Morning Report: Mortgage rates lag Treasury yields

Vital Statistics:

 

Last Change
S&P futures 3217 -17.25
Oil (WTI) 63.87 0.74
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.89%

 

Stocks are lower as the markets continue to digest the Iranian strike last week. Bonds and MBS are up.

 

Friday’s rally in the bond markets left some LOs disappointed, as mortgage backed securities barely moved. This is typical behavior to big shocks in the bond markets – mortgage backed securities (and therefore mortgage rates) invariably lag. We are seeing the same effect again this morning with bond yields falling and MBS barely moving.

 

Senior central bankers saw a possibility that interest rates could go even lower in the future, driven by changing demographics (in other words, an aging population). This is precisely the issue that has been dogging Japan for the past 30 years.

 

There was nothing earth-shattering in the FOMC minutes which were released on Friday. The Fed did nothing at the December meeting, so no new revelations were really expected. Officials “discussed how maintaining the current stance of policy for a time could be helpful for cushioning the economy from the global developments that have been weighing on economic activity.” Note that the latest NY Fed forecast has Q4 GDP coming in at 1.1%, which seems far below the other forecasts out there. This was largely due to the weak December ISM survey which showed manufacturing continue to decline. New orders, production, and employment all were contracting. The report was actually the weakest since 2007. It is probably too early to tell if this is a temporary blip or the new Phase 1 deal with China will make a difference. Punch line: No rate hikes for a while

 

 

Morning Report: Trade deal with China

Vital Statistics:

 

Last Change
S&P futures 3190 13.25
Oil (WTI) 60.14 0.14
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.97%

 

Stocks are up this morning on trade with China. Bonds and MBS are down.

 

The last full workweek of 2019 won’t have much in the way of market-moving data. We will get some housing data (housing starts and existing home sales) and the third revision to Q3 GDP, but that is about it.

 

China agreed to purchase more agricultural products from the US as part of an agreement that canceled additional tariffs that were supposed to take effect last night. This deal should end the tit-for-tat tariffs that have been weighing down financial markets for the past several months.

 

More evidence of weakness in the Eurozone as the German ISM numbers were downright awful, and were echoed by weakness in the UK and France. This will be the push-pull driving interest rates in the near future: an accelerating US economy will push rates higher, while stagnation in Europe will pull them lower.

 

Retail Sales rose 0.2% MOM in November, which was lower than expectations. Ex autos and gas, sales were flat.

 

The Fed is injecting liquidity into the system to prevent a repeat of September’s cash crunch, which sent overnight repo rates up to 10% at one point.

 

 

 

Morning Report: Blowout jobs report

Vital Statistics:

 

Last Change
S&P futures 3148 22.25
Oil (WTI) 57.99 -0.44
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.94%

 

Stocks are higher after a blowout jobs report. Bonds and MBS are down.

 

Jobs report data dump:

  • Nonfarm payrolls up 266,000
  • Unemployment rate 3.5%
  • average hourly earnings up 0.2% MOM / 3.1% YOY
  • Employment-population ratio 61%
  • Labor force participation rate 63.2%

Huge surprise in payrolls given the ADP report only had 67,000. The unemployment rate of 3.5% is the lowest in 50 years. About the only blemish was the small downtick in the labor force participation rate. Note that manufacturing payrolls increased smartly.

 

What does this mean for the bond markets? Nothing since the Fed is on hold, probably through the 2020 election. It also might mean that the rate cuts of earlier this year are beginning to take effect and the drag from the 2018 tightening cycle is behind us.

 

Note that the makeup of the 2020 FOMC voting members will be more dovish than 2019. Eric Rosengren and Esther George – two hawks that dissented against rate cuts – rotate off the board next year. In their place, we will be getting Neel Kahskari and Robert Kaplan. Neel Kashkari is considered one of the most dovish members of the FOMC. Will it make much of a difference? Probably not, although the bar for increasing interest rates will be adjusted upward accordingly.

