All Things in Moderation

Stocks are lower this morning as the Fed begins their two day FOMC meeting. Bonds and MBS are up small.

Another sign the economy is slowing down: Durable goods orders fell 1.2% in September, and are down 0.4% ex-transportation. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%. As a result of these numbers, Goldman took down their Q3 GDP estimates to 1% from 1.2% and JPM took theirs down to 0.6%.

The Markit US Composite PMI slipped to 54.5 from 55 in October and the Services PMI fell from 55.1 to 54.4.

Consumer confidence fell in October to 97.6 from a downward-revised 102.6 in September.

The S&P/Case-Shiller Home Price Index rose 0.11% in August and is up 5.1% year-over-year. They make this point about home price appreciation: “A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.”

Supposedly there is a deal to prevent a government shutdown. The sequester is lifted, and the carried interest deduction goes away. This should clear the decks for Paul Ryan to take over as Speaker of the House. This deal will probably get unanimous Democratic support, but it might be hard to get the necessary 30 Republican votes.

How to get the Millennials to buy houses? NAR had a symposium on that recently, with HUD Secretary Julian Castro speaking. He lamented the tight credit in the mortgage market. The aftermath of the housing bubble has sent homeownership rates to the lowest levels in almost 50 years.

Stocks are higher this morning after China cut interest rates. Bonds and MBS are down.

Definitely a risk-on feel to the markets after yesterday’s torrid rally. China’s easing and yesterday’s comments from the ECB regarding further QE are putting green on the screen. All of this stimulus is going to make it harder for the Fed to raise rates.  Economists are beginning to warn of a global recession.

China’s official growth rate is just shy of the government’s 7% goal. Nobody actually believes that number however – estimates by foreign economists are closer to 3%.

The Markit US Manufacturing PMI rose in October.

The House Financial Services Committee spent some time yesterday looking at the future of HUD. The hearing looked at how HUD could help people escape poverty instead of simply pushing people to build more affordable housing. HUD has been very aggressive in suing local communities to change their zoning laws.

Stocks are higher this morning after ECB President Mario Draghi signaled that the central bank may use more stimulus to counteract a weakening Eurozone. Bonds and MBS are down small.

Existing Home Sales rose 4.7% in September to 5.55 million. This is up 4.7% month-over-month. The median existing home price was $219k, up 6.1% from a year ago. Housing inventory dipped again to 2.21 million homes, which represents a 4.8 month supply, down from 5.1 months in August. Tight inventory remains an issue – 6.5 months is considered a balanced market. First-time buyers continue to sit on the sidelines, as their percentage fell to 29%. This is flat with a year ago. 40% is more or less the historical average.

The Chicago Fed National Activity Index was more or less flat at -.37 in September. The 3 month moving average was zero, which means the economy is growing pretty much on trend. The index can be volatile, but the trend in the last few months is distinctly downward.

Confirming the CFNAI trend, the Index of Leading Economic Indicators fell by 0.2% in September. The Conference Board is forecasting GDP growth of around 2.5% over the next couple of quarters.

Initial Jobless Claims rose to 259k last week. We are still bouncing around 40 year lows in this number.

The Bloomberg Consumer Comfort index fell last week to 43.5 from 45.2.

The FHFA House Price Index rose 0.3% in August. We are now within 1% of the peak level set in March of 2007. This index only looks at houses with conforming mortgages, so it will be a little different than Case-Shiller or CoreLogic.

Stocks are lower this morning after IBM missed earnings. Bonds and MBS are down.

Housing starts rose 1.2 million in September, beating the 1.1 million estimate. These are up 4.7% from a year ago. Building Permits disappointed however, coming in at 1.1 million vs. the 1.2 million estimate. Starts saw an increase in single fam and multi-fam, however permits saw a drop in multi-fam.

Goldman is calling the rally in Treasuries overdone. Their argument is that investors are underestimating the potential for inflation. Not seeing where inflationary pressures are going to come from, with a strong dollar, very little wage growth, and capacity utilization at 77%. The current probability of a Dec rate hike is 33%.

Speaking of wage growth, Wal Mart was hammered last week after announcing that wage increases would cause earnings to drop next year. This will be interesting to watch – do other retailers follow suit or do they maintain lower wages? Some early hints that it will be the former. Turnover for retailers has increased to 65% from 50% and open retail positions are up 31% this year.

The Obama administration rejected calls to re-privatize Fannie and Fred, leaving GSE reform for the next president. The government is making a lot of cash from F&F. Both private investors (especially activist funds who hold Fannie prefs and common) and affordable housing advocates are pushing the government to clarify where F&F stand.

Apparently Joe Biden’s decision of a presidential run will be released any day now.

Markets are lower this morning on some disappointing economic data out of China. Bonds and MBS are up small.

Not a lot of big data this week, but we do have some stuff related to real estate. Tomorrow, we will get housing starts and building permits. On Thursday, we will get existing home sales and the FHFA House Price Index. We will also hear from homebuilder Pulte on Thursday.

The NAHB Housing Market Index rose to 64 in October from a downward-revised 61 in September. This is the highest reading since October 2005. Tight supply means that builders can increase average selling prices pretty easily. Unfortunately, since wage inflation remains muted, the median house price to median income ratio has become stretched again.

Everyone knows China has been dumping Treasuries, yet rates aren’t increasing. The reason why is that US firms are buying them. This means that (a) US investors are more making bearish bets on the US economy (b) the Fed will probably be watching this closely as a “tell” whether they need to raise rates, and (c) even if rates go up, you might not see any effect out on the curve, which means that mortgage rates might simply brush off any tightening for a while.

Deutsche Bank is beginning to discuss scenarios where the next move could be something like a re-introduction of Operation Twist, which is where the Fed sells short term T-bills to fund purchases of long term Treasuries.

Speaking of the Fed, Republican presidential candidate Donald Trump accused the Fed of keeping rates low for political reasons – to help Barack Obama and Hillary Clinton. Cleveland Fed President Loretta Mester fired back saying that politics is never a factor in their decisions. The political independence of the Fed is extremely important – no politician would ever argue that the Fed should hike rates. One thing to keep in mind however is that as we approach the election in 2016, the Fed will probably hold off on making any rate hikes late in the year to prevent the appearance of being political.