Morning Report: A look ahead to the regulatory environment for the financial industry

Vital Statistics:

 

Last Change
S&P futures 2996 7.25
Oil (WTI) 53.47 -0.44
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning on expectations of an orderly Brexit and optimism on trade. Bonds and MBS are down.

 

Not a lot of market-moving data this week, although we will get a lot of housing indicators, with existing home sales, new home sales, and house prices. Note the FOMC meets next week, and it is looking like a lock that they will cut rates. The Fed funds futures are now handicapping a 91% chance of a cut.

 

The Index of Leading Economic Indicators declined in September, as trade concerns and manufacturing offset strength in other areas. “The US LEI declined in September because of weaknesses in the manufacturing sector and the interest rate spread which were only partially offset by rising stock prices and a positive contribution from the Leading Credit Index,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The LEI reflects uncertainty in the outlook and falling business expectations, brought on by the downturn in the industrial sector and trade disputes. Looking ahead, the LEI is consistent with an economy that is still growing, albeit more slowly, through the end of the year and into 2020.”

 

It looks like the structure of the CFPB is going to be decided by the Supreme Court. The issue with the CFPB goes back to its structure, which makes it nearly impossible to remove a director. The idea was to make the CFPB less influenced by politics, however it also makes it completely immune to oversight and accountability. The case will move forward without the support of the government, as CFPB Director Kathy Kraninger doesn’t support the structure of the agency either. If the CFPB’s structure is declared unconstitutional, it wouldn’t mean the end of the agency, it would mean that the single, unfireable director would be replaced by a bipartisan board, which was actually the initial proposal when the CFPB was created during the drafting of Dodd-Frank.

 

Elizabeth Warren threatened to ban fracking if she wins the presidency. “On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking—everywhere.” Needless to say, this would be incredibly disruptive to the US economy as natural gas prices would increase to $9.00 to $15 per mBTU, compared to current prices of around $2.00 – $2.50. Since natural gas is the main way we generate electricity, consumers and industry would feel it immediately, and this would cause uncertainty on steroids, and make Trump’s trade concerns look like a minor annoyance. She would be able to implement many changes via executive order, and she intends to use it. Given that Joe Biden is having trouble fundraising, it is looking more like a lock that she gets the nomination. Even some left-leaning pundits are worried.

 

What would that mean for the mortgage banking business? Regulations will undoubtedly be tightened, but they probably will affect the bigger banks more than the independent operators. She says she wants to re-implement Glass-Steagall, which is really a solution in search of a problem. However, if she succeeds in raising taxes and energy prices as much as she intends, it would almost certainly be the final nail in the longest running expansion ever, and that means the Fed Funds rate is probably heading back to zero. A return to ZIRP almost certainly means the 10 year will breach the 1.47% low set in 2012, which will would create another refi wave similar to the years immediately after the financial crisis. So, perversely a Warren presidency could be great for the mortgage banking business, as the industry feasts on easy refinances.

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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: Bonds rally on Jerome Powell’s prepared remarks

Vital Statistics:

 

Last Change
S&P futures 2975 -6.5
Oil (WTI) 59.12 1.26
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.06%

 

Stocks are lower as we await Jerome Powell’s Humphrey-Hawkins testimony. Bonds and MBS are flat.

 

Bonds were initially lower this morning, with the 10-year touching 2.10%. They rallied back after Powell’s prepared remarks were released. Here is the paragraph that probably caused it:

 

In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.

 

Powell is scheduled to testify at 10:00 am. Note that we will also get the minutes from the June meeting at 2:00 pm today. Given how jittery the bond market is, we could see some volatility.

 

The Fed Funds futures turned slightly more dovish with the July futures predicting roughly a 80% of a 25 basis point cut and a 20% chance of a 50 basis point cut. The most likely outcome by the end of the year is a 75 basis point cut. December Fed Funds futures probabilities:

 

fed funds futures

 

Mortgage applications fell 2.4% last week as purchases rose 2.3% and refis fell 6.5%. The average contract rate on a 30 year fixed rate mortgage fell 3 basis points to 4.04%. There is some seasonal noise from the July 4 holiday baked into the numbers. Separately, the MBA’s Mortgage Credit Availability Index rose by 0.2% in June. Conventional credit expanded, while government credit contracted slightly. Jumbo credit is the easiest it has ever been, at least since the series started in 2011.

 

The House passed legislation yesterday which clarifies which VA loans are eligible to be included in Ginnie Mae Securitizations. They also passed a bill which would lower the mortgage insurance premiums for first-time homebuyers who complete a housing counseling course.

 

 

 

 

Morning Report: Consumer inflation remains muted

Vital Statistics:

 

Last Change
S&P futures 2787 2
Eurostoxx index 372.85 -1
Oil (WTI) 57.27 0.47
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.32%

 

Stocks are higher with a general “risk-on” feel to the tape. Bonds and MBS are down.

 

Lael Brainard speaks this morning and then the Fed enters its quiet period ahead of next week’s FOMC meeting.

 

Consumer inflation rose 0.4% MOM in February. Ex-food and energy, the index rose 0.4% and is up 2.1% YOY. Inflation remains under control, which should give the Fed the leeway to hold the line on rates next week. Falling energy prices at the end of 2018 helped keep the index under control, and we are seeing evidence that medical costs are finally stabilizing. Medical goods fell 1% MOM and services were flat. Stabilizing medical costs should translate into stable health insurance costs, which leaves more room for wage increases.

 

medical cpi

 

Retail Sales in January rose 0.2%, a touch higher than expectations. Those looking for a big rebound after December’s anemic numbers were disappointed. Given the strong consumption numbers in Q4 GDP, the holiday shopping season remains a bit of a mystery. The government shutdown is a possible explanation, and while it certainly hit the shops at Tyson’s Corner, the rest of the nation was unaffected. Note that the Fed’s consumer credit report showed that revolving credit increased only 1.1% in December and 2.9% in January, both well below run rates we have seen in the months leading up to it

 

Nancy Pelosi doesn’t support impeaching Trump. This is probably a tacit admission that the Mueller report isn’t going to contain anything we don’t already know.

 

Small business optimism rebounded in February. Earnings trends fell as many contractors were temporarily sidelined due to the government shutdown. Employment trends also slipped, probably for the same reason. Plans for expansion rose, however they are still below levels we saw in 2017-2018, which were extremely strong. Actual hires were the highest in years, and small business still finds a shortage of qualified workers. I am curious as to whether the “shortage of qualified workers” means (a) nobody around knows how to do the job, (b) nobody around knows how to do the job and can pass a drug test, or (c) nobody around that knows how to do the job will accept what I am willing to pay.