Morning Report: Jerome Powell says rates are going nowhere for a while.

Vital Statistics:


  Last Change
S&P futures 3770 -21.3
Oil (WTI) 52.74 -0.74
10 year government bond yield   1.10%
30 year fixed rate mortgage   2.88%

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


Retail Sales dropped 0.7% in December. This was well below expectations. Ex-gasoline and autos, sales fell 2.1%. This shows the economy is moving in the wrong direction, and I suspect we will see economists take down their estimates for fourth quarter US GDP growth. Separately, the University of Michigan Consumer Sentiment Index fell in January.


Industrial Production rose 1.6% while manufacturing production rose 0.9%. Capacity Utilization rose to 74.5%. We still have a lot of wood to chop to get back to pre-COVID levels here as well.


Fed Chairman Jerome Powell said that “now is not the time” to discuss tapering bond purchases. “Now is not the time to be talking about exit,” from the $120 billion in government securities the Fed is buying each month, Powell said in a web symposium with Princeton University. “A lesson of the Global Financial Crisis is be careful not to exit too early, and by the way try not to talk about exit all the time…because the markets are listening.” ”The economy is far from our goals…and we are strongly committed…to using our monetary policy tools until the job is well and truly done.” He went on further to say that the goal is to get the labor economy back to where it was pre-pandemic. The focus for that will be on lower-wage employment and wage growth.

Bottom line: mortgage rates are probably not going to get away from us for a while. A easy non-legislative way to put money in people’s pockets is to allow them to refinance their mortgage at a lower rate. With 32 million borrowers out there able to save 75 basis points on their rate, it will take years to do all of those loans, given industry capacity constraints. Powell knows this, and unless inflation magically appears from out of the blue, rates are staying low.


The FHFA will not leave conservatorship in the near term. There was talk of the Trump Administration letting them go, but that was always a long shot. FWIW, I do not see the Biden Administration releasing them either – if anything I could see them reinstituting the profit sweep and getting a whole slew of new affordable housing mandates.



Morning Report: Small Business Optimism headed back down.

Vital Statistics:


  Last Change
S&P futures 3811 7.3
Oil (WTI) 51.67 0.94
10 year government bond yield   1.01%
30 year fixed rate mortgage   2.88%

Stocks are higher this morning on hopes of a stimulus package. Bonds and MBS are flattish.


Joe Biden revealed a $2 trillion stimulus package. It will include $2,000 payments, aid for state and local governments and extended unemployment benefits. Separately, Mitch McConnell moved the impeachment trial for Trump until after Joe Biden takes office.


New York City renters owe $1 billion in back rent, according to one survey. It probably is closer to $2 billion. According to one housing advocate, the government could wipe that amount out with aid to the New York City. “It’s not an insurmountable amount,” Mr. Martin said. “The numbers tell us that, probably, if we could get an additional billion or two dollars in the city, we could probably pay off every single renter’s arrears in the entire city of New York over the last year of the crisis.” This may be where the government is headed, with the government making rent payments until the crisis is over. This is a risky course of action, as it will encourage a stampede of rent defaults with the government writing checks and asking questions later. Also, it has to be bearish for apartment pricing in the City as well. I don’t know how you account for potentially unenforceable rent contracts in your cap rate assumptions.


The National Federation of Independent Businesses reported that sentiment fell dramatically in December. “This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

The plus side for the economy going forward is more government aid, and a robust housing market. The downside is more government regulation and general anti-business sentiment.


Mortgage Applications rose 16.7% in the first week of January as purchases rose 8% and refis rose 20%.


Initial Jobless Claims are headed in the wrong direction, with the number of newly unemployed increasing to almost 1 million.

Morning Report: Uncertainty

Vital Statistics:


  Last Change
S&P futures 3809 17.3
Oil (WTI) 51.67 0.94
10 year government bond yield   1.09%
30 year fixed rate mortgage   2.82%

Stocks are higher this morning despite a pretty lousy jobs report. Bonds and MBS are down.


The jobs report showed a loss of 140,000 jobs in December, which was well below the expected 50,000 gain. The unemployment rate slipped to 6.7% and hourly earnings rose by 5.1% YOY. The labor force participation rate was flat at 61.5%.


Given the riot that happened yesterday in DC, I am surprised to see bonds continuing to sell off. My gut tells me that part of the reason is that the bond market is still adjusting to the surprise result in the GA Senate runoff. Yes, we will get more stimulus which is theoretically inflationary. That said, all of the chaos in DC should be considered bond bullish, and I do think the stock market is in a state of denial. This is setting up for an unfriendly business environment.

