|US dollar index||89.4|
|10 Year Govt Bond Yield||2.36%|
|Current Coupon Fannie Mae TBA||102.06|
|Current Coupon Ginnie Mae TBA||103.32|
|30 Year Fixed Rate Mortgage||4.15|
Markets are slightly lower after recouping most of yesterday’s losses. Bonds and MBS are up small.
The trade deficit improved to $64.8 billion from $68.8 billion in February. The weakening dollar is helping things, along with lower oil prices. Meanwhile retail inventories increased 0.4%.
Janet Yellen is scheduled to speak at 12:50 pm on workforce development. I doubt there will be any monetary policy (i.e. market-moving) statements, but you never know.
Donald Trump is hoping he can attract some moderate Democrats to vote in favor of his infrastructure spending plan. Democrats are in favor of infrastructure investment, however they want the government to spend directly, while Trump and the Republicans want to do it via the tax code. The partisan rift will almost undoubtedly fall down that line, although the failure of Obamacare repeal leaves less money for direct spending.
Remember the debt ceiling negotiations and threats of government shutdowns in the Obama admin? The government runs out of money in a month.
Charles Evans said that two hikes might be the right number for 2017, which is more dovish than the consensus. The collapse of the Obamacare repeal is still sinking in. Watch for more dovish statements and a lowering of growth and inflation forecasts.
Economic confidence fell last week according to Gallup and is at the lowest since the election. It is still higher than pre-election however. It will be interesting to see the numbers post the health care vote.
That drop in confidence was not apparent in the Consumer Confidence numbers, which came in way higher than expected in March. The reading of 125.6 was the highest reading since December 2000. Note the cutoff for this survey was mid-March.
The Richmond Fed Manufacturing Index is showing further strength, echoing the strength we have been seeing in the other regional Fed indices.
Home prices rose smartly in January, increasing 5.9% and hitting a 31 month high, according to the Case-Shiller home price index. Seattle, Portland, and Denver led the charge all reporting over 9% growth. Seattle increased by over 11%.
Home inventories are at the lowest level in 2 decades, according to NAR at just under 4 months’ worth. The first time homebuyer is being squeezed by tight inventory, rising prices, and increasing mortgage rates. Unless incomes begin to catch up with prices, something has to give: either home prices or building. According to NAR, the median home price February was $228,400, while the median income (from Sentier Research) was $58,056, putting the median house price to median income ratio at 3.9x, which is higher than the historical range of about 3.2- 3.6 times. Given the continued acceleration in home prices, professional investors who bought properties during the bust years and rented them out are happy holders. And to be honest, as an investor, you would sell real estate to buy what, exactly? Stocks? Bonds? Bitcoins?
Meanwhile, the homebuilder stocks are almost back to 2 year highs heading into the Spring Selling Season. Note that KB Home recently reported strong earnings, while Lennar disappointed on the the gross margin side. Increasing land costs are the biggest problem, while rising material and labor costs are an issue. The question for the bigger builders is what is going to drive revenue growth going forward once home prices plateau. At that point, they may begin to start building again. We aren’t there yet however, as Stuart Miller of Lennar commented on an earnings call: “In this environment of accelerating sales pace, together with limited land and labor, and tight inventory particularly at the lower price points, we believe we are positioned for increased pricing power and solid earnings going forward.” Translated, that says that Lennar plans to keep inventory tight and let price increases drive the top line going forward.
Despite the increase in rates, lenders are still optimistic about the economy, according to the latest Fannie Mae Investor Sentiment Survey, however a challenging purchase environment and the death of refis remain huge issues. Lenders are beginning to increase the size of the credit box in response, although the changes are modest. Increasing the credit box meaningfully will require some sort of return of the private label securitization market, which remains largely dormant. Addressing the issues here will be a huge part of Dodd-Frank reform. The US taxpayer currently stands behind something like 90% of all new origination, which almost nobody in government wants.
The regulators are using AI and machine learning to deal with the markets.