Morning Report: Retail sales strong

Vital Statistics:

 

Last Change
S&P futures 2432.5 -38.5
Eurostoxx index 331.96 -3.2
Oil (WTI) 45.4 -0.32
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are up.

 

Was there any particular catalyst for yesterday’s move in stocks? Not really. Markets don’t go up in a straight line, and they don’t go down in a straight line either. Bonds sold off heavily, but you didn’t see as much action in TBAs. They were down, but not like the 10 year. TBAs have been lagging the move in the bond markets anyway.

 

Home prices rose 5.5% in October, matching the move we saw in September. The usual suspects saw the biggest increases: Las Vegas, and San Francisco. Phoenix is now showing strength as well. Affordability remains the most pressing issue: “Home prices in most parts of the U.S. rose in October from September and from a year earlier,” says
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The combination of higher mortgage rates and higher home prices rising faster than incomes and wages means fewer people can afford to buy a house. Fixed rate 30-year mortgages are currently 4.75%, up from 4% one year earlier. Home prices are up 54%, or 40% excluding inflation, since they bottomed in 2012. Reduced affordability is slowing sales of both new and existing single family homes. Sales peaked in November 2017 and have drifted down since then.”

 

Retail sales were the strongest in 13 years for last week, with same store sales up 7.8%. Since consumption is 70% of the economy, I wouldn’t be surprised to see some strategists bumping up their Q4 GDP estimates.

 

Note that due to the government shutdown, the Commerce Department won’t be releasing economic numbers. We won’t be able to get tax transcripts out of the IRS, but FHFA should be running normally, so you should be able to get case numbers for FHA loans, and Ginnie Mae securitization markets should function normally.

 

The Trump Administration expressed confidence in Jerome Powell, and said that he is safe. There is a precedent for the President showing Fed Chairmen the door – Jimmy Carter dumped G. William Miller after a year on the job, though he kicked him upstairs to Treasury and nominated Paul Volcker.

Morning Report: Fed week

Vital Statistics:

 

Last Change
S&P futures 2603.75 -1
Eurostoxx index 345.16 -2.05
Oil (WTI) 51.84 0.64
10 year government bond yield 2.88%
30 year fixed rate mortgage 4.72%

 

Stocks are flattish as we head into Fed week. Bonds and MBS are flat.

 

The Fed will meet on Tuesday and Wednesday, with the official announcement scheduled for 2:00 pm Wednesday. The markets are anticipating a 25 basis point hike, but the action will be in the forecasts and in the dot plot.

 

We actually do have some interesting data this week with the NAHB Housing market Index later today, housing starts, and existing home sales. We will also get the third revision to Q3 GDP on Friday.

 

Retail Sales rose 0.2% in November, in line with forecasts, and well below October’s torrid levels. The control group, which strips out volatile food, energy, and building product prices, rose 0.9%, which was well above forecasts. FWIW, the retail sector looks to have a good holiday shopping season.

 

The NY Fed’s is predicting 2.4% GDP growth for the 4th quarter. While this is a drop from the third quarter’s 3.5% pace, it is still a decent number. Much will hinge on December retail sales. Note that strategists are beginning to worry about 2019, and PIMCO is saying that recession signs are “flashing yellow.” FWIW, while there is a bit of a slowdown in housing, wages are increasing and that should pump consumption. IMO, the business press is talking their ideological book a lot here – they don’t like Trump, so they are generally pessimistic, and that is feeding into their outlook.

 

Congress and the President need to get a stopgap budget passed this week, and there is all sorts of partisan posturing over border security. Are we going to get a shutdown? Perhaps. Trump wants something like $5 billion for the border wall, and the Democrats are only willing to spend $1.6 billion in “border security.” For the record, $5 billion is chump change in Washington – so this isn’t about money. The D base loathes Trump and the Wall has become a sort of MacGuffin for partisans on both sides. For originators, if the government shuts down, most government lending will be just fine, but tax transcripts will probably be unavailable.

