Morning Report: Dovish FOMC minutes

Vital Statistics:

 

Last Change
S&P futures 2835.25 -22.4
Oil (WTI) 60.47 -0.95
10 year government bond yield 2.36%
30 year fixed rate mortgage 4.41%

 

Stocks are lower this morning on trade fears and European elections. Bonds and MBS are up.

 

The minutes from the April FOMC meeting were released yesterday, and the Fed continues to adjust its sails to the messages from the market. The bond market took the minutes to be dovish, and bond yields dropped after they were released. The quote that investors focused on:

 

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some
time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”

 

That statement (even if global economic and financial conditions continued to improve) is an all-clear signal to the bond market that positive economic data is no longer a threat. Given the background of creeping Eurosclerosis and a trade dispute, the highs for interest rates are probably in, and strategists are already talking about an insurance rate cut.

 

Talk of a rate cut is probably premature however. The data just don’t support it, and with the jawboning out of the White House the Fed is going to resist cutting rates if only to prove they are independent. That said, the circumstances required to justify a rate hike are even more unlikely.

 

Troubles in the luxury end of the real estate market? Not so fast. McMansion builder Toll reported earnings yesterday that exceeded street expectations, and Toll CEO Doug Yearley noted that the Spring Selling Season, which had been a bit of a disappointment, has finally woken up. “We are encouraged by the improvement in demand as the quarter progressed.  FY 2019’s April contracts surpassed FY 2018’s April on both a gross and per-community basis.  Although the Spring selling season bloomed late, it built momentum.  We view this as a positive sign for the overall health of the new home market.”

 

Initial Jobless Claims ticked up to 215,000 last week, while the Markit purchasing managers’ index decreased in April.

 

New home sales ticked down in April, falling to a seasonally adjusted annual pace of 673,000. That said, March’s numbers were revised upwards to 732,000. The median home price was more or less flat YOY at $326,400 and the inventory of 332,000 units represents a 5.9 month supply.

Morning Report: US rates held down by creeping Eurosclerosis

Vital Statistics:

 

Last Change
S&P futures 2859 -7
Oil (WTI) 62.65 -0.48
10 year government bond yield 2.43%
30 year fixed rate mortgage 4.41%

 

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

 

The MBA Secondary Conference was held in NYC on Monday and Tuesday, and it seemed (at least to me) to be much more sparsely attended than in prior years. The most obvious example was the HUB or the conference floor, where there were about half the number of booths. You could see it in the major sessions, where the seats were maybe 25% taken. Of course the secondary conference is largely an off-site event where people go to the various hotels around Times Square for meetings, but it definitely looks like traffic was down this year.

 

The big topic was growth and how to achieve it. Generally speaking most originators were focusing on non-QM as well as renovation loans as the best way to drive growth. Mergers were also mentioned as a way to increase volume. Mohammed El-Arian forecasted that rates will go nowhere in the near future, anchored by negative rates in Europe. The German Bund is trading at a negative yield of 8 basis points (in other words you have to pay for the privilege of lending to the German government), and many money managers prefer to invest in positive-yielding US Treasuries and roll the dice on the currency risk than to lock in a sure loss in German Bunds. He also doesn’t see any sort of recession for at least the next two years unless a massive trade war breaks out internationally.  You can see the creeping Eurosclerosis in the chart of the Bund yield below:

 

german bund

 

The Trump Administration is vetting Judy Shelton to fill a seat on the Federal Reserve Board. She is currently on the European Bank for Reconstruction and Development, which means she has already been through part of the confirmation process. She is in favor of keeping interest rates low, and has criticized the Fed’s methodology for setting the Fed Funds rate.

