Morning Report: Personal Income rises 11/30/17

Vital Statistics:

Last Change
S&P Futures 2633.3 8.3
Eurostoxx Index 389.2 1.2
Oil (WTI) 57.8 0.5
US dollar index 86.8 0.1
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.625
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning as tax reform looks more likely. Bonds and MBS are flat.

Initial Jobless Claims fell 2,000 last week to 238,000.

Personal incomes rose 0.4% in October and personal spending rose 0.3%. The savings rate ticked up to 3.2%.  Inflation remains in check, with the core rate rising 0.2% MOM and 1.4% YOY. It probably won’t make any difference to the Fed, which is pretty much set to hike interest rates next month for the second time this year.

The core PCE (the inflation measure preferred by the Fed) has been pretty much below the Fed’s target for almost a decade, except for a blip in 2012.

Tax reform has begun debate and some hope to see a vote in the Senate tonight. One of the biggest sticking points is the idea of a trigger, which would increase taxes if there is a revenue shortfall. We have had all sorts of spending triggers before (the Medicare “doc fix” is the classic one), but they invariably get ignored. Here is the issue with a revenue trigger. Suppose the US enters a recession, and revenues fall (as they almost always do). The bill would require the government to hike taxes in response, which is exactly the wrong thing to do as it adds another drag to the economy. In other words, it would never happen. Again, I am skeptical that such a large undertaking could be done on a tight timeline without much debate, but you never know.

Morning Report: New FHFA limits 11/29/17

Vital Statistics:

Last Change
S&P Futures 2627.8 3.0
Eurostoxx Index 386.4 1.5
Oil (WTI) 57.6 -0.5
US dollar index 86.5 0.0
10 Year Govt Bond Yield 2.37%
Current Coupon Fannie Mae TBA 102.938
Current Coupon Ginnie Mae TBA 103.75
30 Year Fixed Rate Mortgage 3.89

Stocks are higher this morning on overseas strength. Bonds and MBS are lower.

The second estimate for third quarter GDP was revised upward from 3.0% to 3.3%, in line with expectations. The price deflator was revised downward by 10 basis points to 2.1% and spending was revised downward as well.

Mortgage Applications fell 3% last week as purchases rose 2% and refis fell 8%. There was an adjustment for the Thanksgiving Day holiday. Rates were more or less unchanged.

Corporate Profits rose 10% in the third quarter, an improvement from the 7.4% increase in the second.

Bitcoin hit $10,000 last night, and is a fascinating Rorsach Test for one’s political and monetary views.

The FHFA increased their conforming loan limits to $453,100 yesterday and the high balance limit to $679,650.

Growth is accelerating not only in the US, but globally as well. Goldman and Barclay’s are forecasting that global growth will hit 4% next year, the highest since 2011. Strategists are betting that Japan (the second biggest economy) has finally turned the corner, at long last. This will probably not be great for interest rates however. That said, until inflation returns, slow and steady increases will be the name of the game and the origination business might still do just fine as a wave of first time homebuyers enter the market.

Last night a Federal Judge denied the CFPB’s request for a temporary restraining order to prevent Mick Mulvaney from assuming the role of acting director for the CFPB. His first act was to institute a hiring freeze and a moratorium on new regulations.

Jerome Powell faced the Senate yesterday, and for the most part things stuck to script. He said that the case was strong for a rate hike in December, but he didn’t offer much in the way of specific policy guidance. Many Senators wanted him to opine on tax cuts, but Powell wouldn’t go there.

The MBA is calling on the Senate to change a provision that requires lenders to pay tax on the mortgage servicing right up front, even though it is a non-cash item. It wasn’t specifically directed at MSRs – it was directed at anything that is an accrual. The fact that independent mortgage originators have accumulated so much servicing has bothered many in DC, and this provision would probably encourage more of them to sell servicing to the big banks. It won’t be good for MSR valuations, that is for sure. The MBA makes this point, and also says that small independent originators will have a more volatile income stream, as an MSR portfolio has a counter-cyclical effect on the mortgage origination business. I don’t think this was necessarily a policy intention and it is an excellent example of why you don’t push through tax reform on an expedited timeline without public comment, etc.

NAR is out with their “game changers for 2018.”  They are predicting that supply will finally begin to catch up with demand and that home price appreciation will moderate. The effect will be felt at the middle to high end ($350k+) range as that is where the building has been and demand for starter homes will only increase as the Millennials age and get jobs. Tax reform will have a potential impact, however that will only be at the higher tiers.