Morning Report: Mortgage delinquenices fall

Vital Statistics:

Last Change
S&P futures 2824 -16.5
Eurostoxx index 380.78 -4.14
Oil (WTI) 66.49 -0.55
10 Year Government Bond Yield 2.86%
30 Year fixed rate mortgage 4.58%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

Kind of a mixed bag with economic data this morning.

Retail Sales came in well above expectations in July, with the headline number rising 0.5%. The control group, which excludes autos, gas, and building materials was up the same amount. While July’s numbers were strong, June’s estimate was revised downward, so expect to see a downward revision on Q2 GDP from the first estimate of 4.1%.

Mortgage Applications fell 2% last week as purchases fell 3% and refis were flat. The typical mortgage rate fell 3 basis points, which helped push refis up to 37.6% of all mortgages.

Productivity increased 2.9% as output increased 4.8% and hours worked increased 1.9%. Compensation costs increased 2%, so with the productivity gain, unit labor costs fell 0.9%. This will certainly make the Fed happy, as higher productivity leads to higher non-inflationary wage growth and higher standards of living. This is the preliminary estimate for the second quarter and will be subject to revision.

Industrial production only managed a 0.1% gain in July, and manufacturing production was up 0.3%. June numbers were revised sharply higher, so that offset the weakness. Capacity Utilization was flat at 78.1%.

Homebuilder confidence slipped last month to the lowest in a year as labor shortages and higher material prices dampen sentiment. “The good news is that builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations,” said NAHB Chairman Randy Noel, a homebuilder from LaPlace, La. “However, they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.”

Despite the strong economic news, we are starting to see a bit of a risk-off trade in the structured credit market. Bank of America has gone negative on structured products and agency MBS. This means that mortgage spreads are widening which will either lead to higher mortgage rates or lower profit margins (probably a bit of both). That said, B of A is calling for a flattening of the yield curve, which will offset the wider spreads at least somewhat.

The strong economy is lowering delinquencies, according to CoreLogic. The 30 day + DQ rate fell from 4.5% to 4.2% in May. Seriously delinquent rates are lower overall, except for the hurricane hit states of Florida and Texas. The California wildfires have the potential to goose up DQ rates in the coming months.

Corelogic DQ

Morning Report: Empire State Outlook dims

Vital Statistics:

Last Change
S&P futures 2802 -1
Eurostoxx index 383.92 -1.14
Oil (WTI) 69.81 -1.2
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.50%

Markets are flattish as earnings season gets into full swing. Bonds and MBS are flat.

Oil is dropping after US Treasury Secretary Steve Mnuchin said the US could waive some Iranian oil sanctions.

Bank of America reported decent earnings this morning. This is a big week for earnings, with about 200 major companies reporting. The early part of reporting season is generally dominated by the banks.

Jerome Powell will testify in front of Congress on Tuesday and Wednesday. Generally these events don’t yield much in the way of useful info – they are mainly for the benefit of politicians who want to draw attention to some issue that may or may not relate to monetary policy. Expect a lot of questions regarding how a trade war and income inequality will affect growth from Democrats, and expect a lot of questions regarding regulation from Republicans. The prepared remarks are here.

Retail Sales rose 0.5% in June, which was in line with expectations. Ex-autos and gas they rose 0.3% while the control group was flat. May numbers were revised upward. The control group was below expectations, but with the May revisions offset that. Discretionary items (clothing, sporting goods, department stores) declined, which building materials and furnishings rose.

Business Inventories rose 0.4% in May. The inventory-to-sales ratio is down to 1.34 from 1.39 last year.

Business activity in New York State exhibited continued strength in June, according to the New York Fed’s Empire State Manufacturing Survey. While the current conditions index exhibited strength, the outlook has slipped. The survey doesn’t say whether this is being driven by a potential trade war or something else. Planned capital expenditures (a proxy for expansion plans) decreased.

