Morning Report: Jerome Powell spooks the bond market 2/28/18

Vital Statistics:

S&P Futures 2751.5 4.0
Eurostoxx Index 381.0 -1.3
Oil (WTI) 63.0 0.0
US dollar index 84.1 0.1
10 Year Govt Bond Yield 2.89%
Current Coupon Fannie Mae TBA 102.313
Current Coupon Ginnie Mae TBA 102.531
30 Year Fixed Rate Mortgage 4.4

Stocks are marginally higher this morning after the second revision to fourth quarter GDP came in as expected. Bonds and MBS are flat.

Fourth quarter GDP increased at 2.5%, which matched Street expectations. The price index was revised downward a touch and consumer spending was revised upward. For the year, GDP increased at 2.3% versus 1.6% for 2016. Inflation is picking up, as the price index rose 2.5% versus 1.7% in the third quarter. Excluding food and energy, the index was up 1.9%, compared to 1.3% in the third quarter.

The Chicago PMI decelerated last month, but still came in at a strong 61.9. The number was below estimates however.

Pending Home Sales fell 4.7% in January, according to NAR. This is down 3.8% YOY and the lowest since October 2014 after the Taper Tantrum. Despite higher rates and smaller inventory, traffic was up YOY in January, except for the Northeast, which could have been weather-driven.

Jerome Powell spooked the bond markets yesterday during his testimony in front of the House. He acknowledged that inflation is accelerating and that the economy has improved since the meeting in December, and that statement pushed bond yields higher. He said he didn’t want to “prejudge a new set of projections,” referring to the dot plot at the March meeting. Powell will testify in front of the Senate tomorrow.

The Fed Funds futures didn’t really do much in response: The March futures are now handicapping an 87% chance of a hike and the consensus is still for 3 hikes this year.

Mortgage applications increased 2.7% during the holiday-shortened week, with the refi index falling 1% and the purchase index increasing 6%. The average contract rate was 4.64%, unchanged from the prior week.

The NAR and ATTOM weigh in on the real estate outlook for 2018. Unsurprisingly, they expect the inventory issue to continue, and homebuilders to modestly ramp up production while constrained by labor shortages. They point out also that the churn of move-up buyers has largely collapsed post-crisis. The average tenure (or amount of time that someone has lived in their home) has doubled since the crisis, from just over 4 years to 8 years. This lack of churn depresses the number of homes available on the market. I wonder if the churn was simply an issue related to underwater homeowners – short sales are tough to do. Second, as the foreclosure inventory is largely worked through, with the exception of the Northeast and a few other states, distressed homes are drying up. I suspect the professional investors who bought these homes will want to ring the register at some point, but that will be a function of interest rates and home price appreciation.

Lowe’s missed Street estimates and is down 8% pre-open. It looks like this is a company-specific problem and doesn’t reflect on the home improvement market. The Despot beat earnings recently.

Morning Report: Jerome Powell Addresses Congress 2/27/18

Vital Statistics:

Last Change
S&P Futures 2782.0 -2.5
Eurostoxx Index 381.8 -1.3
Oil (WTI) 63.6 -0.3
US dollar index 83.7 0.2
10 Year Govt Bond Yield 2.88%
Current Coupon Fannie Mae TBA 102.313
Current Coupon Ginnie Mae TBA 102.531
30 Year Fixed Rate Mortgage 4.4

Stocks are down small on no real news. Bonds and MBS are down as well.

Durable Goods Orders fell 3.7% in January MOM, but rose 6.8% YOY. Ex-transportation, they fell 0.3% MOM and rose 6.9% YOY. Core Capital Goods (a proxy for business capital expenditures and expansion) fell 0.2% MOM and is up 6.3% YOY.

In other economic news, the trade deficit widened to 74 billion, while retail inventories rose 0.8%. Wholesale Inventories rose 0.7%.

Home prices rose 6.3% YOY in December to close out 2017 up 6.3% overall. House price inflation will be subject to a bit of a push-pull effect: Strong demand and limited supply will provide support for home prices, while increasing interest rates will reduce affordability and should have a dampening effect on home price inflation. That said, by historical standards, these mortgage rates are still extremely low, and affordability is still extremely high, at least on a long-term basis when you use monthly payment as a percentage of income.

The FHFA House Price Index rose 0.3% and it is up 6.5% for the year.