As things settle down, I suspect the watchword for the business community will become uncertainty. Uncertainty is the reason for not hiring, not spending, etc. Ultimately, Biden is a bit of a blank screen, and until the business community knows whether we are getting Bill Clinton or Barack Obama’s regulatory state it will choose to sit on its hands. Someone remarked that the DC riot is the left’s 9/11, and they want revenge. An angry left is not conducive to commerce. All you can do is hunker down, play it safe and wait for the storm to pass.

I will be willing to bet that the NFIB Small Business Optimism Index will take a dive the next time it is released. Ultimately, this state of affairs should be considered bond bullish, and I suspect rates will be headed back down. The stock market is still being elevated by the Fed and speculative activity (I read somewhere that 6% of the volume in the market has been in one name: Tesla).

Ultimately, if the economy slows (which seems to be the case), the Fed’s bond purchases will have to stay in place. This means that mortgage rates should have a lid on them for the foreseeable future. While I don’t see a return to the economy of 2009-2010, I do think the pre-COVID economy is probably not in the cards for a long time. This is why I think rates are headed back lower.



Morning Report: Looking ahead

Vital Statistics:


  Last Change
S&P futures 3757 17.3
Oil (WTI) 50.57 -0.04
10 year government bond yield   1.07%
30 year fixed rate mortgage   2.81%

Stocks are higher this morning after Trump agreed to an orderly transfer of power. Bonds and MBS are down.


Now that the Democrats control 100% of government, the first order of business will be $2,000 stimulus checks. The other big item on the menu will be a bailout for the Big Broke Blue States of NY, CA and NJ. The left has been itching to raise taxes, however I see that as a long shot while the economy is still in a COVID weakened state. I don’t see a tax hike as something we need to worry about right off the bat. GSE reform will also go to the back burner. I wouldn’t be surprised to see the government re-instate the net profit sweep.


The bigger fear is that the bond market continues to sell off, which counteracts what the Fed is trying to do. The fact that TBA prices are lagging the move in Treasuries indicates that the Fed is still firmly in control of this market and that mortgage rates will stay low. The Fed realizes that the easiest way to get money into people’s pockets is to let them cut their mortgage payment or to get a cash-out refinance. I suspect the Fed will keep the refi boom going for the near term by supporting the TBA market.


The supply / demand imbalance in the housing market should guarantee that home prices keep appreciating. The one thing that worries me is an extended foreclosure and eviction moratorium. The left has zero sympathy for landlords, and they haven’t thought through the consequences of letting people live rent-free for an extended period of time. I wouldn’t touch a non-QM NOO mortgage with a barge pole right now.


The FOMC minutes were uneventful. Unsurprisingly, the Fed is worried about the economy, and low inflation. They didn’t say anything we didn’t already know.


Initial Jobless Claims came in at 787k last week, while the Challenger and Gray job cut report showed 77,000 announced job cuts in December.

Morning Report: The bond vigilantes return

Vital Statistics:


  Last Change
S&P futures 3699 -19.3
Oil (WTI) 50.02 0.24
10 year government bond yield   1.03%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning as the Georgia runoff results are coming in. Bonds and MBS are getting clobbered.


Democrats have won one of the GA Senate seats and the other remains too close to call. Unified control of the country by Democrats is bearish for stocks and bonds, and the 10 year is trading above 1%.


The reaction in the bond market indicates that the bond vigilante is awakening from its 30 year slumber. The Bond Vigilantes bedeviled Bill Clinton’s first term as anything he did to stimulate the economy was greeted with higher interest rates.


The FOMC minutes will be released around 2:00 pm this afternoon. It probably won’t be market-moving, but just be aware.


Mortgage Applications fell 4.2% over the two week holiday period as purchases fell 0.8% and refis fell 8%. “Mortgage rates started 2021 close to record lows, most notably with the 30-year fixed rate at 2.86 percent, and the 15-year fixed rate at a survey low of 2.40 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The record-low rates for fixed-rate mortgages is good news for borrowers looking to refinance or buy a home, as around 98 percent of all applications are for fixed-rate loans. Despite these low rates, overall application activity fell sharply during the holiday period – which is typical every year. Refinance applications were 6 percent lower than two weeks ago, and purchase activity less than 1 percent from its pre-holiday level.”


The economy lost 123,000 jobs in December, according to the ADP report. The Street is looking for 65,000 jobs in this Friday’s jobs report.


Manufacturing improved in December, according to the ISM Report. Overall, the report says that despite the COVID-19 headwinds, things are getting better. One thing did jump out at me: Every commodity was up in price. Nothing was down, and there were all sorts of shortages. Whether this is just a COVID-related bottleneck remains to be seen, but commodity booms are usually associated with higher inflation.