 

Existing home sales fell in April, according to NAR. They were down 4.4% from a year ago to a seasonally adjusted annual rate of 5.19 million. The median home price rose to 267,300 which is a 3.6% increase from a year ago. Inventory rose as well, to 1.83 million units, which represents a 4.2 month supply. Historically, 6 months would have been considered a balanced market, and we also have a mismatch between price points, where there is a glut of luxury properties and a shortage of entry-level homes. Days on market declined however to 24 days. “I think the market had a bit of a slow start in the Fall, but Realtors® all over the country have been telling me that April was a nice rebound. We’re hopeful and expect that this will continue heading into the summer,” said NAR President John Smaby, a second-generation Realtor® from Edina, Minnesota and broker at Edina Realty. “Homes over the last month sold quickly, which is not only a win-win for buyers and sellers, but it’s also great for the real estate industry.”

 

The mismatch between supply and demand is translating into more boomer empty-nesters staying in their homes. Trulia believes this is a matter of choice, but it may simply be the fact that there is not much demand for those 3,500 square foot homes. The demand is at the lower sizes and price points.

 

Mortgage applications rose 2.4% last week as purchases fell 2.4% and refis rose 8.3%. The average contract interest rate fell 7 basis points to 4.33%.

Morning Report: Housing starts weak, but sentiment strong

Vital Statistics:

 

Last Change
S&P futures 2865.5 10
Oil (WTI) 62.69 0.66
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.17%

 

Stocks are higher this morning as the market continues its rebound. Bonds and MBS are flat.

 

Housing starts rose 5.7% MOM to 1.23 million in April, which is down about 2.5% from a year ago. March was revised upward to 1.17 million. Building Permits rose to 1.3 million, up a touch from March, but down 6% YOY. We saw an increase in activity in the historically lagging areas – the Midwest and the Northeast. You would have thought that increasing home prices would drive more construction, but so far there is no evidence of that. Costs are increasing, especially labor costs. Tariffs are also being blamed, but lumber prices are down over 50% from a year ago.

 

lumber

 

Despite the slow and steady pace of new homebuilding, builder confidence did improve markedly in April, according to the NAHB Housing Market Index. “Builders are busy catching up after a wet winter, and many characterize sales as solid, driven by improved demand and ongoing low overall supply,” said NAHB Chairman Greg Ugalde. “However, affordability challenges persist and remain a big impediment to stronger sales.” “Mortgage rates are hovering just above 4% following a challenging fourth quarter of 2018 when they peaked near 5%. This lower interest rate environment, along with ongoing job growth and rising wages, is contributing to a gradual improvement in the marketplace,” said NAHB Chief Economist Robert Dietz.  “At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”

 

Initial Jobless Claims rose to 220,000 last week. The labor market continues to be strong.

 

 

Morning Report: Weak data sends bond yields lower

Vital Statistics:

 

Last Change
S&P futures 2832.5 -6
Oil (WTI) 61.11 -0.59
10 year government bond yield 2.36%
30 year fixed rate mortgage 4.17%

 

Stocks are lower after weak economic data out of China. Bonds and MBS are up.

 

Some weak economic data this morning, which is pushing bond yields lower. The 10 year is trading at 2.63%, which is the lowest level since December 2017.

 

Mortgage Applications fell 0.6% last week as rates were more or less steady. Purchases fell 0.6%, while refis fell 0.5%. The typical 30 year fixed rate mortgage came in at 4.24%. “Purchase applications declined slightly last week but still remained almost 7 percent higher than a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Despite the third straight decline in mortgage rates, refinance applications decreased for the fifth time in six weeks, albeit by less than 1 percent.”

 

Separately, 30-day and 60-day delinquencies did tick up in the first quarter, however foreclosure inventory is at the lowest level since 1995.

 

Retail sales disappointed, with the headline number coming in -0.2%. Ex autos, they rose 0.1% and the control group was flat. YOY, they were up 3.1%

 

Industrial Production and manufacturing production both fell 0.5% in April, while capacity utilization fell to 77.9%.

 

After the weak data, the December Fed Funds futures are forecasting a 76% chance of a rate cut this year, and the June futures are factoring in a 1 in 5 chance of a 25 basis point cut. 1 month ago, the markets were handicapping a 40% chance of a cut this year, so there has been a big change in sentiment. While that seems aggressive given the language out of the Fed, it is hard to ignore what the markets are saying.