Fed Chairman Jerome Powell testifies in front of Congress this morning at 10:00 am. Here are his prepared remarks. Nothing in the remarks jumps out at me as anything all that new, although Powell argues that the stability of the labor force participation rate over the past few years is a sign of strength, not weakness. Yes, baby boomers are retiring but their kids are entering the workforce so it should balance out. Below is a chart of the labor force participation rate going back to WWII. Note the steady rise beginning in the 1960s. That is the baby boom entering the workforce, and the secular change of more women entering the workforce. About half of those gains have been given back in the Great Recession. I think he is saying that the labor force participation rate should be trending even lower due to demographic factors, and that the stability of the past few years is evidence that the labor market is strong. Perhaps.

The Fed has always had a simple model of unemployment and inflation called the Phillips Curve. It basically says that unemployment will start driving inflation if it gets low enough. Historically economists have thought that unemployment levels in the low 4s would trigger it. So far we have seen some wage inflation in some skilled areas, but nothing widespread. Most of the inflation we have been seeing has been commodity push inflation driven by food and energy prices. These things often reverse, as higher prices invite new supply. Or in other words, the cure for high prices is high prices.

You are beginning to see a new theory in academia – that the slow growth in wages is not due to a supply / demand issue, but is evidence of an antitrust problem, or at least a market failure. Hard to see how heavyweights like Wal Mart and McDonalds are colluding for low wage labor, but that;s what they believe, and they think the cure is a higher minimum wage, more unions, and exerting more oversight over the bigger employers. Occam’s Razor says that labor-replacing technology is probably the driver, but that’s no fun.

Toll Brothers reported better-than expected earnings this morning, showing that there is still plenty of strength in the luxury sector of the market. Orders rose 19% in units, and ASPs rose 6.8% to $826k.  Margins are falling however, as increasing input and labor costs push against price hikes.

Surprising stat: 35% of homebuyers bid on a home before seeing it in person. The young buyer is more likely to do this: almost half of Millennial buyers bid before seeing.

Morning Report: New Home Sales fall 2/26/18

Vital Statistics:

Last Change
S&P Futures 2757.3 8.5
Eurostoxx Index 383.2 2.1
Oil (WTI) 63.3 -0.2
US dollar index 83.5 -0.1
10 Year Govt Bond Yield 2.85%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

Stocks are higher this morning on the back of global strength overnight. Bonds and MBS are up.

The highlight of the week will probably be new Fed Chairman Jerome Powell’s testimony in front of Congress. There probably won’t be anything market-moving (the questions will probably focus on financial regulation and wage inflation), but just be aware. He testifies on Tuesday and Thursday. The jobs report will be released next Friday, not this one.

Economic activity moderated slightly in January, according to the Chicago Fed National Activity Index. The 3 month moving average fell as an unusually strong October reading fell off.

New Home Sales fell in January to 593,000. December was revised upward. The median price rose to 323,000. Inventory stood at just over 300k, which amounts to about 6 month’s worth of inventory at the current sales pace.

Goldman is forecasting a 3.25% 10 year yield by the end of the year, adding that if bond yields hit 4.5% you could see a big sell-off in the stock market (no kidding). Surprisingly, they don’t think that sort of yield would trigger a recession.

Quantitative hedge funds are having their worst month in 17 years, especially the trend-following ones. Some of these funds are down 10% plus this month. If this continues, expect to see redemption notices being filed, which means they will be unwinding positions. One of the biggest positions on the street, aside from being long stocks is being short bonds. This will actually provide some support for bond prices, which means that we could be looking at stable / rising rates in the near term.

Very surprising stat: Since the bubble peak, the median home price is up about 4.5% and the Case-Shiller Index is up 6.5%. The new home median price is up 27.5%. This demonstrates just how much the homebuilders focused on the luxury market after the bust. I think it also reflects a push towards urban construction as well.

As the Spring Selling Season begins, inventory is sparse. Most homebuyers have been searching for 3 months or more. The biggest issue? Finding a house they can afford.

Fannie Mae has almost delivered the 10% return on the preferred stock it sold the government during the financial crisis. Freddie has further to go. Once the GSEs pay their 10%, the preferred stock could be retired, perhaps in exchange for housing reform.

Morning Report: The Street is short Treasuries 2/23/18

Vital Statistics:

Last Change
S&P Futures 2722.3 10.8
Eurostoxx Index 380.9 0.5
Oil (WTI) 62.7 0.0
US dollar index 83.6 0.1
10 Year Govt Bond Yield 2.89%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

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

No economic data today, but we do have a lot of Fed-Speak.