Empire State

The Atlanta Fed took up their Q2 GDP estimate to 3.9%. Morgan Stanley warns that we are seeing a bit of a sugar rush in the economy courtesy of trade tensions. As companies worry about a potential trade war, they stockpile raw materials and other inputs. This gooses the inventory numbers which makes the current quarter look particularly strong. The problem is that you get a double whammy if the trade war materializes. Activity will drop, and that inventory will be liquidated, both of which will reduce GDP growth. Even if a trade war doesn’t happen, uncertainty could cause companies to pull in their horns. FWIW, I am skeptical of the “uncertainty” argument. Regulatory “uncertainty” out of DC generally causes companies to be cautious. The rest of the clatter is just noise. Certainly investors (judging by the S&P 500) aren’t worried.

One stat to watch: Corporate bond spreads. We are seeing a slight widening in some of the junkier investment grade debt. Baa spreads increased to 200 basis points from 165 in February. While spreads are still tight relative to historic levels, this is something to watch. Years of financial repression have given issuers the upper hand with regards to covenants and some of those chickens will come home to roost in the next recession.

Morning Report: Fed hikes rates as expected

Vital Statistics:

Last Change
S&P futures 2786 8
Eurostoxx index 389.9 1.7
Oil (WTI) 67.03 0.39
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.61%

Stocks are higher after the FOMC raised interest rates a quarter of a point. Bonds and MBS are up.

As expected, the Fed raised the Fed funds rate by 25 basis points to a range of 1.75% – 2%. The economy is clicking on all cylinders, with unemployment down, consumer spending up and business investment increasing. They took up their estimates for 2018 GDP growth to 2.8% from 2.7%, took up core PCE inflation to 2% from 1.9% and took down their unemployment rate forecast to 3.6% from 3.8%. The dot plot was increased slightly and the Fed funds futures shifted to a 60/40 probability of 2 more hikes this year.

Bonds initially sold off on the announcement, touching 3% at one point, but have since rallied back. The ECB also announced that it will stop buying bonds in September, depending on the data. Bunds are rallying on that statement and the 10 year could be rallying on the relative value trade. The Fed noted that longer-term inflation expectations have not changed, and they didn’t change their outlook for inflation from 2019 onward. One other thing of note: the Fed is going to start having press conferences after every meeting in order to disabuse people of the idea that the Fed can only hike in December, March, June and September.

Jun-Mar dot plot comparison

In other economic news, initial jobless claims fell to 218,000 last week, while retail came in way higher than expected, rising 0.8% for the headline number and 0.5% for the control group, which excludes gasoline, autos and building materials. Restaurants and apparel were the big gainers, increasing 1.3% and 1.5%. Consumer discretionary spending is back, as the FOMC statement indicated.  Finally, import and export prices were higher than expected, with increasing energy prices pushing up imports and higher ag prices increasing exports.

Outgoing Republican Congressman Darrell Issa is supposedly one of the finalists who will be appointed as the head of the CFPB. The Administration has said that it will abide by its June 22 deadline to appoint a permanent head of the CFPB. Acting Chairman Mick Mulvaney is not involved in the selection process. Mark McWatters, a former banking regulator is another top choice, and probably makes more sense than Issa.

The May real estate market was the strongest on record, according to Redfin. Prices rose 6.3% and the average home was on market 34 days. In Denver, the time on market was under a week. Over a quarter of the homes sold in May went over their listing price. San Jose saw a price increase of 27% YOY to a median home price of over $1.2 million.

Note that rents rose by 3.6%, which is tilting the rent-vs-buy decision a little. Interestingly, Sam Zell, a famous real estate financier, thinks the multifam market is topping and should become less attractive going forward.

Affordable home advocates are touting a statistic that shows a minimum wage worker cannot afford a 2 bedroom apartment anywhere in the country. That is an awfully high bar – heck entry level investment bankers can’t afford a 2 bedroom apartment either. That is why young adults usually have roommates. I get there is a shortage of affordable housing, but that is a completely disingenuous statistic. Sam Zell is probably correct, however there could in fact be a glut of luxury apartments and a shortage of affordable ones.

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.