Morning Report: Personal Incomes rise

Vital Statistics:

 

Last Change
S&P futures 2989 8.25
Oil (WTI) 55.35 -1.24
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.95%

 

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

 

Personal incomes rose 0.4% in August, while personal consumption rose 0.1%. Income surprised to the upside, while spending disappointed. Inflation remains within the Fed’s target, with the core PCE index rising 0.1% MOM and 1.8% YOY. The headline PCE, which includes food and energy, was flat MOM and up 1.4% YOY. Wages and salaries were up 0.6% MOM and up 4.8% YOY. Given that inflation is running below 2%, we are seeing real wage growth.

 

Durable goods orders rose as well, increasing 0.2%, while the Street was looking for a decrease of 1%. Ex-transportation they were up 0.5%, again above expectations. Business capital expenditures disappointed, however falling 0.2%.

 

Pending home sales rose 1.6% in August, according to NAR. “It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply.” The Western region was up 8% YOY as falling mortgage rates are improving affordability.

 

Millennials are continuing to leave the big cities, as they head to the suburbs to raise families (and also get priced out). New York City lost almost 38,000 young adults last year, which was twice the decline it had seen in the previous few years. When the Millennials were younger, urban walkable environments were all the rage and many in the industry thought this time was different. It wasn’t. The Millennial generation is getting married later and having kids later, but it seems like they are going for the same thing every generation prior to them wanted: space, good schools, etc. This is good news for the builders at the lower price points. Take a look at PulteGroup’s chart below.

 

pulte

 

The IPO market is still broken. Peloton was the most recent IPO to break price on the open. “Break Price” means to trade below the IPO price. It opened around $27 versus an IPO price of $29. This won’t help We Work’s IPO which is looking like an absolute dumpster fire as the price keeps getting cut. Historically, IPOs would trade at substantial premiums to their offering price, but those days are over. This represents the change in who pays the bills for investment banks, from the buy side to issuers.

Morning Report; Whistleblower complaint released

Vital Statistics:

 

Last Change
S&P futures 2988 1.25
Oil (WTI) 56.05 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.93%

 

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

 

The House Intelligence Committee released the whistleblower complaint. This is a developing story and I have not read the complaint carefully, but it seems to be all hearsay. In other words, the whistleblower is recounting things he heard from other people and did not hear directly. My guess is that the issue is going have a similar fate to the Russian Collusion story – it will fall down along partisan lines again, and the markets will largely ignore the story. At the margin, it should mean lower stock prices and lower interest rates, but it probably won’t be meaningful.

 

New Home Sales came in at 713,000, which was up 7.1% MOM and 18% YOY. The standard deviations on new home sales is always huge, so take it with a grain of salt. The South and the West experienced the biggest gains. Note that housing has been a drag on the economy for six consecutive quarters, and it appears that it will finally contribute to GDP.

 

Speaking of GDP, the third revision to second quarter GDP is out. Growth came in at 2%, and the inflation numbers were tweaked upward. The core PCE index rose 1.9%, up from the 1.7% previous estimate and the headline number was bumped up 0.2% to 2.4%. The uptick inflation doesn’t appear to have had any impact to the Fed Funds futures.

Morning Report: The impeachment process begins

Vital Statistics:

 

Last Change
S&P futures 3968 -2.25
Oil (WTI) 56.35 -0.64
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.91%

 

Stocks are flattish this morning despite overseas weakness and Trump Impeachment news. Bonds and MBS are flat.

 

The news that Nancy Pelosi was opening an impeachment inquiry over the Trump / Ukraine situation was a non-event market-wise. Stocks and bonds didn’t budge. Supposedly Trump will release the transcript of the call today, and will make the whistleblower available to Congress. We will see where this goes, but market-wise it will take a while to play out. Check out the chart of the S&P 500 during 1998 when the whole Bill Clinton impeachment situation was played out:

 

clinton

 

Here is a chart of the bond market during the same time period (10 year yield). Looks like we saw a drop in the 10 year of about 160 basis points peak to trough during the whole process. Note that this is a classic example of the old market saw “buy the rumor, sell the fact.” The market priced in impeachment before the votes even took place. If you got short on the votes, you got your head handed to you. If you bought the Treasury flight to safety in late summer of 98, when the whole thing was coming to a head, you were too late, and were on the wrong side of the trade by that point.

 

clinton bond

 

There was some slight movement in the Fed Funds futures for December, with the current odds at 22% no cut, 52%, a 25 basis point cut, and 26% chance of 50 basis points. Note that the repo market issues has been taken by the Fed that they don’t have as much leeway to shrink the balance sheet as they had anticipated.