Speculative short positions in US Treasuries are at a record. This means in plain language, that a lot of speculators are making the same bet: that interest rates are going higher. In practice, crowded trades like this often will behave in a perverse manner, especially when you get data points that don’t support the prevailing view.  Right now, the Street thinks inflation is rising and they are negative on Treasuries. Any data point that supports that view will probably have a muted effect, while any data point that doesn’t support that view will probably have an outsized reaction. To give an example: Say next week’s GDP number comes in higher than expected – maybe 3%, with an increase of the GDP deflator (inflation) at 2.8%. Bonds might sell off from something like 2.9% to 2.92%. However, if GDP comes in light (say 2%), and the GDP deflator comes in at 2% as well, we could see bonds rally from 2.9% to 2.85%. These sorts of movements are generally short-lived (lasting a morning or a day), but they do provide opportunities to lock at good prices if you are nimble. Big picture, rates are going higher, however since there are so many speculative bets against Treasuries at the moment, it will provide some opportunities to lock in at good rates if you are quick.

Lenders are loosening requirements to get a mortgage, particularly for first time homebuyers. We are seeing a modest drop in overall credit scores, and a slight increase in LTV and DTI ratios. This indicates a move towards low down payment loans. As rates increase, the credit box will almost invariably increase as lenders fight for fewer and fewer loans. Some lenders are also changing the way they treat student loan debt, even excluding it altogether if a parent is making the payments.

Who is the biggest mortgage lender out there? If you said Wells Fargo, you would be correct for all of 2017. However the biggest lender in the 4th quarter was Quicken.

HUD is providing foreclosure relief for victims of the 2017 hurricanes in Texas and Florida. Homeowners affected by these disasters (and some others) may be able to get a loan that covers their mortgage payments for a year, payable upon sale of the property or a refinance.

How much do you have to make to be in the top 1% these days? Just shy of half a million. To be in the top 10%? Just under 150k.

This weekend is Buffetapalooza, or the annual shareholders meeting for Berkshire Hathaway in Omaha. It has been called a Woodstock of Capitalism, where shareholders dance with the Froot of the Loom guys, eat See’s candy and have dinner at Warren’s favorite steakhouse. The climax will be his letter to shareholders, which is usually chock full of folksy advice for investors, along with observations on the economy and the state of affairs politically. Warren is the second-biggest corporate holder of short term Treasuries and is probably itching for a deal. That said, I think the last big deal he did was several years ago when he bought Precision Castparts.

There is a rumor going around that the Fed will begin holding press conferences after all FOMC meetings, not just the Mar, Jun, Sep and Dec meetings. That could be a setup to begin making interest rate changes at these meetings as well. As of now, the markets expect them not to. Don’t forget, press releases after a FOMC meeting is relatively new. Historically the Fed wanted to be opaque, as they believe that their policy is more effective if it is a surprise to the markets. Greenspan was known for changing interest rates between meetings.

Morning Report: FOMC minutes mildly bearish for bonds 2/22/18

Vital Statistics:

Last Change
S&P Futures 2704.0 5.3
Eurostoxx Index 378.5 -2.6
Oil (WTI) 61.8 0.1
US dollar index 83.8 -0.1
10 Year Govt Bond Yield 2.92%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

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

The FOMC minutes were surprisingly upbeat on the economy, which pushed up bond yields yesterday afternoon. The part that got everyone’s attention:

“A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes—while still uncertain—might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.” (emphasis mine)

Separately, Bullard and Quarles cited the strength in the economy and the need to continue to raise interest rates.

This language caused some strategists to increase their forecast to 4 hikes this year from 3. Surprisingly, the Fed Funds futures reacted in an opposite manner on the minutes, but reversed course later to become unchanged on the day. The 10 year treasury sold off throughout the day, and hit 2.94% in the late afternoon.

Part of the movement in bonds is being driven by Europe. European governments have been increasing their bond issuance at the same time the European Central Bank is decreasing its demand for paper. The market for government bonds is a global market, and if there is excess supply, it will hit interest rates across the board. This is why you will sometimes see bonds move lower without any particular catalyst. The catalyst may exist, however it is something overseas that the US business press is either ignoring or covering lightly.

Initial Jobless Claims fell to 222,000 last week. We remain at lows not seen since the Vietnam War and the days of the military draft. Still have yet to see widespread wage inflation however. Until that happens, the Fed will go slowly.

The Index of Leading Economic Indicators improved in January, increasing 1%. It will be interesting to see if February’s number is affected by the recent stock market volatility.

