Morning Report: Wages and confidence rising 10/31/17

Vital Statistics:

Last Change
S&P Futures 2573.0 4.8
Eurostoxx Index 394.7 0.8
Oil (WTI) 54.1 -0.1
US dollar index 87.6 0.1
10 Year Govt Bond Yield 2.37%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 3.99

Stocks are up this morning as we start the November FOMC meeting. Bonds and MBS are down small.

No changes to FOMC policy are expected at this week’s meeting, however the Fed Funds market is predicting a 96% chance they raise rates in December.

Aside from the FOMC meeting, Congress is expected to unveil tax reform tomorrow, and Trump is slated to nominate the new Federal Reserve Chairman on Thursday. And on Friday, we get the all-important jobs report, so a lot going on this week.

Despite what the business press is saying, the markets are treating the Mueller / Manafort thing as a sideshow. As of now, nothing going on there is going to affect Washington enough to rile up markets. Earnings are the focus at the moment for stocks, and economic data (along with foreign central bank policy) is driving the bond market.

The Washington DC goat rodeo isn’t affecting consumer confidence either, which just hit a 17 year high. Most notably, the job market got positive marks for strength for the first time since 2001.

Are we starting to see stirrings of wage inflation? Perhaps. The Employment Cost Index rose 0.7% in the third quarter, faster than the 0.5% rate we saw in the second. Wages and salaries (which account for 70% of the ECI) rose 0.7%, while benefits rose 0.8%. On a year-over-year basis, they rose 2.5%. So far, bonds aren’t reacting to the number. An increase in wage inflation will force the Fed to move more aggressively. For those who worry about income inequality, the biggest growth was in blue collar jobs, where wages rose 0.8% and benefits rose 1.7%.

Home prices rose 0.5% in August and are up 5.9% for the year, according to Case-Shiller. Seattle has been on a tear, rising over 13% for the past year, followed by Las Vegas and San Diego. A strong economy along with low inventory and rates have been a support for home prices. The interest rate environment will be changing, however inventory doesn’t appear to be a temporary phenomenon, and the US economy seems to be accelerating, not declining. While the usual affordability questions are mentioned, the median mortgage payment for the median house as a percent of income is still very low by historical standards.

Note that the lack of building is simply creating pent-up demand for housing which will get satisfied eventually. That will push up growth for the next few years when it finally happens.

Manufacturing continues to hum along, with the Chicago PMI coming in well above expectations.

Bitcoin futures are coming… The contracts will be cash settled, not by delivery of the underlying.

Morning Report: Personal spending rises on strong vehicle sales 10/30/17

Vital Statistics:

Last Change
S&P Futures 2572.3 -6.3
Eurostoxx Index 393.6 0.2
Oil (WTI) 54.1 0.2
US dollar index 87.7 0.4
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 4

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

This week will have a lot of market-moving potential, between the FOMC meeting and the jobs report. We will also get productivity and employment costs, two numbers the Fed monitors closely.

Personal incomes rose 0.4%, while spending rose 1%. Wages and salaries increased 0.4%. Inflation remains under the Fed’s target, but it did pick up in September to 1.6% on higher food and energy prices. The core rate increased 1.3%. A bump up in motor vehicle spending was behind the strong spending number, however that could be replacement activity for areas affected by the hurricanes in September. Regardless, it was the strongest jump in vehicle sales since “Cash for Clunkers” in early 2009.

Donald Trump is leaning towards Jerome Powell to run the Fed after Janet Yellen’s term expires in February. Jerome Powell is the economists’ choice and will probably continue on the same path that has already been established: gradual rate increases and a gradual tapering of QE. “People are anxiously awaiting my decision as to who the next head of the Fed will be,” Trump said an Instagram video Friday. Historically, nobody pays too much attention to who runs the Fed aside from bankers and financial economists. Reagan jammed Paul Volcker’s re-appointment in an unrelated radio address from Camp David. He even joked before the big announcement that “I have a story that will crack this town wide open”

Home price appreciation continues, as the Black Knight Home Price Index rose .2% in August and is up 6.2% YOY. New York (!) was one of the fast growing states, rising 1.6%. Georgia, Maryland and Virginia saw slight declines. Seattle continues to astound, with prices up 12% YTD and up 14% YOY.

We should get more details on tax reform this week, and we have been getting a lot of mixed signals and trial balloons. After talk about limiting 401k contributions, now the talk is of increasing the deduction to $20k. On the state and local tax deduction, it looks like property taxes may still be deductible, but state taxes will not be. Stay tuned.