 

Mortgage applications fell by 10% last week as purchases fell 3% and refis fell 15%. Rates were more or less flat at 4.01% last week, so the refi number is a surprise. That said, mortgage rates had risen about 20 basis points over the past few weeks, so maybe this was a catch-up phenomenon. Despite the back up in rates, the MBA estimates that 2019 will be the best year since 2016, with originations expected to hit $1.9 trillion.

 

Consumer confidence fell in September on trade fears and darkening expectations. The present conditions index fell but it was mainly future expectations that drove the decline.

Morning Report: Fannie and Fred are told to level the playing field.

Vital Statistics:

 

Last Change
S&P futures 3005 7.25
Oil (WTI) 57.95 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.96%

 

Stocks are higher this morning after China made some agricultural trade concessions to the US. Bonds and MBS are flat.

 

House prices rose 0.4% MOM and 5% YOY in July, according to the FHFA House Price Index. Home price appreciation has slowed across the board compared to 2018’s numbers. This is despite a meaningful drop in rates. Separately, the Case-Shiller index was more or less flat on a MOM basis and up a couple of percent annually.

 

FHFA regional

 

One of the best predictors of rising wages is the quits rate, which has been inching up slowly since the economy bottomed out in 2009. The latest reading had it at 2.6%. We are seeing an uptick in the quits rate for the bottom income brackets, with 12% of all lower income households switching jobs during the spring and early summer. For all the concern about income inequality, this is a welcome sign.  Separately, another 1.3 million workers will qualify for overtime pay due to a new Labor Department directive.

 

The FHFA has issued a directive to Fannie Mae and Freddie Mac to end guarantee fee discounts for high volume lenders. “We trying to make sure Fannie and Freddie aren’t driving consolidation in the market, but instead they’re providing a level playing field, and that’s really something we’re focused on,” Calabria said Monday at a National Association of Federally Insured Credit Unions conference. “One of the things that really concerned me before the crisis was that it wasn’t unusual where the big guys like Countrywide would come in and they pay G-fees down here and you come in and pay G-fees up here.” The ruling would level the playing field for smaller lenders, and apply the principle of “same rate of return for the same risks, regardless of size.”

 

What will be the implications of this change? Until we have a better grasp of how Fannie will make changes, it is hard to tell. It will probably push the redevelopment of the private label securities market. If other insurers can compete for the big aggregators, then we might see a more competitive marketplace, and will reduce the taxpayer’s footprint in the mortgage market.

Morning Report: Summer recession trade gets smashed

Vital Statistics:

 

Last Change
S&P futures 3987 -2.25
Oil (WTI) 58.05 -0.04
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.96%

 

Stocks are flattish as trade progress was offset by weakness in overseas economies. Bonds and MBS are up.

 

Global bond yields are falling this morning after a dismal ISM manufacturing reading for Germany. The Bund is down 5.5 basis points to negative 57 bps, which is pulling down US Treasury yields. We have a big week of data, with home prices tomorrow, new home sales on Wednesday, GDP on Thursday, and Personal Incomes / Spending on Friday. We will also have Fed-speak every day except Tuesday.

 

The NY Fed addd $50 billion in cash to the markets this morning to ease pressure in the overnight repo markets. A shortage of cash last week pushed overnight repo rates to 10% last week. Mortgage Backed security repo rates spiked last week along with Treasuries, but MBS are now back to normal levels. A rise in MBS repo rates can make leveraged bets in MBS more expensive (this really affects mortgage REITs) and will therefore make them require a higher return, which means higher mortgage rates, at least at the margin.

 

Note that Fannie Mae has also reportedly backed off its pricing last week, especially at the higher note rates in response to pressure from regulators. These changes went into effect on Thursday. Reportedly, the increase was in the 25 basis point range on average, but it was lower at the 3% note rates and up to 50 basis points higher up in the stack. From the chatter I am hearing Freddie adjusted as well, but not as dramatically. What does this mean? Pricing for investment properties will be hit hard, and borrowers are not getting paid much to buy up the rate.

 

The MBA made its recommendations to the CFPB over how to best deal with the GSE patch. The MBA recommends that the CFPB scrap the 43% debt to income ratio standard and pursue a more holistic method of determining a borrower’s ability to pay. The MBA lays out a number of recommendations for how to de-emphasize the importance of DTI. The GSE patch is set to expire in January 2021.

 

The Chicago Fed National Activity Index showed an uptick in activity during August. Production-related indices drove the increase, while employment-related indicators were flat. Many traders who were making recessionary bets (short stocks / long bonds) earlier in the summer (based on trade fears) found themselves on the wrong side of the boat this month. The S&P 500 is flirting with all-time highs, and the 10 year bond yield backed up nearly 30 basis points since the start of the month. The CBOE volatility index (VIX) has fallen from 25 in early August to around 15, which is historically a benign level.