 

Interesting chart: the median age of US homebuyers since 1980. It has increased from 32 to 47 over that period. Half of that increase came from the Great Recession. Much of this is explained by the muted presence of the first time homebuyer, who has been about 30% of sales as opposed to their historical 40%.

 

median age of us homebuyer

Morning Report: Construction spending disappoints

Vital Statistics:

 

Last Change
S&P futures 3092 -21.25
Oil (WTI) 55.39 -0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.98%

 

Stocks are lower this morning on negative trade talk out of the White House. Bonds and MBS are up, following German Bund yields lower.

 

Home Prices rose 3.5% YOY in October, according to CoreLogic. “Nationally, over the past year, home prices are up 3.5% with the rate of growth accelerating from September into October,” said Frank Martell, president and CEO of CoreLogic. “We expect home prices to rise at least another 5% over the next 12 months. Interestingly, this persistent increase in home prices isn’t deterring older millennials. In fact, 25% of those surveyed anticipate purchasing a home over the next six to eight months.” CoreLogic conducted a survey with RTi Research regarding to consumer-housing sentiment and found that millennials are largely unconcerned about qualifying for a mortgage.

 

Construction spending disappointed in October, falling 0.8% on a MOM basis and rising 1.1% on an annual basis. Residential Construction fell 0.9% on a monthly basis and was up only 0.5% year-over-year. Despite the lousy number, the National Association of Realtors is optimistic that homebuilding will step up in 2020. “This housing cycle is definitely unique in the sense that it’s been a decade and we’re not back to normal in terms of home building,” said Lawrence Yun, NAR’s chief economist. “Many small-time builders are still out of the game. It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity….All the factors that contribute to higher home sales like the job situation are terrific, and of course mortgage rates are critical to buying a home and those are favorable,” Yun said.” Note that construction loans increased 0.8% in the third quarter.

 

The Fed is considering raising its inflation target above its 2% target, according to the Financial Times. The idea (called the “make-up” strategy) would be to temporarily raise the target level if inflation comes in below 2% (the current target). The Fed fears deflation more than inflation, and has been utterly vexed by their inability to push inflation up to their target rate. This would be a signal to the markets that the Fed intends to keep rates lower for longer, although many members are worried about communication issues with the markets.

 

HUD has put out a request for information regarding affordable housing development, specifically which laws, regulations or administrative practices are inhibiting building. “Owning a home is an essential component of the American Dream. It is imperative that we remove regulatory barriers that prevent that dream from becoming a reality,” said HUD Secretary Ben Carson, who is also Chairman of the White House Council on Eliminating Regulatory Barriers to Affordable Housing. “Through this request, communities across the country will have the opportunity to identify roadblocks to affordable housing and work with State, Federal, and local leaders to remove them.”

 

 

Morning Report: Online Black Friday sales surprisingly strong

Vital Statistics:

 

Last Change
S&P futures 3145 2.25
Oil (WTI) 56.39 1.24
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.88%

 

Stocks are flattish this morning on no real news. Bonds and MBS are down.

 

A surprise election result in Germany over the weekend has pushed the German Bund yield up 8 basis points to negative 28 bps. Since global sovereign debt generally trades together, this will put some upward pressure on rates in the US.

 

We have quite a bit of economic data this week, with the ISM reports, construction spending and the jobs report. Given that the Fed is on hold, it probably won’t be that dramatic to the markets.

 

The FHFA lifted its conforming limits last week to $510,400 for a single family home. For high cost areas, the limit for a single family residence is now $765,500.

 

Pending Home Sales fell 1.7% in October, according to NAR. Lawrence Yun, NAR’s chief economist, noted the decline in inventory and a small rise in mortgage rates in October from September to, in part, explain this month’s signings drop. “While contract signings have decreased, the overall economic landscape remains favorable,” Yun said. “Mortgage rates continue to be low at below 4% – which will attract buyers – employment levels are strong and many recession claims have dissipated.”