There is a big merger in the homebuilder space this morning: Lennar and CalAtlantic will merge which will create the US’s biggest homebuilder by revenue.

Manafort Indictment Here (and not related to DJT on its face)

Manafort and his partner, Richard Gates, were apparently big time crooks.

The indictment is replete with factual allegations which include defrauding banks, major tax evasion, FBar violations, money laundering [HUGE money laundering], and more. A fascinating read. I have not tried to read between the lines to find the connection to the campaign, if any. I invite you to do so.

Morning Report: Q3 GDP comes in strong 10/27/17

Vital Statistics:

Last Change
S&P Futures 2567.3 5.8
Eurostoxx Index 392.7 1.4
Oil (WTI) 52.4 -0.3
US dollar index 88.2 0.4
10 Year Govt Bond Yield 2.46%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 4

Stocks are higher this morning on strong earnings and a good GDP report. Bonds and MBS are down.

Very slow news day.

Third quarter GDP came in at 3%, much higher than the 2.5% the Street was looking for. This is the strongest back-to-back performance since 2014. It looks like the hurricanes had a negligible effect on growth, and the Commerce Department cannot measure the effect at any rate. Consumption increased 2.4%. Housing remained a weak spot, falling 6%, as builders struggle with labor shortages and a lack of buildable land. This is the worst stretch for housing since 2010. The core inflation rate rose at 1.3%, an increase from the 0.9% from Q2, but well below the Fed’s 2% target.

Paul Ryan is confident he can sweeten tax reform to bring some of the last GOP holdouts in line. The biggest hurdle will be Republican house members in blue states, who will be affected by any changes to the state and local tax deduction. Tax reform is scheduled to be unveiled November 1.

The luxury end of the market is beginning to bifurcate, as the super high end ($5 MM plus) languishes while homes in the $1.5 million range are moving quickly. Demand for high-end homes is being driven by foreign demand as well as the stock market rally. That said, in the Northeast, particularly the pricey NYC suburbs, sellers are pulling their listings given weak demand.

Janet Yellen is reportedly out of the running now for Fed Chairman. It will come down to John Taylor (the conservative choice) versus Jerome Powell (the Professional Economist’s choice). Her term ends February 1.

Ben Carson says that HUD will work with DOJ to pull back on fines for mortgage lending errors. Aggressive prosecution during the Obama Administration pushed J.P. Morgan to get out of the FHA business altogether. “Innocent errors should not create chaos and fear and make people less likely to get involved in the first place,” he said.

Morning Report: Pending Home Sales flat 10/26/17

Vital Statistics:

Last Change
S&P Futures 2561.8 3.3
Eurostoxx Index 389.7 2.5
Oil (WTI) 52.2 0.0
US dollar index 87.4 0.2
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 3.93

Stocks are up this morning after yesterday’s sell-off. Bonds and MBS are up on the ECB’s decision to start tapering QE.

Initial Jobless Claims rose 10k to hit 233k last week. We are still at historically low levels.

Pending home sales were flat in September, according to NAR. The hurricanes in Florida and Texas did depress the number somewhat, but the same old story of low inventory is the real culprit. The Pending Home Sale Index is the lowest since early 2015.

The House will vote on a budget for next year, which will set the stage for tax reform scheduled to be announced on November 1. As expected, the state and local tax deduction is the biggest bone of contention, with Northeast Republicans dead set against ending it. They are hoping to use the budget vote as leverage to keep the deduction in the tax plan, but they may end up having to wait to see what comes out of the Committee.

Rising rents are becoming a burden for one in five renters, as the number of people looking to rent exceeds the supply of rentals out there. For people earning under 30,000, 28% were unable to make a full rental payment in the last 3 months. Affordable housing advocates will undoubtedly seize upon this number in order to push HUD to do more.

The MBA is forecasting about a 5% drop in origination volume from 2017 to 2018 based on higher interest rates depressing refinancing opportunities. Refis will probably be driven by two effects going forward: home price appreciation and the flattening yield curve. As home prices appreciate, those that have FHA loans with MI may now have enough equity in their homes to refinance into a conventional loan with no MI, thus saving a lot of money. Second, 30 year fixed rate mortgages will become more attractive relative to ARMS as the yield curve flattens. These two effects will create refinance opportunities in a rising interest rate environment. That said, purchase activity will be driving things going forward.

