Morning Report: Inflation remains below the Fed’s target 10/31/16

Posted on October 31, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2126.3 2.5
Eurostoxx Index 339.5 -1.3
Oil (WTI) 48.2 -0.6
US dollar index 88.8 0.1
10 Year Govt Bond Yield 1.84%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.62

Markets are up on earnings and merger mania. Bonds and MBS are down.

Personal Incomes rose 0.3% in September, which was a little below expectations. Consumer spending rose 0.5%, which was in line with expectations. Core PCE inflation – the number the Fed uses to measure inflation – rose 1.7% YOY, so we are still below the 2% target.

The Chicago PMI Index fell to 50.6 from 54.3.

The FBI re-opened the email investigation on Hillary late Friday night. Democrats are attacking Comey (who just went from hero to goat). This will take until mid-week to be fully reflected in the polls, and the pundits will be watching polls in VA and NC closely.

IMO, regardless of who wins, gridlock will be the result, unless Democrats sweep. So more of the same. I don’t see much of an effect happening in either interest rates or stock prices. The Fed is much more influential than who occupies the WH.

Home prices are up 0.3% MOM and 5.3% YOY, according to Black Knight Financial Services. The index now stands at $266k, which is 0.7% below the 2006 peak of $268. The report has good state-by-state info, so check it out.

Banks continue to hoard Treasuries, and are tightening credit to business. Deposit growth is outstripping loan demand, which is the biggest reason. As the US savings rate increases, consumer spending is affected. Part of this is demographics: The baby boom is retiring and will inevitably cut spending, while the Millennials have yet to make any real money and start spending.

Filed under: Economy, Morning Report | 31 Comments »

Morning Report: Strong headline GDP number 10/28/16

Posted on October 28, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2127.5 4.0
Eurostoxx Index 340.8 -0.9
Oil (WTI) 49.2 -0.6
US dollar index 88.9 0.0
10 Year Govt Bond Yield 1.85%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.58

Stocks are higher this morning as earnings reports pile in. Bonds and MBS are flat.

The first estimate of Q3 GDP came in at +2.9%, which was higher than expected. Inventory and exports drove the increase. This is a sharp rebound after 3 extremely weak reports. Disposable personal income rose 3.6% and the savings rate was flat at 5.7%. This number will be revised at least once before the December Fed meeting.

gdp

Inventories and exports are not great indicators of domestic demand, however and that is what really drives the economy. If you strip those two things out, you can see that demand increased, but it wasn’t the blockbuster number that the headline GDP print suggests. This helps explain why GDP growth can be 2.9% (which is a robust expansion) and not feel like it. Consumer spending decelerated in Q3 from 4.3% to 2.1%. Back-to-school numbers for the retailers were disappointing, and this number bears that out.

gdp-ex-inventory-and-trade

Employment costs rose 0.6% in the third quarter as comp increased 0.5% and benefits increased 0.7%. Judging by the increase in Obamacare insurance premiums, benefit cost inflation will continue to increase the costs of employees which will act as a damper on wage growth.

Pending home sales increased 1.5% in September, according to the NAR. According to NAR Chief Economist Lawrence Yun, tight inventory remains a problem: “The one major predicament in the housing market is without a doubt the painfully low levels of housing inventory in much of the country…It’s leading to home prices outpacing wages, properties selling a lot quicker than a year ago 2 and the home search for many prospective buyers being highly competitive and drawn out because of a shortage of listings at affordable prices.” Of course this means the ratio of house prices to income is getting stretched. Wage inflation is needed to maintain these prices.

The US 10 year has gotten hammered over the past month. What is going on? Economic data has generally been soft (today’s GDP report notwithstanding). IMO, we are in the middle of a correction in global bonds. Using the German Bund as proxy for global bonds, you can see that yields have backed up in a big way over the past month. US Treasuries may not necessarily be rising ahead of the December GDP report and may simply be correlating with bond yields overseas. Note that the yield is higher than it was pre-Brexit.

bund-yield

Filed under: Economy, Morning Report | 45 Comments »

Morning Report: Wages and assets 10/27/16

Posted on October 27, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2142.4 9.0
Eurostoxx Index 341.9 0.1
Oil (WTI) 49.3 0.1
US dollar index 88.7 0.0
10 Year Govt Bond Yield 1.84%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.58

Back from the MBA conference in Boston. The main chatter was about Ginnie’s new plan to discourage the serial VA IRRRL shops. Consensus is that it will work because it will decimate the margins on these loans. The prepay speeds on VA loans have gotten so high that Ginnie Mae servicing prices are being affected.

Separately, Richard Cordray took aim at servicers at the conference.

Let’s get caught up on economic data.

Durable Goods orders fell 0.1% MOM in September. Business capital expenditures fell 1.2% MOM and are down 4.1% YOY. Some of that has been due to the strength in the dollar, and continued fallout from energy prices.