 

fed funds futures

 

 

 

 

Morning Report: 35% of metro areas are overvalued

Vital Statistics:

 

Last Change
S&P futures 2821 26
Oil (WTI) 61.65 0.61
10 year government bond yield 2.42%
30 year fixed rate mortgage 4.17%

 

Stocks are higher this morning as overseas stocks rebound. Bonds and MBS are down.

 

Small Business Optimism increased in April, according to the NFIB. Pretty much every component of the index increased, with only capital expenditure plans unchanged from March. “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,” said NFIB’s Chief Economist Bill Dunkelberg.

 

What will global warming do to Florida real estate values? According to one environmentalist, lending for 30 year for Florida property is insane. “No one should be lending for 30 years in most of Florida,” [Woods Hole senior fellow Spencer Glendon] said at an investment conference in New York last week. “During that time frame, insurance will disappear and terminal values” — future resale income — “will shrink. I tell my parents that it’s fine to rent in Florida, but it’s insane to own or to lend.” Note that the US flood insurance is heavily subsidized and will probably have to be cut back if the more extreme forecasts end up being borne out.

 

Stocks had a bit of a rebound yesterday after Steve Mnuchin assured that the trade talks with China are still ongoing. Uber had another rough day, with the stock closing at $37.10 a share, down 18% from the IPO price on Friday.

 

30 day DQs are down 80 basis points from 4.8% to 4% according to CoreLogic. DQs fell in every bucket, and the foreclosure rate fell from 0.6% to 0.4%. Separately, home prices rose 3.7% YOY in February. 35% of cities have overvalued housing stock, while 26% are undervalued and 39% are fairly valued.

 

Corelogic overvalued

Morning Report: Wages and interest rates

Vital Statistics:

 

Last Change
S&P futures 2851 -35
Oil (WTI) 62.46 0.8
10 year government bond yield 2.43%
30 year fixed rate mortgage 4.15%

 

Stocks are lower this morning after rhetoric between the US and China hardened over the weekend. Bonds and MBS are up.

 

The rhetoric over trade intensified over the weekend, with both China and the US blaming each other for the impasse. As promised, the US hiked tariffs on $200 billion worth of Chinese goods on Friday and blamed China for reneging on its deal. In response, China said it would never surrender, and has raised tariffs on about $60 billion worth of US goods starting on June 1. FWIW, the issue with China is not so much tariff-related, it is intellectual property related.

 

This week is relatively data-light, at least as far as market-moving data is concerned. We will get housing starts and the NAHB Housing Market Index, along with a lot of Fed-speak.

 

Uber priced its IPO on Friday at $45 a share, and the stock ended up opening at $42. It never broke above the IPO price for the entire day. The record for IPOs has been downright awful and they have gone from being an almost sure thing to a greatest fool tournament. Historically, bankers would underprice IPOs by about 10% – 20%, so that investors would get a nice bump on the first day. Of course this means the company left some money on the table, but everyone was generally happy with that arrangement. Today, all the value is extracted in the pre-IPO funding rounds, so by the time it hits the public stock exchanges the companies are fully valued (if not overvalued). I have to imagine the big institutional investors are going to start turning these things down.

 

The share of 43%+ DTI loans going to Fannie and Freddie has almost doubled over the past couple of years from 15% to 30%. This is triggering more debate over the “QM patch” that allows safe harbor for loans with DTIs over 43% as long as they are GSE loans. This provision is slated to expire in 2021, but affordable housing advocates are pushing for it to be extended. Interestingly, the Urban Institute says that while default rates for 45+ DTI loans were higher prior to the crisis, that is no longer the case. Urban Institute has an agenda to push, so counterintuitive findings like that might be the result of some statistical jiggery-pokery and further examination is warranted.

