Morning Report: Bank earnings coming in

Vital Statistics:

 

Last Change
S&P futures 2609 2
Eurostoxx index 347.72 0.2
Oil (WTI) 51.15 0.64
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.44%

 

Stocks are flattish as bank earnings continue to come in. Bonds and MBS are down.

 

Inflation at the wholesale level declined 0.2% MOM and rose 2.5% YOY. Ex-food and energy, it rose 0.1% MOM and 2.3% YOY. Rising food prices more than offset declines in energy. More and more strategists are thinking the Fed will stand pat: “We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy and uncertainty surrounding geopolitical events,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

 

Mortgage applications jumped 13.5% last week as rates fell to the lowest levels in 9 months. Purchases rose 9% while refis rose 19%.

 

Last week United Wholesale announced that they were removing most LLPAs from their loans in order to guarantee the best rate. Yesterday cross state rival Quicken announced they would cut pricing as well to compete. We have a wholesale price war in Amityville.

 

Wells Fargo announced earnings that disappointed the street as revenues declined. Mortgage banking volumes were down 28% on a YOY basis. Despite a flattening yield curve, net interest margins were flat with Q3 at 2.94%.

 

JP Morgan reported a sequential drop in revenues as well, however earnings were up smartly. There is some tax cut noise in the numbers however. The mortgage business had a rough go of it as originations fell 30% to $17.4 billion.

 

Fitch sees a stable mortgage market in 2019, after a 9% decline in 2018. Good news: delinquencies and arrears continue to fall. Bad news: lack of affordability will depress origination.

 

Kansas City Fed Head Esther George thinks now would be a good time to pause in the normalization process. FWIW, she doesn’t think we are quite at “neutral” yet but we are close. Note that she is on the hawkish end of the spectrum.

Partial Shutdown – “unintended” security consequence (from WaPo)

Dozens of government websites have been rendered insecure or inactive.

Some NASA, Justice Department and other government agency websites were insecure or not working as of today because important security certificates had expired, according to a report from Internet security company Netcraft. With so many federal employees out, the agencies probably do not have the IT resources to renew the certificate.

Check out the link.

Morning Report: Jerome Powell stresses flexibility

Vital Statistics:

 

Last Change
S&P futures 2587.75 -6.75
Eurostoxx index 348.54 -0.31
Oil (WTI) 52.94 0.34
10 year government bond yield 2.72%
30 year fixed rate mortgage 4.48%

 

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

 

Initial Jobless Claims fell to 216,000 last week.

 

Jerome Powell stressed that the Fed has the flexibility to be patient in raising rates and will react to new data as appropriate. “Especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we … figure out which of these two narratives [slowdown or inflation] is going to be the story of 2019,” Powell said at the Economic Club of Washington. Separately, St. Louis Fed President James Bullard said that the Fed had “reached the end of the road” in this tightening cycle.

 

The Fed Funds futures have retraced some of their December move and are now forecasting that the Fed will do nothing in 2019. In November, they were forecasting another hike in 2019, and then swung to forecasting a cut in December. They are now more or less agreeing with James Bullard that this tightening cycle is in the books.

 

fed funds futures

 

Bonds largely ignored the Fed Speak and stocks were more focused on punishing the mall based retailers and department stores, many of which had a difficult holiday shopping season.

 

Fannie Mae reported another drop in delinquencies, as the SDQ percent fell to .76% of their portfolio from .79% a month ago and 1.12% a year ago. The DQ rate for loans originated during the bubble years is 4.5%. The DQ rate for loans originated since is .33%.

 

It is looking more and more likely that Trump will declare a national emergency to allocate funds to the wall and to re-open the government. It will then be up to the courts to decide if such a move is legal, which opens up a new can of worms as the executive branch continues its decades-long path of power consolidation.

Morning Report: FOMC minutes and homebuilder earnings

Vital Statistics:

 

Last Change
S&P futures 2569 -13.5
Eurostoxx index 346.51 -1.2
Oil (WTI) 51.94 -0.24
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.48%

 

Stocks are lower this morning on overseas weakness. Bonds and MBS are up small.