The Chicago Fed National Activity Index improved to -.14. The 3 month moving average (the number to look at) is still negative at -.21, which means the economy is growing below trend. When the 3 month MA drops below -.7 that is a recessionary signal.

Home prices continue to rise according to the FHFA. Prices increased 0.7% MOM and 6.4% YOY in August. Prices are now about 5% higher than the peak 2006 levels. Note that this is a subset of all homes (only those with conforming mortgages) but it is a good estimate for the “middle of the plate” housing in the US.

Separately, Case-Shiller was up 0.2% MOM and 5.1% YOY.

New Home Sales came in a little lighter than expected, up just under 600k, however July and August were revised sharply downward. The South performed best, while the West performed the worst. Take the Census numbers with a grain of salt, however. The sample sizes are small and therefore the confidence intervals around those numbers are very wide. Homebuilder earnings usually tell the story a bit better.

Mortgage Applications fell 4% last week as purchases fell 7% and refis fell 2%. Purchase activity is still up smartly YOY, however refis are at the worst levels since June.

Initial Jobless Claims came in at 258k, which is a quite strong number.

Wages are increasing for skilled labor, especially in construction. Below is a chart plotting annual wage growth for manufacturing and construction labor. Construction labor wage inflation is back to the bubble years, and manufacturing wage growth is approaching those levels as well.

construction-wage-growth

Ultimately this is good news for the economy. Wage growth has been a disappointment in this recovery. This probably isn’t great news for homebuilding stocks (the SPDR homebuilder ETF XHB is down about 13% over the past 6 weeks), and is probably not great news for manufacturers either. That said, the elephant in the room is the Fed. Does this push the Fed to hike more aggressively than forecast? Given how many times the Fed has gotten cold feet already, and the fact that unskilled labor remains in a glut, I don’t think so. Janet Yellen has said the Fed will let the labor market run hot for a while in order to bring back some of the long term unemployed.

In the same article, Joe Lavorgne of Deutsche Bank has a chart that is a bit more worrisome, which looks at the ratio of household net worth to disposable income. We are back at levels associated with the stock market bubble peak and the residential real estate bubble peak. Taking this chart at face value you would probably conclude that asset prices are in bubble territory, which is definitely the case for sovereign debt. However, if wage growth is accelerating, then the ratio will fall going forward, for the right reason. However if wages continue to stagnate, then yes we could be vulnerable to a sell-off in asset prices.

household-net-worth-over-income

Filed under: Economy, Morning Report | 33 Comments »

Morning Report: More rent versus buy 10/21/16

Posted on October 21, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2124.7 -12.0
Eurostoxx Index 343.3 -1.0
Oil (WTI) 50.3 -1.3
US dollar index 88.6 0.0
10 Year Govt Bond Yield 1.74%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

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

No economic data today, however we do have some Fed-speak.

Following on yesterday’s rent-versus-buy article from Trulia, I crunched some numbers to demonstrate the relative value proposition currently. Using census data for median asking rent and median house prices, I plotted the median asking rent against the mortgage payment for a FHA loan with 3.5% down, including mortgage insurance, property taxes, homeowner’s insurance, and the tax benefit of deducting interest and property taxes for a borrower making the median income. Historically, buying has resulted in a payment higher than the median rent payment. This makes sense: your mortgage payment will be more or less fixed, while rent will increase with inflation.

The chart below plots the two numbers in absolute dollars. You can see the two lines converging which means the rent-versus-buy decision is about as far skewed towards buying than it ever has been.

rent-vs-buy-graph

In the second chart, I plotted the difference between the “median” mortgage payment and median asking rent. The range recently has been anywhere from -10% to 100%.

rent-vs-buy-percent

The other thing to keep in mind with the rent vs buy decision is that the world’s central banks are on a mission to create inflation. They will eventually succeed, and over time the asking rent is going to increase, while the mortgage payment will be largely fixed, with the exception of property taxes and perhaps homeowner’s insurance. On the other side of the coin, home price appreciation will probably maintain at least a mid-single digit rate of appreciation, which is higher than the mortgage interest rate, especially when you take into account the tax benefits.

The takeaway is that the Fed is giving the homeowner a gift in low rates, and that won’t last forever.

Filed under: Economy, Morning Report | 20 Comments »

Morning Report: Buying is still a better deal than renting 10/20/16

Posted on October 20, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2135.3 -3.0
Eurostoxx Index 341.6 -2.0
Oil (WTI) 50.7 -0.9
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.75%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are lower this morning after ECB President Mario Draghi said the ECB is not looking at doing more QE after the program ends in March. Bonds and MBS are up.

In economic data this morning, initial jobless claims rose 13k to 260k. Separately, the Bloomberg Consumer Comfort Index fell. The Philly Fed manufacturing index improved in September, but manufacturing has generally been weak across the board as the stronger dollar hurts competitiveness overseas.

