Morning Report: FOMC statement 2/1/18

Vital Statistics:

Last Change
S&P Futures 282.0 -2.8
Eurostoxx Index 395.1 -0.4
Oil (WTI) 65.4 0.7
US dollar index 83.3 0.0
10 Year Govt Bond Yield 2.74%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.19

Stocks are down small on earnings. Bonds and MBS are down small as well.

The Fed left interest rates unchanged, and released a somewhat hawkish statement. The changes weren’t really all that major, and they confirmed what we pretty much already know: the economy continues to strengthen, the labor markets remain tight, and inflation remains below target. The Fed Funds futures pushed up their probability estimate for a March hike by a few percentage points and the market is now handicapping a 77% chance of a 25 basis point hike in March. Bonds sold off a couple of basis points on the statement.

Initial Jobless Claims came in at 230,000 last week, a drop from the downward-revised 231,000 the week prior. Meanwhile, the Challenger Job cuts report increased to 44,500 as retailers shed jobs after the holidays.

Nonfarm productivity declined 0.1% last quarter as output increased 3.2% and hours worked increased 3.3%. Unit labor costs increased 2.0%, with compensation increasing 1.8%. Manufacturing productivity really took off, as output increased over over 7% while hours worked increased 1.5%. Productivity is incredibly hard to actually measure, but it is the secret to increasing living standards. A lack of productivity growth since the late 90s has acted to depress wage growth.

Some loan officers have noticed that FHA and VA pricing has been lousy lately higher up in the rate stack. This is an industry-wide phenomenon. For some reason, there is not much demand for the higher coupon Ginnie Mae TBAs, which means borrowers aren’t seeing the pickup in lender credit they would expect as they go up in rate. It has been so bad, that we are seeing state downpayment assistance programs suspend pricing until things work themselves out. I am not sure what is driving this – the knock on Ginnie mortgage backed securities has always been prepayment speeds. Between FHA streamlines and VA IRRRLs, the prepay speeds have been much higher than trading desks have been modeling. Ginnie has issued new guidance and regulations in order to prevent serial refinancings. So far, that hasn’t translated into demand for the higher note rate TBAs. Loan officers, don’t be afraid to contact us with pricing issues – we will do what we can to try and help.

The DC appeals court yesterday affirmed the CFPB’s structure, largely along partisan lines. The Court also lowered the penalty to PHH, so it isn’t necessarily a given that this will go to SCOTUS.

Construction spending increased 0.7% MOM and is up 2.6% YOY. Residential construction was up 0.4% MOM and 6.2% YOY.

D.R. Horton’s affordable home program targeted to the first time homebuyer is growing, and it seems like this segment is becoming the focus of the homebuilding industry, especially since demand in general (and tax law changes) are affecting the luxury end of the market. D.R. Horton started the unit in 2014, and was bucking the trend in building of buying up urban land and focusing on renters. Instead, they bought land in the less-fashionable suburbs and focused on entry-level homes. You are starting to see other builders attack this segment as well.

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