Morning Report: Jerome Powell testifies in front of the Senate 11/28/17

Vital Statistics:

Last Change
S&P Futures 2604.8 3.0
Eurostoxx Index 386.4 1.5
Oil (WTI) 57.6 -0.5
US dollar index 86.5 0.0
10 Year Govt Bond Yield 2.32%
Current Coupon Fannie Mae TBA 102.938
Current Coupon Ginnie Mae TBA 103.75
30 Year Fixed Rate Mortgage 3.89

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

Jerome Powell will testify in front of the Senate today. Here are his prepared remarks. With respect to monetary policy, he had this to say: “If confirmed, I would strive, along with my colleagues, to support the economy’s continued progress toward full recovery. Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink.” He discusses the dual mandate, and his interpretation of that: “maximum employment, meaning people who want to work either have a job or are likely to find one fairly quickly; and price stability, meaning inflation is low and stable enough that it need not figure into households’ and businesses’ economic decisions.”

In other words, he is pretty much going to vote to continue the same path of Janet Yellen and Ben Bernanke. He thinks inflation is too low, and we are not yet at full employment. However, we are closer to our goals and therefore it is time to remove some of the emergency measures we took during the crisis. Monetary policy is not going to become more hawkish in any meaningful way.

On the regulatory front, he had this to say: “As a regulator and supervisor of banking institutions, in collaboration with other federal and state agencies, we must help ensure that our financial system remains both stable and efficient. Our financial system is without doubt far stronger and more resilient than it was a decade ago. Our banks have much higher levels of capital and liquid assets, are more aware of the risks they run, and are better able to manage those risks. Even as we have worked to implement improvements, we also have sought to tailor regulation and supervision to the size and risk profile of banks, particularly community institutions. We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms–strong levels of capital and liquidity, stress testing, and resolution planning–so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy. In doing so, we must be clear and transparent about the principles that are driving our decisions and about the expectations we have for the institutions we regulate.”

On this issue, he is probably very close to Yellen, however he is presenting a more business-friendly face. He wants to ease regulatory burdens where appropriate, and to give (hopefully) brighter lines about what the regulators want than previously.

The issue of regulatory transparency falls along two schools of thought. First, the attitude of the Obama administration (and many regulators on the left) is that regulators should disseminate general principles and not specific guidance (bright lines). Their logic is that the financial sector will figure out a way to game the system, so the easiest way to prevent that is to make the lines so blurry that bankers will not approach them. It definitely makes the system safer, however the downside is that compliance officers end up running the banking system. Most bankers refer to compliance as “the business discouragement unit” because the incentives for compliance offers are to focus solely on the downside. It makes banks risk averse and therefore restricts credit.

The attitude of those on the right is that there are diminishing returns to that framework in terms of safety at the expense of credit expansion (and overall economic growth). So their view is to give the banks brighter lines so that the lawyers (who are risk averse) are no longer making the capital allocation decisions. The plus side is higher growth, however the downside is that banks game the system and take too much risk.

I suspect both Yellen and Powell are pretty similar in their regulatory approach, but Powell will probably be a touch more banker-friendly. Of course for the banking sector, the Fed is just one regulator, and they have all the state regulators, plus the CFPB to consider so any change will probably be minor if recognizable at all. So punch line: don’t expect to even notice the difference between Powell and Yellen.

In other news, home prices continued to rise in September, with the FHFA house price index up 0.3% MOM / 6.3% YOY and the Case-Shiller index up 0.5% MOM and 6.2% YOY. While the Pacific and Mountain states continue to experience strong growth, we are seeing a pickup in New England and the Middle Atlantic states. These are the judicial states which still have been still working through their foreclosure inventory.

Inventories fell at both the retail and wholesale level in October, which means Q4 GDP will start off with an inventory drag. Note we will get the second revision to Q3 GDP tomorrow morning.

The Senate continues to work with tax reform. Here are the 8 Senators who can make or break tax reform and what they are looking for. In one group are the deficit hawks. The CBO estimate is that this will add $1.4 trillion to the national debt, before taking into account any improvement in growth. Some are looking for some sort of trigger that will bump tax rates back up if the revenue is not there. Others worry about the effect tax rate uncertainty will have on corporate behavior. Another group worries that tax reform will benefit large multinational corporations at the expense of small business. And finally, there are the ones that don’t support eliminating the individual mandate in Obamacare to fund tax cuts (Collins and McCain). The inability to repeal and replace Obamacare is making tax reform so much more difficult. We’ll see what happens, but I suspect we can’t thread the needle here.

