Morning Report: Retail Sales strong

Vital Statistics:

 

Last Change
S&P futures 3105 8.25
Oil (WTI) 56.59 -0.14
10 year government bond yield 1.84%
30 year fixed rate mortgage 4.00%

 

Stocks are up this morning on optimism for a trade deal. Bonds and MBS are flat.

 

Retail Sales increased 0.3% MOM and 3.1% YOY. in October. The control group, which strips out the volatile auto, gas, and building materials sectors) increased 0.3%. Apparel and big-ticket items like furniture and appliances were weak, however. Regardless, it is looking like this year’s holiday shopping season will be strong.

 

Dallas Fed President Robert Kaplan doesn’t see a recession in 2020 as strong consumer spending and a robust labor market provide a strong foundation to keep the economy going. Numerous Fed speakers – Powell, Williams, Kaplan, Clarida – have all expressed comfort with the current level of interest rates. As a general rule, the central bank is loath to do anything during an election year for fear of appearing political and wanting to help one candidate or another. This is especially true when one of the candidates is trying to influence Fed policy publicly. This means we probably won’t see any further action out of the FOMC until 2021. Long-term rates (and mortgage rates) will therefore be more influenced by overseas rates and any sort of inflation surprises in the US. FWIW, I think the Fed is exactly where they want to be, with a positively sloped yield curve, decent growth and tame inflation.

 

Mortgage delinquencies fell to a 25 year low, according to the MBA. The rate for 1 – 4 unit DQs fell to 3.97% in the third quarter, which was down 59 bps from the second quarter and 50 bps from a year ago. “Mortgage delinquencies decreased in the third quarter across all loan types – conventional, VA, and in particular, FHA,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “The FHA delinquency rate dropped 100 basis points, as weather-related disruptions from the spring waned. The labor market remains healthy and economic growth has been stronger than anticipated. These two factors have contributed to the lowest level of overall delinquencies in almost 25 years.”

 

 

 

 

Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

 

Last Change
S&P futures 3088 -6.25
Oil (WTI) 57.59 0.44
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

 

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

 

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

 

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

 

FNMA chart

Morning Report: Jerome Powell to testify at 11:00 am today

Vital Statistics:

 

Last Change
S&P futures 3082 -9.25
Oil (WTI) 56.59 -0.24
10 year government bond yield 1.88%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning after overseas weakness due to the protests in Hong Kong. Bonds and MBS are up.

 

Jerome Powell will testify in front of Congress at 11:00 am today. It probably won’t be market-moving, but you never know. With the Fed in a holding pattern and the 2020 election coming up, the central bank will probably fade into the background.

 

Inflation at the consumer level increased 0.4% MOM in October and 1.8% YOY, driven by increasing housing and medical costs. The core number (ex-food and energy) was up 0.2% MOM and 2.3% YOY. We will get wholesale inflation numbers tomorrow.

 

Mortgage applications increased 10% last week as purchases rose 5% and refis increased 13%. “Mortgage applications increased to their highest level in over a month, as both purchase and refinance activity rose despite another climb in mortgage rates,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Positive data on consumer sentiment and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate to 4.03 percent. Refinance applications jumped 13 percent to the highest level in five weeks, as conventional, FHA and VA refinances all posted weekly gains. With rates still in the 4 percent range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

 

Bidding wars for real estate have hit a 10 year low, driven by flattening prices on the Left Coast. Nationally, the percentage of houses with bidding wars fell to 10.1%, a drop from 38% a year ago. This was almost certainly driven by home price appreciation failing to keep up with wage inflation, along with rising interest rates. San Francisco was probably affected by a disappointing IPO market. The supply / demand imbalance is still there however, so if interest rates remain at these levels, we could see bidding wars return when the spring selling season hits.

 

Google is getting into the banking business by offering checking accounts. As if Google doesn’t already know enough about us…

Morning Report: Trump talks trade at noon today

Vital Statistics:

 

Last Change
S&P futures 3087 -0.25
Oil (WTI) 57.09 -0.04
10 year government bond yield 1.94%
30 year fixed rate mortgage 4.02%

 

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

 

Donald Trump will speak at the Economics Club today around noon and markets will be listening for any sort of information on trade with China. This will probably be something that affects stocks more than bonds, but just be aware.

 

Small business optimism remained strong in October, according to the NFIB Small Business Optimism Index. Job creation, inventory investment and capital spending drove the increase. While we are seeing increases in labor compensation, prices paid are still flattish so we aren’t seeing inflation. “Labor shortages are impacting investment adversely – a new truck, or tractor, or crane is of no value if operators cannot be hired to operate them,” said NFIB Chief Economist William Dunkelberg. “The economy will likely remain steady at its current level of activity for the next 12 months as Congress will be focused on other matters, and an election cycle will limit action. Any significant change in trade issues will impact financial markets more than the real economy during this period. Adjustments to a new set of ‘prices,’ such as tariffs, will take time.”

 

Homebuilder D.R. Horton reported better than expected earnings this morning, sending the shares up 3% pre-open. Forward guidance for 2020 was also above expectations. The homebuilders have been on a tear this year, as interest rates have fallen. The homebuilder ETF (XHB) is up something like 50% YTD.