 

Neel Kashkari is making the argument that rates should stay low due to income inequality. This is not necessarily a new argument – Janet Yellen said she was willing to let the labor market “run hot” for a while to wring all of the slack out of the labor market. Historically, the Fed has shied away from political footballs like income inequality, fiscal policy, etc given the fact that the Fed handles banking regulation and the Fed Funds rate – tools that aren’t suited to tackle either issue. In fact, you could make the argument that loose monetary policy increases inequality due to the fact that it pushes up asset prices. Here is another issue: if low rates increase the cost of shelter more than it helps increase wages, it could in fact be a negative for those that rent. Note that he isn’t arguing that the Fed should cut rates, but he is in favor of waiting to see if inflation returns.

 

That said, wage growth has been strong over the past couple of years as the labor market has strengthened. If you compare the yield on the 10 year bond to wage growth, historically they have correlated reasonably well. Over the past couple of years, the 10 year yield has fallen while average hourly earnings have increased. Given that labor’s share of GDP is still around historical lows, wages have to rise further to reach historical averages.

 

wage growth versus interest rates

Morning Report: Usury laws are back

Vital Statistics:

 

Last Change
S&P futures 2858 -14
Oil (WTI) 61.94 0.24
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.15%

 

Stocks are lower after the US imposed further tariffs on Chinese goods. Bonds and MBS are flat.

 

As promised, the US increased tariffs on about $200 billion of Chinese goods as trade talks continue. The Chinese vowed to retaliate, and that sent the Chinese stock market up sharply overnight. Both parties say they want to strike some sort of deal and it is possible this could get walked back.

 

Inflation at the consumer level rose 0.3% MOM and 2.0% YOY, right in line with the Fed’s target. Ex-food and energy, they were up 0.2% / 2.1%. Although the Fed doesn’t really pay too much attention to CPI (they prefer PCE), it keeps the Fed at bay, probably through the 2020 election.

 

Uber priced its IPO at $45 a share last night, towards the bottom of the range. The bankers claim that was due to market conditions, but the IPO market has been lousy in general, partly because all of the value is extracted in the funding rounds prior to the IPO, which means they are coming to the market priced for perfection. The lousy performance of Lyft’s IPO didn’t help matters either. A labor standoff with its drivers isn’t helping either.

 

Neel Kashkari discusses why we aren’t seeing inflation even at 3.6% unemployment. His main point is that the unemployment rate uses a measure of the labor force that is probably understated. You have to be actively looking for a job to be considered part of the labor force, and people who have been unemployed for over 6 months no longer count. The tell, therefore is wage growth. Given productivity has been running at around 1.5% and inflation is running around 2%, then non-inflationary wage growth should be around 3.5%. Since we are closer to 3%, there is still slack in the labor market. He also cited two interesting stats: First, of the people that got jobs in April, 70% said they weren’t looking for work in March. That suggests that many of these workers were on disability, which is basically long-term unemployment. The fact that they are coming back is a good sign. Second, the fall in the labor force participation rate offsets the unemployment effect. To get an apples-to-apples comparison of today’s job market versus the late 90s, 2.3 million more prime age workers (age 25-54) would need to have jobs. This also explains why wage growth has been running below what it should.

 

Usury laws are back. Bernie Sanders and Alexandria Ocasio-Cortez want to cap credit card interest rates at 15%. I guess the hope is that credit card companies will say “yes, we were overcharging you and we’ll still make money at 15%, so here you go.” In reality, all they will do is stop issuing cards to people with FICOs below a certain level. Credit card debt is unsecured, which means that the lender generally gets little to nothing if the borrower defaults.  So, they assign a probability of default and multiply the interest by 1 minus the default rate and decide whether that return is acceptable compared to other debt instruments. By the way, these ideas aren’t new. Much of this had been tried and rejected over the past 100 years, but i guess in politics and finance, knowledge is cyclical, versus cumulative as it is in the sciences.

 

Mortgage credit standards loosened last month as more lenders embraced non-QM lending. The MBA’s Mortgage Credit Availability Index increased for everything except government loans, which fell. The drop in government is probably due to VA loans, which are under scrutiny right now. By the way, although the chart below is close to highs, it doesn’t go back to the bubble years. Compared to then, credit is still much, much tighter. The current index of 190 or so is still a fraction of the 900 level which characterized the days of “pick a pay” loans.

 

MCAI

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