Morgan Stanley is advising clients to bet on a yield curve flattening via the 2 year and 10 year spread. Right now the 10 year is trading at 2.32% and the 2 year is at 1.74%. They are forecasting that the difference in yields (currently 58 basis points) will go to 0 next year. Continued demand from global central banks will support demand for government debt to begin with, and if growth comes in stronger than expected, short rates will increase faster. If growth comes in lower than expected, then demand for duration will keep the 10 year yield low. Note this strategist at Morgan Stanley is a huge bond bull, and was calling for a 1% 10 year bond in 2016 before the surprise election of Donald Trump destroyed that forecast.

Morning Report: The CFPB has two directors 11/27/17

Vital Statistics:

Last Change
S&P Futures 2601.0 0.0
Eurostoxx Index 385.7 -1.0
Oil (WTI) 58.3 -0.7
US dollar index 86.2 -0.2
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 102.651
Current Coupon Ginnie Mae TBA 103.494
30 Year Fixed Rate Mortgage 3.9

Stocks are flat this morning after the US comes back from a long weekend. Bonds and MBS are up.

Retailers are rallying this morning on expectations of a strong holiday shopping season. Meanwhile, Bitcoin is pushing $10,000.

New Home Sales rose 6.2% MOM and almost 19% YOY, according to Census and HUD. The median sales price was $313k, while the average was $400k. Inventory is at 4.9 months’ worth.

We have a good amount of data this week, although the jobs report will not be released this Friday. We get new home sales today, house prices tomorrow, GDP on Wednesday, Personal Incomes / Spending on Thursday, and the ISM data on Friday. Janet Yellen will also speak on Wednesday.

Richard Cordray resigned from the CFPB last week and Donald Trump nominated Mick Mulvaney to lead the Bureau. Outgoing Director Cordray nominated Obama appointee Leandra English (a career civil servant in the Elizabeth Warren mold) to replace himself and the agency is suing the Trump Administration to prevent him from nominating Mulvaney. So, for the moment, the agency has two directors.

While there is partisan rancor over who will lead the CFPB, Trump’s nominee to lead the Fed, Jerome Powell, expects to have a smooth path to confirmation.

Tax reform will be front and center this week as the Senate hopes to vote this Thursday. If the Senate passes a bill, the House and the Senate will need to come to an agreement between their respective bills. Trump hopes to sign something by the end of the year.

Who would be the biggest losers in the tax bill? The very rich in Greenwich, CT and Manhattan. This is the last thing Connecticut needs – their entire state is largely financed by the rich in Fairfield County. Goldman Sachs estimates that NYC could lose 4% of their top earners. The most likely beneficiary? Florida. The rarefied air of the Northeast luxury market will take a hit (it was already moribund before people were talking about eliminating the state and local tax rate), although inventory is so tight it probably won’t affect the lower price points.

The NAR has released a study claiming that tax reform will hit real estate prices overall by 10%. The fear is that it will discourage homebuilding which will sap the economy of strength. It is true that economic growth has been tepid over the past decade as homebuilding contracted, but will the changes in the tax code matter all that much? I am skeptical that lowering the MID cap from $1 million to $500k will matter all that much, given the median home price in the US is under $250k. The median income in the US is under $60k as well and most people will be better off just taking the increased standardized deduction. So while they may “lose the mortgage interest deduction” it is a moot point – the increased standard deduction replaces it. But yes, I would expect to see some sort of effect at the top 10% of the market, but that should be about it. As far as homebuilding, I think the builders will shift their focus from luxury to starter homes, where the demand is. As a matter of policy, if you wanted to get rid of the mortgage interest deduction when it causes the least amount of economic pain, you would do it when the economy is expanding and interest rates are low. Interest as a percent of your mortgage payment is the lowest in 50 years.

Madness in the Method?


Uber has ordered 24K self driving Volvo SUVs.

Forget that self-driving without a human monitor is not legal in most jurisdictions.  Assume Uber can rapidly obtain local approval for self driving vehicles. Assume it can cut its labor cost and sidestep its pending fight over whether its drivers are contract or employee.  Assume that by developing its own software controls for these Volvos it can customize successfully to locale and traffic patterns.

What I see is this:  Uber is banking its future on an asset base that will be pretty much worthless in 3-5 years.

I see that as a billion dollars blown every three years.  I see that as Uber having to build and staff and manage its own expert maintenance yards because it is using proprietary software, or having to contract that out at a premium.

It might be a workable model, but it is a HUGE gamble.  Yes or No?





