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: 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: New Home inventory is declining.

Vital Statistics:

 

Last Change
S&P futures 3005 0.25
Oil (WTI) 56.21 0.04
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.03%

 

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

 

New Home Sales came in at 701,000, a hair above consensus and in line with the previous few months. The number was up 15.5% on an annual basis. There was 321,000 homes for sale at the end of September, which represents a 5.5 month supply. The inventory of homes for sale has been consistently declining, however the median sales price was down 8% MOM and 9% YOY. This appears to have been driven by a fall in the number of homes sold at the higher price points, but could be a sign of builders discounting as well. Note that the homebuilders have been on a tear this year, with the homebuilder ETF right at all time highs.

 

XHB

 

The new mortgage backed securities containing high LTV VA cashouts made their trading debut yesterday, and as expected they traded well back of normal Ginnies. Remember that GNMA made 90 LTV cashout VAs ineligible for regular delivery into Ginnie I and Ginnie II mortgage backed securities in response to investor complaints about fast prepayment speeds. These loans had to go into custom pools and the bid for these securities in the market reflected the higher risk. They traded anywhere from 2 to 4 points below commensurate Ginnie MBS. For example, the 4% coupon traded 120 ticks (or 3.75 points) behind. In other words, the 4% custom pools traded at 100, versus the 4% December Ginnies which traded at 103.75, which means that giving a borrower par pricing is going to be almost impossible.

 

Amazon.com disappointed the street with its holiday forecast. They anticipate $80 – $86 billion in revenue, which lagged the street estimate of $87 billion plus. This may just be Amazon-specific, but the economy has been held up by consumer spending and wage growth. If the spending aspect is declining, it means a weak Q4. The stock is down 7% pre-open.

 

 

Morning Report: Whistleblower complaint released

Vital Statistics:

 

Last Change
S&P futures 2988 1.25
Oil (WTI) 56.05 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.93%

 

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

 

The House Intelligence Committee released the whistleblower complaint. This is a developing story and I have not read the complaint carefully, but it seems to be all hearsay. In other words, the whistleblower is recounting things he heard from other people and did not hear directly. My guess is that the issue is going have a similar fate to the Russian Collusion story – it will fall down along partisan lines again, and the markets will largely ignore the story. At the margin, it should mean lower stock prices and lower interest rates, but it probably won’t be meaningful.

 

New Home Sales came in at 713,000, which was up 7.1% MOM and 18% YOY. The standard deviations on new home sales is always huge, so take it with a grain of salt. The South and the West experienced the biggest gains. Note that housing has been a drag on the economy for six consecutive quarters, and it appears that it will finally contribute to GDP.

 

Speaking of GDP, the third revision to second quarter GDP is out. Growth came in at 2%, and the inflation numbers were tweaked upward. The core PCE index rose 1.9%, up from the 1.7% previous estimate and the headline number was bumped up 0.2% to 2.4%. The uptick inflation doesn’t appear to have had any impact to the Fed Funds futures.

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: New home sales fall.

Vital Statistics:

 

Last Change
S&P futures 2907 -14.5
Oil (WTI) 53.79 -1.64
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.86%

 

Stocks are lower as we await Jerome Powell’s speech in Jackson Hole. Bonds and MBS are flat.

 

Jerome Powell speaks at 10:00 am, while the markets are looking to see if the Fed trims its sails to what the Fed Funds futures are saying. Some at the Fed have been throwing cold water on the idea that we have entered an easing cycle, but in an era of negative sovereign yields worldwide the die is probably cast for lower rates regardless of what the Fed does.

 

New Home Sales fell to 635,000 from an upwardly-revised 728,000 in June. They are up over 4% from a year ago.

 

new home sales

 

The Conference Board Index of Leading Economic Indicators improved last month. “The US LEI increased in July, following back-to-back modest declines. Housing permits, unemployment insurance claims, stock prices and the Leading Credit Index were the major drivers of the improvement,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, the manufacturing sector continues exhibiting signs of weakness and the yield spread was negative for a second consecutive month. While the LEI suggests the US economy will continue to expand in the second half of 2019, it is likely to do so at a moderate pace.”

 

Note that China imposed additional tariffs on $75 billion of US goods overnight. The tariffs would apply to soybeans, small aircraft, and crude oil.

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.