 

The FOMC minutes didn’t really contain much interesting information – the committee noted that financial conditions were tightening slightly and that the stock market was falling (we bottomed on Christmas Eve), but still decided unanimously to hike the Fed Funds rate 25 basis points. Despite fears in the market that the Fed has overshot, that possibility was not entertained by either the members or the staff. Incidentally, we will have a lot of Fed speakers throughout the day.

 

Homebuilder Lennar reported strong earnings for the fourth quarter, however it decided to hold off giving guidance on 2019 due to opaque market conditions. That said, new orders were up big, and margins were strong. Lennar is transitioning into a pure-play homebuilder and has been exiting businesses like asset management and real estate brokerage. This quarter should be the last with any CalAtlantic integration noise in the numbers. The Street was happy with the numbers, sending the stock up about 8%.

 

KB Home also reported numbers, although they saw a decrease in revenues, margins and a fall in average selling prices. KB is more of a turnaround story, however and the whole sector is so out of favor that it seems any non-disaster is taken as positive. KB was up 4% on its numbers.

 

Canary in the coal mine? No high-yield debt has been issued since November, according to DealLogic. This is the first December without junk issuance since 2008. This could have simply been due to the gyrations in the stock market, but this bears watching. Despite a spike at the end of 2018, credit spreads are still at historically normal levels, so it is too early to sound any alarms yet. The Fed noted tightening credit conditions in its FOMC minutes as well.

 

Donald Trump met with Democratic Congressional leaders yesterday on the subject of border security and the government shutdown. He characterized the meeting as a “waste of time” after being told there is basically no way Democrats will allocate funds for the wall. The government shutdown is almost 3 weeks old, and Federal workers are not getting paid. That said, unlike the Obama-era shutdowns, the Trump Administration is trying to make the shutdown as invisible as possible to the average citizen. The IRS is back issuing refunds and 4506-Ts, so for the most part there isn’t much of an effect on real estate with the exception of flood insurance. 75% of all realtors noticed no impact on buyers.

 

Michael Bright, who has been the interim president of Ginnie Mae for a year and a half, has resigned and will return to the private sector. 

 

The drop in interest rates means that another half a million borrowers (total of 43 million) will find it attractive to refinance, according to Black Knight Financial Services. This is up 29% from the bottom, but still down 50% from last year.

“As recently as last month, the size of the refinanceable population fell to a 10-year low as interest rates hit multi-year highs,” said Graboske. “Rates have since pulled back, with the 30-year fixed rate falling to 4.55 percent as of the end of December. As a result, some 550,000 homeowners with mortgages who would not benefit from refinancing have now seen their interest rate incentive to refinance return. Even so, at 2.43 million, the refinanceable population is still down nearly 50 percent from last year. Still, the increase does represent a 29 percent rise from that 10-year low, which may provide some solace to a refinance market still reeling from multiple quarters of historically low – and declining – volumes.

“In fact, through the third quarter of 2018, refinances made up just 36 percent of mortgage originations, an 18-year low. And of course, as refinances decline, the purchase share of the market rises correspondingly. So now, in the most purchase-dominant market we’ve seen this century, we need to ask whether the shift in originations will have any impact on mortgage performance. The short answer, based on historical trends, is that it certainly bears close watching.  Refinances have tended to perform significantly better than purchase mortgages in recent years. When we take a look back and apply today’s blend of originations to prior vintages, the impact becomes clear. A market blend matching today’s would have resulted in an increase in the number of non-current mortgages by anywhere from two percent in 2017 to more than a 30 percent rise in 2012, when refinances made up more than 70 percent of all lending. As today’s market shifts to a purchase-heavy blend of lending, Black Knight will continue to keep a close eye on the data for signs of how – or if – this impacts mortgage performance moving forward.”

Morning Report: FOMC minutes today

Vital Statistics:

 

Last Change
S&P futures 2577 4.5
Eurostoxx index 348.5 3.89
Oil (WTI) 50.86 1.06
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.48%

 

Stocks are higher this morning as optimism for trade talks with China is offset by pessimism over the government shutdown. Bonds and MBS are down.

 

The minutes from the December FOMC meeting are scheduled to come out at 2:00 pm EST. Given the massive change in sentiment over the past month, they will be the most interesting in a while. Generally these are not market-moving events, but today could be an exception, especially since rates have dropped so much recently. I would be leaning towards higher rates as investors get a reality check about how strong the economy really is.

