All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	3521	-11.6
Oil (WTI)	40.22	-0.79
10 year government bond yield		0.74%
30 year fixed rate mortgage		2.91%

Stocks are lower as we kick off earnings season. Bonds and MBS are up.

JP Morgan reported better-than-expected earnings this morning. The biggest news from the bank was that it took no further provisions for loan losses. Mortgage banking revenue and income increased due to wider spreads, however volumes were up 20% on a QOQ basis but down 10% compared to a year ago. The number of mortgages with payment deferrals dropped about 50% compared to June 30, which is about 4.4% of the portfolio. 91% of borrowers who exited payment deferrals were current. JPM stock is flat on the open.

Inflation at the consumer level rose 0.2% MOM and 1.2% YOY. The increase was driven mainly by an increase in the price of used cars; without transportation, inflation would have been close to zero. Ex-food and energy, inflation rose 0.2% MOM / 1.7% YOY.

Small business optimism increased in September, however uncertainty remains a huge issue.

“We are experiencing the shortest recession in modern history, starting in March or April and ending no later than September (official dates will eventually be determined by the National Bureau of Economic Research once more precise data are available). Housing is probably the hottest sector, posting record home sales last month and double digit price increases. More construction firms have unfilled job openings than in any other industry. Durable goods orders were strong except for aircraft, autos were weak after several strong months. Non-defense capital goods orders (excluding aircraft) were also very strong.”

Home prices rose 1% MOM and 5.9% YOY, according to CoreLogic. Interestingly, CoreLogic expects prices to decline over the next year. Not sure I buy that given the supply / demand imbalance and rates at record lows.

Fannie Mae’s Chief Economist Doug Duncan offers his predictions for next year.

“Current homeowners are more pessimistic than potential new buyers – they’re pessimistic because they’re afraid of somebody coming to their house and walking through with the virus or the fact that other people won’t go out and shop because of fear of the virus, so they might take a discount on their house price,” Duncan said. “They’re simply not offering houses for sale, and you did see a big drop in listings at that time.”

If there is a resurgence of COVID-19 without an effective vaccine broadly distributed, Duncan said that the ‘W-shaped’ environment could become a reality.

“In that environment, I would not expect a normal housing cycle because what would happen is, then those businesses which have been able to keep going and keep their salary workers, who tend to be more in management in place, would start laying those people off and that’s when the risks rise on the housing side,” Duncan said. “But if we get a relatively broadly distributed vaccine that is demonstrated to be effective, then I think we do return to a to a normal housing cycle, especially, unless the Fed changes its posture, if rates stay low, it will be viewed as a great opportunity for people to get in.”

Filed under: Economy, Morning Report |