 

VIX

Morning Report: James Bullard explains his dissent

Vital Statistics:

 

Last Change
S&P futures 3012.25 5.25
Oil (WTI) 58.67 0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%

 

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

 

Existing home sales rose 1.3% in August, according to NAR. Sales are up 2.6% from a year ago to a seasonally adjusted annual rate of 5.49 million units. The median existing home price rose to $278,200, which was up 4.7%. “Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” said Yun. “Homebuilders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.” Inventory did fall to 1.86 million units, which represents a 4.1 month supply. In the “every dog has its day” category, the Northeast led the pack with a 7.6% increase in sales although the median home prices was flat. The Northeast still has a glut of higher priced inventory it needs to work through.

 

In other economic news, the index of leading economic indicators was flat in August, and initial jobless claims came in at 205,000. The Fed’s balance sheet increased to $3.845 trillion in assets.

 

St. Louis Fed President James Bullard explained his dissent on Wednesday’s FOMC vote. While the Committee ended up easing by 25 basis points, Bullard wanted to cut rates by 50 basis points.

 

First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.

Second, core and headline personal consumption expenditures (PCE) inflation measures continue to run some 40 to 60 basis points, respectively, below the FOMC’s 2% inflation target. Market-based measures of inflation expectations continue to indicate expected longer-term inflation rates substantially below the Committee’s target. This is occurring despite the 25 basis point cut in July and the 25 basis point cut that was expected for the September meeting. While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.

 

The quote about manufacturing is interesting. Industrial production rose 60 basis points last month and manufacturing production was up 50 bps. Capacity utilization rose 40 basis points as well. We had one reading on the ISM that came in at 49.1, which was technically below 50, where manufacturing is neither contracting nor expanding. For all intents and purposes, it was flat given the inherent error built into these sentiment surveys. Historically, a manufacturing ISM reading of 42 corresponds with an overall recession. FWIW, the ISM reading of 49.1 usually corresponds with a GDP growth rate of 1.8%. In other words, hardly recessionary, and manufacturing represents only about 13% of the US economy to begin with. The statement about G7 rates is probably what is driving things – the Fed is simply following the markets.

 

Home equity rose 4.8% in the second quarter, or about 428 billion. Negative equity fell by 9%, or about 151,000 homes. The home equity number is a new record, and home equity has doubled since the depths of the housing recession. You can see below which parts of the country still have a negative equity issue to work through.

 

corelogic home equity

Morning Report: The Fed cuts rates.

Vital Statistics:

 

Last Change
S&P futures 3007.75 0.25
Oil (WTI) 59.37 1.24
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.00%

 

Stocks are flat after the Fed cut rates yesterday. Bonds and MBS are up small.

 

As expected, the Fed cut rates 25 basis points amidst concerns about capital expenditures and investment. The decision was 7 to 3, with one dissenter (Bullard) who wanted a 50 basis point cut and two dissenters (George and Rosengren) preferring to maintain current policy. The economic projections were largely unchanged, with a few upward tweaks to 2019 and 2021 GDP estimates, and a slight change to unemployment. Inflation measures were unchanged. The Fed Funds estimates were revised downward anywhere from 25 – 37 basis points compared to the June dot plot.

 

Sep-June dot plot comparison

 

Powell was noncommittal on future moves: “There will come a time, I suspect, when we think we’ve done enough. But there may also come a time when the economy worsens and we would then have to cut more aggressively. We don’t know.” In other words, we are data-dependent. The German Bund has sold off a touch, with the yield moving from negative 70 basis points a couple of weeks ago to negative 50 basis points now. FWIW, the Bund seems to be leading the dance.

 

Bonds initially sold off on the move, with the 10 year rising 4 basis points to 1.8%. This morning, we are back down to where we started. The December Fed Funds futures are predicting a 14% chance of another 50 basis points in cuts, a 49% of a 25 bp cut and a 37% probability of no further changes. Trump weighed in on the cut as well tweeting: “A terrible communicator. Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision!”

 

The spike in overnight repo rates (which got as high as 10% at one point) has raised an interesting question: The overnight repo rate is supposed to be the index that replaces LIBOR. While the complaint about LIBOR was the presence of some jiggery-pokery by the big banks, is the the cure (an index that can spike 800 bps in a day) really better than the disease? Note this flows through the whole mortgage ecosystem, with MBS repo rates, ARM pricing, warehouse line pricing, etc. It might not yet be ready for prime time.

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