 

Job openings fell to 6.9 million in November, according to the JOLTS job openings report. The quits rate edged down to 2.3% from 2.4%, which is surprising given the bump in wages from Friday’s jobs report. Overall, it continues to show a strong labor market – there are almost 900k more open positions than there are unemployed people. There is a skills gap to be addressed, but the jump in the unemployment rate shows that the long – term unemployed are beginning to return to the labor force and look for a job.

 

The drop in rates is finally beginning to show up in mortgage applications. The MBA reported that applications increased 24% from the previous week. Refis rose 35%, and the refinance percentage of applications is the highest since February 2018. Purchases were up 17%. Rates fell anywhere from 9 to 20 basis points depending on the product. While there is some holiday noise in the numbers, they are also being depressed by the government shutdown.

 

Amerisave is buying the retail mortgage operations of TMS as they focus more on servicing and fintech than origination.

Morning Report: Homebuyer sentiment softens.

Vital Statistics:

 

Last Change
S&P futures 2571 20
Eurostoxx index 346.77 3.89
Oil (WTI) 49.14 0.86
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

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

 

As the shutdown drags on with no end in sight, the IRS has decided to begin issuing tax transcripts. It will probably take a few days to catch up with the backlog, but at least this headache for originators will go away.

 

Small business sentiment remains strong, according to the NFIB. “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.” Bill Dunkelberg notes the cognitive dissonance in the business press these days:  “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates,” said NFIB Chief Economist Bill Dunkelberg. “However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

 

Growth in the service sector decelerated in December, according to the ISM Non-Manufacturing Index. New Orders were the bright spot in the report while most other indicators fell. Note that we are still at historically very strong levels, so there is nothing recessionary in this report. Residential construction remains an issue. One of the respondents said: “New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases.” I found that surprising given that lumber prices have been falling steadily for the past 6 months and are down 22% YOY.

 

lumber

 

Homebuyer sentiment has been souring as well, according to the latest Fannie Mae National Housing Survey. Blame high house prices: “Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Although home price growth slowed in 2018, the cumulative impact of sustained, robust increases in home prices outpacing income growth likely helped drive the share of consumers citing high home prices as a primary reason for a bad time to buy a home to a survey high.” The net number of people who think it is a good time to buy fell from 23% to 11%. The net number of people who think home prices will rise fell slightly, but nothing as dramatic as the good time to buy statistic. Note that there was no major moves in the personal economics numbers either – the net number of people not concerned about losing their job hit 79%, a series high.

 

The Washington Post summarized the 2019 housing forecasts from the MBA, NAR, and more. The MBA is forecasting that the 30 year fixed rate mortgage will hit 5.1%. (Zillow is even more bearish – they are forecasting 5.8%) While those forecasts are certainly a possibility, they seem unlikely if the Fed is indeed done with this tightening cycle.  Despite that rate forecast the MBA does see purchase origination increasing, while refis will decline. The NAHB is predicting new home sales will be flat with 2018, around 618,000.

Morning Report: No progress on government shutdown.

Vital Statistics:

 

Last Change
S&P futures 2528.75 -3
Eurostoxx index 341.85 -1.49
Oil (WTI) 49.18 1.22
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.43%

 

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

 

No progress was made over the weekend with respect to re-opening the government. Trump mentioned the possibility of declaring a national emergency in order to obtain funding for the wall without Congressional approval.

 

The drop in rates over the past month has caused an increase in activity in what is typically a dead part of the year. Falling interest rates have lured some buyers back into the market who are looking to take advantage of the decline before they move up again. FTN Financial estimates that if we get another 20 basis point drop in the 30 year fixed rate mortgage, 300 billion conforming loans will become in the money and refinanceable. With the Fed Funds futures predicting the next Fed move will be a rate cut, that is in the realm of possibility.

 

Friday’s jobs report showed an increase of 300k jobs, yet the unemployment rate rose from 3.7% to 3.9%. Does that make sense? It does if you get deep in the weeds on how the BLS calculates these numbers.

 

New York State is legendary for how long a delinquent borrower can live in their house without paying the mortgage. Some have been there for almost a decade.

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