Morning Report: Existing home sales fall 11/21/17

Vital Statistics:

Last Change
S&P Futures 2590.3 8.3
Eurostoxx Index 388.5 2.1
Oil (WTI) 56.2 -0.3
US dollar index 87.4 -0.1
10 Year Govt Bond Yield 2.36%
Current Coupon Fannie Mae TBA 102.651
Current Coupon Ginnie Mae TBA 103.494
30 Year Fixed Rate Mortgage 3.9

Stocks are higher this morning on overseas strength. Bonds and MBS are flat.

Existing Home Sales rose 0.7% in September, according to NAR. This was the second slowest this year, behind August. Overall, sales were down 1.5% YOY. Tight inventory and the hurricanes affected sales. The median home price increased 4.2% YOY to 245k. Inventory was 4.2 month’s worth. First time homebuyers fell to 29% of sales, driven by a dearth of inventory at the lower price points. The NAR also puts in a plug for maintaining the mortgage interest deduction and the state / local tax deductions, as eliminating them will make homeownership more expensive. “There’s no way around the fact that any proposal that marginalizes the mortgage interest deduction and eliminates state and local tax deductions essentially disincentives homeownership and is a potential tax hike on millions of middle-class homeowners,” said Brown. “Reforming the tax code is a worthy goal, but it should not lead to the middle class, who primarily build wealth through owning a home, footing the bill. Instead, Congress should be looking at ways to ensure more creditworthy prospective buyers are able to achieve homeownership and enjoy its personal and wealth-building benefits.”

Economic activity picked up in October, according the Chicago Fed National Activity Index. Production-related indicators drove the increase. Employment-related indicators were positive, but less so than September. The economy definitely seems to be accelerating.

What is driving global growth? China and India for the most part, but it looks like Japan is waking from its long slumber at last. Japanese growth has been missing since the early 90s and is transitioning from being a drag on global growth to a driver of it. Don’t forget, Japan is the third biggest economy in the world and has been largely moribund since the early 90s. Want to see what a real bear market in stocks looks like? Take a look at the long term chart of the Nikkei 225: The Nikkei is hitting 20 year highs, and is still 43% below its 1989 peak.


The Japanese resurgence will probably mean higher interest rates, at least at the margin, as well as higher commodity prices. Much of this will depend on what happens in China, which has a massive real estate bubble and will probably have to go through a secular recession like the US did in the 30s and Japan did for the last 2 decades.

Janet Yellen said she will resign her position on the Federal Reserve Board once Jerome Powell is sworn in. “As I prepare to leave the Board, I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability and continue supporting the economic aspirations of American families and businesses,” Yellen said in her resignation letter. Her term officially expires in 2024, but it is rare for an ex-chairman to stay on. Donald Trump will have four open positions to fill, leaving him with the ability to make his mark on the Fed.

Morning Report: Goldman sees 3.7% unemployment in 2018 11/20/17

Vital Statistics:

Last Change
S&P Futures 2576.3 0.0
Eurostoxx Index 385.1 1.3
Oil (WTI) 56.3 -0.3
US dollar index 87.2 0.1
10 Year Govt Bond Yield 2.34%
Current Coupon Fannie Mae TBA 102.651
Current Coupon Ginnie Mae TBA 103.494
30 Year Fixed Rate Mortgage 3.9

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

Slow news day.

This week should be relatively quiet with the Thanksgiving holiday. There won’t be any market-moving economic releases, and the only thing out of the Fed will be the minutes from the November meeting on Wednesday.

The Index of Leading Economic Indicators came in at 1.2%, doubling the Street estimate of 0.6%.

Goldman is extremely bullish on 2018, as they see the job market getting even tighter and wage growth accelerating. They see the unemployment rate falling to 3.7% in 2018, and to 3.5% in 2019. They are forecasting 4 rate hikes as well, which is well above what the Fed Funds futures are predicting. The Fed Funds futures are pricing in between 1 and 2 hikes in 2018 (assuming that December is a given).

More than half the refis in October were FHA / VA loans. This is due as much to home price appreciation as interest rates. Borrowers can save money by refinancing into a conventional loan once they have 20% equity. Loan officers, take a look at the FHA loans you did a few years ago and look for opportunities.

Tax reform is scheduled for an 11/30 vote in the Senate, as Congress takes this week off. The upper middle class is probably going to benefit the least from tax reform, and Republicans are going to test the theory that they are indeed the third rail in US politics. The upper middle class consists of what demographers call the HENRYs (high income, not rich yet), who may appear to be rich according to the numbers, but often live in high cost areas and have lifestyles more similar to the middle class than the rich. We could see home price appreciation begin to moderate in some of the suburbs around DC and NYC. It probably won’t affect California as much, as the CA real estate market inhabits its own universe.

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