Morning Report: Another mortgage banking IPO

Vital Statistics:


  Last Change
S&P futures 3683 -9.3
Oil (WTI) 48.82 0.24
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning after yesterday’s sell-off. Bonds and MBS are flat.


Construction spending rose 0.9% MOM and 3.8% YOY. Residential construction rose 2.6% MOM and 16.2% YOY. 2021 should be a breakout year for housing construction.


Home prices increased 1.1% MOM and 8.2% YOY, according to CoreLogic. “The housing market performed remarkably well in 2020 despite the volatile economic state,” said Frank Martell, president and CEO of CoreLogic. “While we can expect to see lingering effects of COVID-19 resurgences and subsequent shutdowns in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong.” FWIW, I believe that economists are not factoring into their forecasts that housing starts are going to rocket this year. Housing as has a huge multiplier effect and that will offset some of the COVID-driven weakness.


Many economists are forecasting mortgage rates to stay in the 2% range next year. The MBA forecasts rates will rise in the second half of next year. Personally, I don’t see that happening. The Federal government is writing checks to people in order to put money in people’s pockets. One of the most bang-for-the-buck ways to do that is to lower someone’s housing payment. The Fed wants the refi boom to last – that is partly why it is buying MBS.

What about inflation? The Fed has said it wants to target an average inflation rate, and since inflation has been below the Fed’s 2% target for years, they will have to accept inflation above the 2% target for a long time in order to get the average up. While the Fed has been pulling out all the stops trying to create inflation, that doesn’t guarantee it will be successful. Witness Japan, which has run the same playbook for a generation only to achieve deflation.


Striking while the iron is hot: Amerihome is the latest mortgage banker to file for an IPO. The company plans to raise about $250 million and the price talk values the company around $1.3 billion.

Morning Report: Housing affordability declines

Vital Statistics:


  Last Change
S&P futures 3763 14.3
Oil (WTI) 48.72 0.24
10 year government bond yield   0.94%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on strong overseas economic data. Bonds and MBS are down small.


This week contains a lot of Fed-speak as well as the FOMC minutes on Wednesday. On Friday, we will get the jobs report. On Tuesday, the GA Senate runoff elections will happen, and that could be market-moving as well. Gridlock will be more positive for the markets than an aggressively leftist one will be.


Joe Biden is setting up for an aggressive regulatory state, at least on the environmental side. I have to imagine he will do the same thing on the financial side.


The decrease in interest rates has pushed up housing prices and is making homes less affordable, according to data from ATTOM. “Owning a home in the United States slipped into the unaffordable zone for average workers across the nation in the fourth quarter as the numbers continued a year-long slide in the wrong direction,” said Todd Teta, chief product officer with ATTOM Data Solutions. “The latest housing market data shows the average worker unable to meet the 28 percent affordability guideline used by lenders. That’s happened as home prices have continued rising throughout 2020 and the housing market has remained remarkably resilient in the face of the brutal economic fallout from the coronavirus pandemic. The future remains wholly uncertain and affordability could swing back into positive territory. But for now, things are going in the wrong direction for buyers.”


New York State bans evictions. It also prevents lenders from foreclosing on landlords who own 10 or fewer units.

Morning Report: Pending Home Sales fall

Vital Statistics:


  Last Change
S&P futures 3720 -4.3
Oil (WTI) 47.92 -0.44
10 year government bond yield   0.92%
30 year fixed rate mortgage   2.78%

Stocks are flattish as we end out 2020. Bonds and MBS are flat as well.


Pending Home Sales fell 2.6% in November, according to NAR. Year-over-year contract signings were up.

“The latest monthly decline is largely due to the shortage of inventory and fast-rising home prices,” said Lawrence Yun, NAR’s chief economist. “It is important to keep in mind that the current sales and prices are far stronger than a year ago.”

“The market is incredibly swift this winter with the listed homes going under contract on average at less than a month due to a backlog of buyers wanting to take advantage of record-low mortgage rates,” Yun said.


For 2021, NAR predicts existing home sales will rise 10% and new home sales will rise 20%. The mortgage rate will rise slightly from 2.7% to 3%.


Initial Jobless Claims fell to 787k last week.


Other than that, have a Happy New Year and see you on the other side.

Morning Report: Doug Kass’s 15 surprises for 2021

Vital Statistics:


  Last Change
S&P futures 3743 15.3
Oil (WTI) 48.22 0.64
10 year government bond yield   0.95%
30 year fixed rate mortgage   2.78%

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


Home prices rose 1.6% in October and were up 7.9% on a year-over-year basis. With mortgage rates continuing to hit new lows, and a complete dearth of inventory, home price appreciation should continue.