 

Retailers are optimistic about the holiday shopping season after record online spending on Black Friday. The National Retail Federation estimates nearly 69 million Americans will scour the web for deals on everything from iPads and homeware to kids’ toys, and Adobe’s estimate of $9.4 billion would be a 19% increase on the same day a year ago.

 

Personal incomes were flat in October, while personal spending rose 0.3%. The PCE inflation indices were up 1.3%. The personal income number was a surprise, as wages and salaries have been growing, but falling interest income and rental income pulled down the number.

Morning Report: Home price appreciation accelerates in September

Vital Statistics:

 

Last Change
S&P futures 3134 1.25
Oil (WTI) 58.39 0.24
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.93%

 

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

 

Jerome Powell spoke last night and said that the Fed cut rates this year as the economy wasn’t as strong as anticipated. He reiterated that the Fed won’t be making any moves unless things change “materially” in the US economy: “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to our symmetric 2 percent objective. If the outlook changes materially, policy will change as well. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

 

Home prices rose 1.1% in the third quarter, according to the FHFA House Price Index. They are up 4.9% on a YOY basis. They added an interactive map, so you can drill down to MSA-level home price appreciation. Separately, the Case-Shiller home price index rose 3.2% on an annual basis in September.

 

Mortgage delinquency rates fell in October, according to Black Knight’s First Look. The Deep South still has the highest delinquency rates, while the West Coast and Mountain states have the lowest levels. Prepay speeds are up 134% on a YOY basis.

 

Redfin makes its predictions for the 2020 housing market.

  • a return of bidding wars
  • 30 year fixed rate mortgage stabilizes at 3.8%
  • home prices will rise in the Southeast as people get priced out of the cities

Morning Report: FOMC minutes confirm no move in December

Vital Statistics:

 

Last Change
S&P futures 3110 1.25
Oil (WTI) 57.39 0.74
10 year government bond yield 1.76%
30 year fixed rate mortgage 3.93%

 

Stocks are flat this morning after China invited the US for trade talks in Beijing despite the resolution backing Hong Kong. Bonds and MBS are down small.

 

In economic data, initial jobless claims were flat at 227,000 last week and the Philadelphia Fed manufacturing survey improved.

 

The CFPB is conducting an assessment of the TRID rule. There doesn’t appear to be any specific issues the CFPB is looking to address, but it is part of the Trump Administration’s push to eliminate unnecessary burdens on business.

 

Independent mortgage banks had their best quarter in 7 years as pretax production profit rose to 74 basis points from 64 in the prior quarter. “A surge in refinance activity and a healthy purchase market led to robust mortgage volume in the third quarter, pushing up production profits to a high not seen since the fourth quarter of 2012 ($2,256 per loan),” said Marina Walsh, MBA Vice President of Industry Analysis. “The increase in profits was primarily driven by declining production expenses and higher loan balances, which mitigated the effects of lower basis-point revenue.” Interestingly, production revenue and secondary marketing income fell. The purchase share of the market fell from 74% to 60%.

 

Bold prediction: Within the next two years, we will see the majority of loans go through the entire process without any human involvement. It will be a much more mechanized process.

 

The minutes from the Fed confirmed the market’s view that the central bank will be out of the picture for a while. They removed the “act as appropriate” language in order to signal that stance. From the minutes:

 

In describing the monetary policy outlook, they also agreed to remove the “act as appropriate” language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee’s expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook.

 

Translation: We aren’t moving in December. Note the Fed Funds futures agree with that assessment, although they are predicting more cuts in 2020. FWIW, the Fed generally tires to avoid modifying policy in the months leading up to an election for fear of appearing political. That said, the March futures are pricing in about a 25% chance of a cut.

 

fed funds futures

 

Is the REO-to-Rental trade finally done? Blackstone has finally exited its entire position in Invitation Homes, which it created in the aftermath of the financial crisis. Invitation was one of the first to buy up distressed properties and rehab them to rent. Turns out Blackstone tripled its money on the trade.