spending – The Daily Tearsheet

Morning Report: The Fed maintains rates at zero

Vital Statistics:

	Last	Change
S&P futures	2908	-28.1
Oil (WTI)	16.81	3.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

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

The Fed maintained interest rates at 0% and pledged to continue to do what it can to support functioning markets, including buying agency mortgage backed securities and treasuries. They didn’t specify amounts, just that they wanted to keep orderly markets. As Dave Stevens noted, it is clear the Fed wants to see lower mortgage rates as a way to stimulate the economy. The problem with that of course is that the CARES Act is doing the exact opposite – it is restricting credit more than what happened in 2008. The MBA’s Mortgage Credit Availability index took a nosedive in March, and I think it will be much, much worse in April.

Flagstar just announced a 5 point LLPA for cash-out refis. It is clear that these are the next program to go bye-bye, joining jumbos, non-QM, and sub 700 FHA. The law of unintended consequences rears its ugly head once again. I wonder if the government could tweak the CARES Act to make cash-outs ineligible for forbearance. That way the program could still exist and provide relief to people hit by COVID. Presumably if you do a cash-out, you have money to live on, so….

Initial Jobless Claims came in at 3.8 million, pushing the COVID job losses over 30 million.

Personal incomes fell 2% in March and personal spending fell 7%. The personal consumption expenditure index remained under control. I suspect that increasing food prices are being offset by lower energy prices.

Mortgage REITs AGNC and Annaly reported yesterday, and needless to say both were hit hard by COVID. Both have completed their deleveraging, and AGNC noted that its book value per share increased by 8% in April, after declining about 22% in Q1. For the agency REITs, it looks like the crisis is over.

Another round of stimulus may be a bridge too far. Nancy Pelosi wants to force states to vote by mail, and that is a non-starter with Republicans. Mitch McConnell wants lawsuit protection for businesses that remain open during the COVID crisis, and that is a non-starter to Democrats. As Travelers noted on its conference call, trial lawyers smell an opportunity here and are ginning up lawsuits as we speak.

Morning Report: Personal incomes rise

Vital Statistics:

	Last	Change
S&P futures	2943	16.5
Oil (WTI)	56.33	-0.34
10 year government bond yield		1.51%
30 year fixed rate mortgage		3.77%

Stocks are up ahead of the 3 day weekend. Bonds and MBS are flat.

No word yet from SIFMA regarding an early close, so assume the bond market is open all day.

Personal incomes rose 0.1% in July, which was a deceleration from the previous few months. June was revised upward from 0.4% to 0.5%. Disposable personal income rose 0.3%, and spending rose 0.6%, which came in above expectations. The core PCE index (the Fed’s preferred measure of inflation) rose 0.2% MOM and 1.6% YOY, which is below their 2% target. The headline PCE rose 0.2% / 1.4%.

Consumer sentiment fell in August according to the University of Michigan Consumer Sentiment Survey.

Pending Home Sales fell 2.5% in July, according to NAR. “Super-low mortgage rates have not yet consistently pulled buyers back into the market,” said Lawrence Yun, NAR chief economist. “Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Regionally, they declined 1.6% in the Northeast and fell 3.4% on the Left Coast.

As bond yields have fallen, mortgage rates have not kept up as investors have been sweating prepayment speeds in the MBS market. The biggest issues have been rate volatility, which negatively impacts mortgage backed security pricing, along with fears we are entering a new refinance cycle. Also, many mortgage bankers set their staffing levels for the year back in late 2018, when it looked like we were in a tightening cycle and volumes would be much lower. “Do not expect much, if any of a drop in mortgage rates in the coming weeks,” said Mitch Ohlbaum, president, Macoy Capital Partners in Los Angeles. “It’s not because they shouldn’t, it’s because the lenders are already beyond capacity with refinances and frankly do not want any more volume.” There is probably some truth to that, but that is fixable. The volatility in the Treasury market and convexity risk is killing MBS investors. The classic example of a MBS investor is Annaly, a mortgage REIT, which has gotten clocked this year and cut its dividend.

PIMCO is advising the Fed to “aggressively cut rates” given the recent economic data suggests a slowdown. Their point is that recent data is “understating” the extent of the slowdown. They raise the point that labor market momentum has decelerated more than forecasters were predicting. Of course, at 3.7% unemployment, we are pretty much at or close to full employment. Wages are generally a lagging indicator, but this morning’s personal income disappointment was partially driven by a decrease in asset income, which probably just reflects falling interest rates.

Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P futures	3004	-17.5
Oil (WTI)	57.21	0.34
10 year government bond yield		2.06%
30 year fixed rate mortgage		4.07%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

The FOMC begins its 2 day meeting today. The decision is expected to come out at 2:00 pm tomorrow afternoon.

Personal consumption and personal incomes came in as expected, with consumption rising 0.3% and personal incomes rising 0.4%. The core PCE inflation index (which is the Fed’s preferred measure of inflation) rose 0.2% month-over-month and 1.6% YOY, which was slightly lower than expectations. Finally, disposable personal income rose 0.4%, while the savings rate was 8.1%. Overall, this report won’t move the needle with respect to the Fed’s thinking about the economy. The economy is moving along, and inflation remains below the Fed’s target rate.

You can see how much the savings rate has increased since the bubble days. Remember when the business press was wringing its hands over the drop in the savings rate?

Home Prices rose 0.2% MOM and 3.4% YOY according to the Case-Shiller home price index. YOY home price appreciation has been decelerating for some time as higher interest rates and higher home prices begin to bite. Erstwhile market darling Seattle reported a YOY decline of 1.2%, while the gainers were Las Vegas, Phoenix and Tampa.

Bloomberg has an interesting chart of the global real estate and looks at home prices versus rents and incomes. It shows Canada and New Zealand as the most vulnerable markets. It doesn’t show China, which has a huge bubble and probably doesn’t fit on the diagram. Scandinavia also has a bubble issue as well. For those that admire the Scandinavian economies, remember that whenever a country appears to have have “cracked the code” economically (like the US in the 20s, Japan in the 80s, etc) it usually has a real estate bubble lurking in the background.

Note that despite all the talk about real estate bubbles in the US, we are actually on the cheap side, as is Japan.

The US vacancy rate was 6.8% for rental properties and 1.5% for homeowner housing in the second quarter of 2019. The homeownership vacancy rate of 1.5% is the lowest since 1981, and illustrates the supply issue that is only going to get worse as homebuilding fails to keep up with household formation.