000 – 2015, the state built 3.4 million too few homes to keep up with job, population, and income growth. That is over 2 year’s worth of current housing starts for the whole US population. Pretty astounding when you consider those years start before the housing bubble really got going. CA has always had NIMBY issues, and now there is a push to allow dense multi-family building near public transit, even if local zoning codes prohibit it. Separately, it looks like Dodd-Frank regulations did have an adverse affect on smaller banks. I wonder how much that plays into the housing shortage.

Speaking of CA housing, here is what you can get for $800,000 in San Jose. Handyman special.