The financial services industry had a small victory yesterday as the Senate overturned a rule from the CFPB allowing class-action suits for banks. The argument in favor of class action lawsuits say it is necessary to prevent bad behavior from the banks, while those against class action suits say that wronged customers make more in arbitration, since they save on legal fees. While the big banks are probably able to absorb the massive penalties from a class-action suit, the smaller ones probably cannot. This is a highly divisive issue, pitting two giant funding sources for both parties: the trial lawyer bar for Democrats, and the financial services industry for Republicans. The vote was 50-50 and Mike Pence had to cast the tiebreaking vote.

The BLS released its projection of the job market for the next 10 years. Suffice it to say, the trends we have been seeing over the past decades (decreased emphasis on manufacturing, increased emphasis on services, higher education requirements) will continue. Heath care employment is the growth area, while many manufacturing jobs are becoming obsolete.

dorme con i pesci, Harvey Weinstein

[Any excuse to link this song]

Morning Report: New Home Sales increase smartly 10/25/17

Vital Statistics:

Last Change
S&P Futures 2564.0 -3.3
Eurostoxx Index 389.9 0.6
Oil (WTI) 52.3 -0.2
US dollar index 87.3 0.0
10 Year Govt Bond Yield 2.46%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 3.93

Stocks are lower on no real news. Bonds and MBS are down.

Stocks are in the middle of earnings season. Companies that beat their numbers are seeing a slight bump, while companies that miss are being taken to the woodshed. AMD is down 8% this morning, and Chipotle is down 14%. This has been a historical warning sign for stocks, along with declining breadth.

New Home Sales shocked to the upside, rising 19% MOM and 17% YOY to an annualized pace of 667,000. FWIW, the margin of error on these estimates out of Census is gargantuan, and building permits / housing starts have not really confirmed this data. Regardless, it is great news, if it holds up. The biggest growth was in the South, although we saw increases everywhere.

Mortgage Applications fell 4.6% last week as purchases fell 6% and refis fell 3%. Rising rates affected the numbers as well as the comparison to the holiday-shortened week previously. Overall, mortgage rates increased about 4 basis points to 4.18%. The purchase index is up 10% YOY.

Durable goods orders came in better than expected, increasing 2.2%, a touch better than expectations. Ex-transportation, they rose 0.7%. Core capital goods expenditures rose 1.3%.

Home prices rose 0.7% MOM and 6.6% YOY, according to the FHFA House Price Index.

The 10 year bond yield is trading above 2.4% – a key technical level over the past year. If it holds, it means the bond bears might have their day at last. Much of this will depend on whether we get tax reform, and what shape it takes. Republicans are supposedly releasing their tax bill on November 1.

Machinations in DC are not the only thing influencing bonds, though. Overseas strength is also playing a role here: the UK economy grew faster than expected, and German business confidence is at a high. Despite the differences between economies, sovereign debt does trade as an asset class and therefore strength and weakness overseas will flow through to our bond market.

One thing to keep in mind is that mortgage rates generally lag Treasuries. In other words, if the 10 year bond yield spikes, mortgage rates will generally take a few days to adjust. So, if you are floating and wondering whether to lock, mortgage rates will probably move up over the course of the next few days if this level holds in the 10 year. It pays to check the movements in the 10 year and the mortgage market to get an idea of where mortgage rates are headed over a day or two.

Arizona Senator Jeff Flake announced yesterday that he will not run for re-election. Republicans have a huge advantage in the Senate midterms as they are defending only a few seats while Democrats are defending a lot. There was always a rift in the Republican Party between Trump and Establishment Republicans, who were never comfortable with each other. Establishment Republicans like Corker and Flake were going to be primaried, and it appears that their constituents are further to the right than they are. Despite all the media spin, Jeff Flake was going to have a tough re-election anyway. This is nothing new: In 2010, Republicans hoped to re-take the Senate, however they ran some Tea Party types who ended up losing. The entire US electorate is becoming more polarized, which makes legislation all that more difficult, and shows the importance of controlling the regulatory agencies.

Fannie Mae is collaborating with fintech companies to launch Single Source Validation, part of its Day 1 Certainty program. Single Source Validation will augment a borrower’s credit report with data from other sources. The program is being piloted right now with Quicken. They are also working with companies to improve security and to allow lenders to get info directly from the borrower’s bank without having to scan and email statements.

What jobs are most likely to not be replaced by robots and AI? Many in healthcare.

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