Doug Kass released his 15 surprises for 2021. Doug’s surprises are always an entertaining read. Note that by definition, a “surprise” is not a high-probability event, it is like picking an upset in your NCAA bracket. Some of more interesting predictions revolve around inflation:

Surprise #5 Bottlenecks Multiply and Inflation Surges –There are bottlenecks everywhere in 2021 and inflation in places beyond financial assets. As the economy reopens, there are shortages of almost everything. Commodities boom, but so do service prices. It seems that prices of everything from shipping to manicures are on the rise. The infrastructure bill sends construction material prices through the proverbial roof. Pent up savings are unleashed in robust consumer demand. Concerts, sporting events reopen with limited capacity and tickets are in hot demand. Residential real estate (single and multi family) soar in price, as people put stimulus, the recovery and stock market winnings into real estate. By mid-year, even the badly manipulated CPI is running up +4%.

Surprise #6 Inflation and Interest Rates Rip Higher Leading to A Valuation Reset (Lower) For Equities in 2021… At first, the bond market reacts “normally” to rising inflation. The 10 year yield breaks 2% (to the upside). The stock market has a late spring/early summer wobble in response to rising rates and the possibility that target inflation will force higher rates. A mid-year Treasury auction goes poorly. The Federal Reserve, faced with the dilemma of choosing between a lower stock market and higher inflation, chooses to accept higher inflation. The Fed announces a cap on the 10 year yield at 1.5% and expresses its willingness to do whatever it takes to enforce it. In effect, the Fed becomes the Treasury buyer of first resort. This sends stocks, commodities and most everything briefly higher (towards the upper end of the 3600-3800 S&P trading range) – except the dollar, which falls 10%-15%. Though temporarily ignored by infinite liquidity and easing financial conditions at all costs, it grows clear that Covid-19 spurred a dangerous leveraging up in the global economy that has been almost constantly in place since The Great Decession of 2008-09. Higher inflation and interest rates bring the “bond vigilantes” out of their long hibernation. Stocks fall by -15% over the last six months of the year as price earnings multiples contract in the face of the highest level of corporate defaults in over a decade (led by companies in the retail space and others that were already struggling prior to the virus). Credit spreads (now at record lows), widen dramatically, the CLO market collapses and private equity companies are among the worst market performers of the year.

Doug’s comments about shortages touches on what has been missing from the whole inflation puzzle. Market prognosticators have been wrong about inflation for decades because they focus solely on the monetary aspect. Inflation is too much money chasing too few goods. The “too few goods” piece of the puzzle has been missing, since China has been producing cheap goods for decades. “Too much money” is a necessary, but not sufficient, condition for inflation.

One of the “tells” for higher inflation is higher capacity utilization. This is an indicator that factories are maxed out, and increasing demand will push up prices, not output. Take a look at capacity utilization over the past 50 years:

Compare capacity utilization rates in the 1970s versus today. If demand increases, there is plenty of slack in the system to meet it. Obviously COVID is adding some constraints, but that is a temporary phenomenon.

I do think Doug’s point about the Fed capping the Treasury yield is interesting, although I think with all of the deflationary forces around the world: Japan, Europe, it will be hard to create an inflationary cauldron in the US while the rest of the world struggles with deflation.


Morning Report: Stimulus Bill Passes

Vital Statistics:


  Last Change
S&P futures 3721 25.3
Oil (WTI) 48.21 0.24
10 year government bond yield   0.96%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning after Trump signed the COVID-19 relief bill. Bonds and MBS are down.


The stimulus bill includes $600 checks for most Americans, and also includes a continuing resolution to keep the government open.


This should be a quiet week between Christmas and New Years. Markets will be closed on Friday, and the bond market closes early on Thursday. There doesn’t appear to be any market-moving data either, although we will get Case Shiller and Pending Home Sales.


While Treasury yields have been inching up, mortgage rates continue to hit new lows. This has been driven primarily by Fed MBS purchases and increased competitive behavior from originators. While existing homeowners are benefiting from lower rates, the first time homebuyer is struggling to find anything affordable as inventory is stuck at record lows.


Unintended consequence of Fed policy: stock market margin debt is at an all-time high. Today’s WSJ has a story of a guy who sold his house and spent some of the proceeds to buy Tesla call options. IMO the Fed has painted itself into a corner here, and I suspect returning to any sense of pre-COVID normalcy will be a rough road indeed. Meanwhile, Bitcoin continues to soar, and home prices are rising at a double digit rate.



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