Interesting map from GeoFred which shows the economic growth in different parts of the country. The thing that jumps out at me is how bad the NY-NJ-CT area is. I guess the fact that that area is somewhat levered to the financial industry is an issue, although I wonder how much of it is due to people who have been fleeing high taxes, though if that was the case you would expect to see it in CA as well and you don’t.

Morning Report: Existing Home Sales fall 2/21/18

Vital Statistics:

Last Change
S&P Futures 2715.3 1.3
Eurostoxx Index 379.1 -1.4
Oil (WTI) 61.8 0.1
US dollar index 83.8 0.2
10 Year Govt Bond Yield 2.88%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

Stocks are flattish this morning on no real news. Bonds are lower after a tough auction yesterday.

Mortgage Applications fell 6.6% last week as purchases fell 6% and refis fell 7%. Higher mortgage rates are beginning to bite.

Existing Home Sales fell 3.2% in January, according to the National Association of Realtors. Lawrence Yun, NAR’s Chief Economist said: “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month. While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.” The median home price rose 5.8% to $240,500. Inventory rose, however it still remains extremely tight at 3.4 month’s worth of supply. The rise in prices and scant inventory may be scaring away the first time homebuyer which dropped to 29% of sales. Historically, that number has been closer to 40%.

The FOMC minutes from the January meeting are scheduled to be released at 2:00 pm EST today. Investors noted a slight change in the January FOMC statement, where the need for “gradual adjustments” in interest rates was changed to “further gradual adjustments” in interest rates. They hope to get more clarity on what message the Fed intends to send with that change of language, however we probably will have to wait until the March meeting when the Fed releases their new dot plot of expected interest rate movements. As of now, the consensus seems to be a total of 3 hikes this year, at least according to the Fed Funds futures. New York Fed Chairman William Dudley said in an interview that the statement was meant to reflect further strength in the economy.

Homeowners will be able to deduct mortgage insurance premiums on their 2017 returns thanks to a last-minute change in the budget. Borrowers must have adjusted gross income below $100k and the insurance must apply to their principal residence. No word on whether this will continue, and it will probably be a moot point anyway as taxpayers with AGIs under 100k will probably be better off taking the standard deduction most of the time. The tax liability on principal forgiveness also was extended for another year. This would apply to homeowners who get principal forgiven in loan modifications, short sales, and foreclosures. The tax code treats forgiven debt as ordinary income, and the people who go through mods or foreclosures are usually in such financial trouble to begin with that the last thing they need is an additional tax bill.

The Supreme Court yesterday declined to hear a lawsuit brought by Fannie Mae shareholders which challenges the government’s sweep of all of Fannie’s profits into the Treasury. This isn’t the end of the road for the investors however – they have one more claim pending in the U.S Court of Federal Claims in DC. Fannie Mae stock is down about 5% pre-open.

Merger mania in the mortgage banking space continues. Mr. Cooper has been bought by WMIH in a cash and stock transaction worth $3.8 billion in cash, stock and assumed debt. Mr. Cooper and WMIH are the new monikers for old stalwarts Nationstar (or IndyMac) and Washington Mutual. Separately, Flagstar has bought the mortgage warehousing operations of Santander Bank.

The DACA Cases

Scott and I were discussing the DACA cases and while I had not read the briefs or opinions I thought that a due process argument could temporarily prevail against the Administration if the circumstances warranted.  I think it was fair to say that Scott thought the circumstances could not warrant that, ever.  I agreed that without knowing the facts and precedents for this case the current DACA cases might be losers.

Here are two of the most trustworthy legal discussions, both from Volokh Conspiracy, and a link to the California opinion.

https://www.washingtonpost.com/news/volokh-conspiracy/wp/2017/09/09/assessing-the-administrative-law-claims-against-rescinding-daca/?nid&utm_term=.d99021a00f12

https://www.washingtonpost.com/news/volokh-conspiracy/wp/2017/09/04/the-case-for-daca/?utm_term=.dc9d6e8e66f1

and

https://assets.documentcloud.org/documents/4345906/1-9-18-DACA-Opinion.pdf

I think these cases are surely eventual losers having read this much.  I think Temporary Relief could be justified based on the Justice Department’s missed argument.  Arguing that DACA was never lawful was a loser where arguing DAPA was never lawful had been a winner.

Read the two articles and the Opinion and come to your own conclusions.

I produced this as filler for the missing Morning Report.  Brent, where are you?

Also, Volokh has a new and better for them home at Reason.com.

 

 

 

 

 

 

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