 

Mortgage credit availability increased in October, according to the MBA. “Mortgage credit availability increased in October, driven mainly by an increase in conventional loan programs, including more for borrowers with lower credit scores, as well as for investors and second home loans,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Credit supply for government mortgages continued to lag, declining for the sixth straight month. Meanwhile, the jumbo credit index increased 3 percent to another survey-high, as that segment of the market stays resilient despite signs of a slowing economy.”

 

CBS is out with a piece claiming that climate change will eliminate the 30 year fixed rate mortgage. The fear is that flood insurance could get too expensive and wildfires will make certain areas uninsurable / uninhabitable. How that translates into the end of the 30 year fixed rate mortgage is anyone’s guess, since the piece fails to show its work. FWIW, this article is just clickbait. The 30 year mortgage is going nowhere, and climate change isn’t going to destroy the financial system. The Union of Concerned Scientists frets about the “short sighted” market, but a typical mortgage lasts about 7-10 years, so something that might happen in 30-50 years is going to be off the radar, by definition.

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: Yesterday’s bond market sell-off

Vital Statistics:

 

Last Change
S&P futures 3082 -2.25
Oil (WTI) 56.27 -0.94
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

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

 

There was no catalyst I can see for why bond yields rose so dramatically yesterday. There wasn’t any economic data (initial jobless claims aren’t market movers) and there was no Fed testimony or anything. The 10 year bond yield rose from 1.81% to 1.97% intraday in what was a complete wash-out for the bond market. If anything, it felt like a major asset allocation trade was happening, where investors sell bonds and buy stocks. Many funds will use a strategy comparing the earnings yield or dividend yield on the S&P 500 versus the yield on government bonds. That said, this was a global phenomenon, as the German Bund and UK bond yields have also been heading lower. It is almost as if we went from fretting about a recession to fretting about inflation. Maybe the China deal caused it, and maybe it was exacerbated by convexity selling, but there really isn’t a good explanation out there of what was going on. You can see the dramatic move intraday yesterday. Note that the move started late in Asian trading before the European markets opened and carried on throughout the day.

 

11-7 bond chart

 

JP Morgan just did a credit risk transfer deal on portfolio of jumbo mortgages. In these sorts of deals, investors get a above market interest rate in exchange for bearing first losses on the portfolio. It works essentially like an insurance policy. This means two things: first, banks may be the first step in taking some of the burden off Fannie and Fred, and second we may see better jumbo pricing as a result.

 

Zillow says that its house-flipping business will generate as much as $1.25 billion in revenues. The company reported a loss last night that beat expectations, and the stock was sent up 9% after hours.

Morning Report: Risk on feel as the US and China strike a trade deal

Vital Statistics:

 

Last Change
S&P futures 3088 12.25
Oil (WTI) 57.27 0.94
10 year government bond yield 1.88%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning after the US and China agree to remove tariffs. China also made some high profile arrests to stem the tide of fentanyl coming into the US. The fentanyl issue was a key part of the US’s issues with China. Bonds and MBS are down on the “risk-on” trade.

 

After a dismal start to the year, the luxury end of the market (homes over $1.5 million) rebounded in the third quarter as rates fell. Prices rose 0.3% on average, but they had been falling since 2018. Manhattan was hit particularly hard on the new mansion tax. Florida was the beneficiary as prices rose over 100% in West Palm and some of the other nearby areas. Previously hot markets like San Diego also remained in the losing category. “Because recession fears peaked over the summer, I expected luxury home prices and sales to dip. But it appears that nerves alone weren’t enough to scare off wealthy homebuyers,” said Redfin chief economist Daryl Fairweather. “The U.S. economy grew faster than expected in the third quarter, partly as a result of healthy consumer spending. Those results, along with flat luxury home prices and rising sales, go to show that Americans are basing their spending habits on their own personal financial situation rather than concerns about global economic tensions. For many, that means strong incomes and good employment prospects.”

 

Fannie Mae is out with their housing forecasts for 2020. They anticipate the 30 year fixed rate mortgage will continue to fall, hitting 3.5% by the end of 2020, and home prices will rise about 4%. Interestingly, they do not anticipate any sort of pickup in housing starts – in fact they anticipate they will be flat with 2019. Despite the drop in rates, they anticipate origination volumes will fall to 1.86 trillion from 2.04 trillion as the refinance share of the market falls from 37% to 31%.

 

New York Fed President John Williams said that the FOMC sees no reason to cut interest rates further: “The three rate cuts we did were very effective at managing the risks” slowing global growth and trade uncertainty present to the U.S. economy, New York Fed President John Williams said at a Wall Street Journal event in New York. Chicago Fed President Charles Evans echoed the same sentiment.

 

Finally, we know that gathering strength in the US economy is helping push rates higher. It is important to note that rising rates is not simply a US phenomenon. US Treasuries don’t trade in a vacuum – they are always going to be subject to moves in overseas rates. For now, the key overseas interest rate to watch is the yield on the German Bund, which has increased by 45 basis points since early September. The Bund still has a negative yield, but it is now -27 basis points after bottoming at -72 basis points 2 months ago.

 

bund

%d bloggers like this: