Morning Report: New Lows on rates

Vital Statistics:

 

Last Change
S&P futures 2926 -29.25
Oil (WTI) 45.47 -1.79
10 year government bond yield 1.18%
30 year fixed rate mortgage 3.51%

 

Another day in paradise, with the stock market indices down a percent and bond yields at new lows. Stocks are on pace to have the worst week since 2008 as coronavirus fears infect the global markets. Oil is getting slammed as well.

 

Mortgage backed securities have lagged this move in a big way, so don’t be disappointed when you run a scenario. Rate sheets are not driven by the 10 year.

 

St. Louis Fed Governor James Bullard cautioned the market to not get ahead of itself regarding coronavirus. “Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time.” That said, ever since 2008, the markets have been the dog and the Fed has been the tail.

 

Personal incomes rose 0.6% in January, which was way more than expected. Personal spending rose 0.2%, which was below expectation, and inflation remained well below the Fed’s 2% target rate.

 

Pending Home Sales rose 5.2% in January according to NAR. “This month’s solid activity – the second-highest monthly figure in over two years – is due to the good economic backdrop and exceptionally low mortgage rates,” said Lawrence Yun, NAR’s chief economist. We are still lacking in inventory.” Supply is the lowest since 1999.

 

Where is iBuying (selling your home directly to Zillow or Opendoor) most popular? Turns out Phoenix and Raleigh. “It’s no surprise Raleigh and Phoenix led the nation in iBuyer share because those housing markets are iBuyer sweet spots and are poised for price growth in 2020,” said Redfin Chief Economist Daryl Fairweather. “These markets work well for iBuyers which tend to purchase homes that are relatively affordable, were built within the last few decades and are easy to price accurately because they are located in tract neighborhoods with largely homogenous housing stock.” Selling your home directly to Zillow (for example) isn’t necessarily cheap. Zillow charges anywhere from 7% to 9.7% to buy your home, so it isn’t like you are escaping the realtor commissions. This process probably appeals most in a competitive housing market, where a non-contingent offer can carry the day if everyone is close.

 

 

Morning Report: Markets now predicting a March rate cut

Vital Statistics:

 

Last Change
S&P futures 3070 -39.25
Oil (WTI) 46.77 -1.79
10 year government bond yield 1.28%
30 year fixed rate mortgage 3.54%

 

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

 

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

 

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver.  Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

 

new home sales

 

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

 

Interesting on the flight to safety trade – gold is up. bitcoin is not.

 

 

Morning Report: March rate cut comes into view

Vital Statistics:

 

Last Change
S&P futures 3143 11.25
Oil (WTI) 49.46 0.19
10 year government bond yield 1.36%
30 year fixed rate mortgage 3.54%

 

Stocks have stabilized this morning and rates are up a touch from their intra-day all time lows yesterday. At one point, the 10 year Treasury was trading at 1.31%. This morning, Treasuries are down a touch and MBS are flat. For the most part, MBS underperformed Treasuries yesterday.

 

Mortgage applications rose 1.5% last week as purchases increased 6% and refis fell by 1%. “Last week appears to have been the calm before the storm,” said MBA Chief Economist Mike Fratantoni. “Weaker readings on economic growth caused a slight drop in mortgage rates, bringing them back to their level two weeks ago, but applications overall moved 1.5 percent higher. Refinance applications for conventional loans dropped a bit, but FHA refinances increased more than 22 percent. Purchase volume remained strong, supported both by low rates and the increased pace of construction over the past few months. With housing supply at low levels, new inventory is a positive development for prospective homebuyers.”

 

The Coronavirus issue has spooked the Fed funds futures market. The futures are now predicting a 1 in 3 chance of a rate cut at the March meeting. Just one  month ago, the March futures were handicapping a 4% chance. Take a look at the December futures, which are now forecasting 2 or 3 cuts this year.

 

fed funds futures

 

Note that Dallas Fed President said yesterday: “It is still too soon to make a judgment about how it might relate to monetary policy. I still think we are a number of weeks away from being able to make the judgment” whether a rate change is required.” The April futures are already pricing it in.

 

Coronavirus fears didn’t do much to dampen US consumer confidence, which rose again. Historically consumer confidence has been an inverse of gasoline prices, in other words, when gasoline rises, consumers get salty and vice versa. Oil is now trading below $50 a barrel, and the refineries are beginning to switch from heating oil to gasoline refining. Good news for the summer driving season.

 

Luxury homebuilder Toll Brothers reported lower than expected earnings this morning and the stock is getting hammered pre-open (down about 9%). Earnings were down big and revenues missed guidance.

Morning Report: Rates steady

Vital Statistics:

 

Last Change
S&P futures 3239 12.25
Oil (WTI) 51.46 0.19
10 year government bond yield 1.37%
30 year fixed rate mortgage 3.55%

 

Stocks are higher this morning as coronavirus fears ease. Bonds and MBS are flat.

 

The 10 year bond yield traded briefly yesterday below the 2016 closing low of 1.37%. So far, that level seems to be holding. The trader in me thinks that any sort of good news on the coronavirus front will send rates back up 10 – 20 basis points. Big moves generally have decent retracements, and the 1.37% seems to be providing technical support. Note that the German Bund is not at record lows and any bounce up in rates there will be felt in the US. While it feels like the path of least resistance is down in rates over the long term, that might not be the case over the next few weeks. Lock accordingly.

 

Home prices rose 0.4% MOM and 2.9% YOY according to the Case-Shiller Home Price Index. Separately, the FHFA House Price Index rose 0.6% MOM and 5.1% YOY. The FHFA index only looks at homes with conforming mortgages, so it excludes jumbos and distressed.

 

It looks like economic growth improved in January, according to the Chicago Fed National Activity Index. Note that Goldman and others are taking down Q1 GDP growth estimates based on Coronavirus.

 

Intuit is buying Credit Karma, which will help the company create a “personalized financial assistant” to help people manage their money. Credit Karma bought Approved, a digital mortgage platform in 2018, and this will be part of the strategy. “We wake up every day trying to help consumers make ends meet. By joining forces with Credit Karma, we can create a personalized financial assistant that will help consumers find the right financial products, put more money in their pockets and provide insights and advice, enabling them to buy the home they’ve always dreamed about, pay for education and take the vacation they’ve always wanted.”

 

Joe Biden has a housing plan, which includes returning to the Obama-era CFPB practices (presumably regulation by enforcement action), spending $100 billion on affordable housing, and a tax credit of up to $15,000 for first time homebuyers. The plan also includes aid for low-income renters and a task force to combat homelessness.

Morning Report: Bond yields flirting with 2016 lows

Vital Statistics:

 

Last Change
S&P futures 3251 -88.25
Oil (WTI) 51.16 -2.19
10 year government bond yield 1.38%
30 year fixed rate mortgage 3.63%

 

Stocks are lower this morning on overseas weakness, as investors continue to fret about Coronavirus, which is spreading beyond Asia. Bonds and MBS are up (yields down) on the flight to safety trade.

 

The 10-year Treasury is trading just off the lows of 2016, where it hit 1.36%. FWIW, that is a modern historical low – long term rates never fell below 2% even in the Great Depression. How low can rates go? The thing about bubbles is that they on longer and further than anyone expects. How many people are talking about a sovereign debt bubble? It hasn’t even registered yet.

 

Existing Home Sales fell 1.3% MOM in January to an annualized rate of 5.46 million. Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.” The median existing home price was $266,300 up 6.8% from a year ago. The first time homebuyer accounted for 32% of sales.

 

Fannie and Freddie will be freed with “limited and tailored” government backstops, according to US Treasury Secretary Steve Mnuchin. SIFMA has warned that removing the explicit government guarantee from Fannie and Freddie’s MBS would have a devastating impact on the market. Remember during the crisis, a trial balloon was floated about removing the government guarantee, and Bill Gross shot it down with a howitzer. No mention was made of what will happen to current stockholders.

 

Wells agreed to pay $3 billion to settle DOJ and SEC cases over the fake accounts scandal. Whether this will permit the company to begin growing again remains to be seen. The Fed has restricted growth in Well’s balance sheet since 2017.

Morning Report: The Fed is concerned about coronavirus

Vital Statistics:

 

Last Change
S&P futures 3379 -6.25
Oil (WTI) 53.76 0.45
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.69%

 

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

 

The FOMC minutes didn’t reveal anything too surprising. The central bank is concerned about coronavirus, and the situation “warranted close watching.” In his Humphrey Hawkins testimony, Jerome Powell said he wanted to see evidence that Chinese disruptions are having a material effect on the US economy that will last. China is idling factories and restricting travel, and companies are now seeing the downside of stretched supply chains. In addition they fretted about persistently low inflation and searched for reasons why it has consistently missed their 2% target to the downside. Basically the message is that if rates are going anywhere, it is down not up.

 

In other economic news, initial jobless claims came in at 210,000 and the Philadelphia Fed manufacturing survey surged to a robust level of 37.

 

Mortgage delinquencies are the lowest on record (going back to 2000).  The total 30 day + DQ rate came in at 3.22%, which was down 14% YOY and down 5% on a MOM basis. This is unusual given that DQs often spike early in the year as holiday spending gets the better of people.

Morning Report: Housing starts jump

Vital Statistics:

 

Last Change
S&P futures 3376 6.25
Oil (WTI) 52.86 0.95
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.69%

 

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

 

Mortgage applications fell 6.4% last week as purchases fell 3% and refinances fell 8%.

 

Housing starts rose 21% on a YOY basis to 1.57 million, according to the Census Bureau. Building Permits were up 18% YOY to 1.55 million. Housing may turn out to be the economic surprise of 2020, and if that is the case, GDP estimates are way too low. Check out the chart below, and note the highlighted jump in starts over the past two months. Remember we are just going to back to historical averages, which doesn’t take into account population growth.

 

housing starts

 

Speaking of homebuilding, the NAHB Housing Market Index slipped from record levels but is still historically very strong. Separately, Tri Pointe reported that orders grew 52%. Interestingly, they hiked their stock buyback. If the housing market is really that strong, why not invest in the business as opposed to buying back stock?

 

Producer prices rebounded in January after a soft December. The headline number rose 0.5% MOM versus expectations of 0.1%. On a YOY basis, inflation remains close to the Fed’s target rate.

 

The minutes from the January FOMC meeting will be released at 2:00 pm EST. They shouldn’t be market-moving, and the interest seems to be on the balance sheet side of things.

 

Lots of merger activity in the financial space. Asset manager Franklin Resources is buying Baltimore stalwart Legg Mason.

 

Lending Club, a fintech that makes personal loans, just bought a bank in order to gain access to a cheaper source of funds. “What a bank charter does for LendingClub is it allows us to take what is the leading digital loan provider online and combine it with a leading digital deposit gatherer,” Scott Sanborn, CEO of LendingClub, said Tuesday on CNBC. “It totally changes the earnings profile of this business.”

 

Speaking of mergers, Ally is buying CardWorks in a $2.65 billion deal. The street doesn’t like it as the stock is down 10% pre-open.

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