Existing Home Sales rebounded in September to an annualized pace of 5.47% from a downward-revised pace of 5.3 million in August. The median home price was up 5.6% to $234,200. The first time homebuyer represented 34% of all sales, which is a big improvement from the 30% – 32% range it had been stuck in for the past year. Inventory remains tight, however with about 2.05 million homes on the market, which represents a 4.5 month supply. A balanced market is closer to 6.5 months. Distressed sales (foreclosures and short sales) represented 4% of all sales, which is a post-crisis low. Days on market ticked up to 39 days from 36 in August. The increase in the first time homebuyer is definitely good news, and we may finally be seeing the pent-up demand that has been building over the past 10 years finally come to market.

In spite of all that pent-up demand, housing starts remain anemic given where we are in the economic cycle. Housing construction has been the missing link this whole recession. Note the shaded grey areas on the chart. Those are recessions. See how housing construction historically experienced a sharp rebound after the economy bottomed? We haven’t seen that this time around. Some of that was due to an overhang of inventory from the bubble years that needed to be sold, however that adjustment was made by 2011 or so. Since then, tight inventory and rising prices have been the story. The reason why this recovery has been so tepid has been the absence of a robust housing construction market.

housing-starts-fred

Note that Fannie Mae thinks that housing construction will remain muted. In their latest Economic Commentary, they forecast housing starts will grow to about 1.3 million in 2017, which is about 12% higher than their forecast for 2016. The bright spot? SFR will increase to 15% to an annualized pace of 883k. SFR will cannibalize multi-fam going forward as the economy improves and more Millennials go from being renters to being buyers. Speaking of which…

Trulia has a good piece out on the advantages of buying versus renting. Buying a home is 37% cheaper than renting nationally. Naturally, the advantage differs from market to market, but even the worst markets for buying are still 17% cheaper. This assumes the buyer puts down 20% and stays in the house for 7 years. The advantage was as high as 41% in 2012, and got as low as 34% in 2014. Of course this is a moving target as mortgage rates and house prices change. Where are the tipping points to flip the relationship? For home prices, it is a median house price of $468k. For mortgage rates, it is 9.1%.

trulia-rent-vs-buy

Filed under: Economy, Morning Report | 24 Comments »

Morning Report: Housing starts disappoint 10/19/16

Posted on October 19, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2137.5 4.0
Eurostoxx Index 343.1 0.6
Oil (WTI) 51.1 0.8
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.76%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are up this morning as earnings reports continue to pile in. Bonds and MBS are flat.

Mortgage Applications rose 0.6% last week as purchases rose 3% and refis fell 1%.

Housing starts fell to a 1.05 million pace in September, driven by a big drop in multi-fam. Single fam was up around 8%. Building Permits rose to 1.23 million. Housing continues to be the biggest underperformer in the economy, but the subject hasn’t really come up in this election, for either side.

We have some Fed-speak today, with John Williams speaking at 8:45, Rob Kaplan at 1:30 and William Dudley tonight.

The final debate is tonight, and it looks like Hillary is pulling away from Trump at this point. The black swan event for the markets is a Democratic Party sweep, which will probably cause the stock market to spit up a hairball.

Lending standards in the jumbo space are loosening, even as the luxury end of the housing market underperforms. Loan Depot is now offering 40 year jumbo products that are interest-only for the first 10 years. Redwood is now offering a 90 LTV product that goes down to a 660 FICO.

The NAR is releasing its latest Profile of Home Buyers and Sellers. Here are the big changes over the past 35 years.

  • The first time homebuyer is a smaller percentage than it has been in the past.
  • The internet is not replacing the real estate agent
  • Houses have been getting bigger of the past 30 years, but have leveled out in recent years
  • Down payments have been going down
  • The home search process is taking longer than ever due to tight inventory

Zillow has their own report on trends in housing. Here is the executive summary (the report is very long and detailed):

“The home buying experience is both an intimidating financial transaction and an emotional milestone. Half of home buyers in the U.S. are under 36, meaning a new generation— Millennials—is shaping the future of real estate. Despite demographic reports about young adults’ urban lifestyles, Millennials share their parents’ aspirations for a single-family home, often in the suburbs.

The process of finding or selling a home is much more collaborative for Millennials than for older generations. They bring all available tools to the process, including their smartphones, social media and online networks. While older generations rely on real estate agents for information and expertise, Millennials expect real estate agents to become trusted advisers and strategic partners.

Millennial home buyers are also diverse. While only 9 percent of all homeowners are Hispanic, nearly 15 percent of the Millennials buying homes are Hispanic—reflecting the changing demographics of the American middle class.

Homeownership remains a vehicle for wealth in the U.S., but it can also be a financial burden, as families stretch their finances to afford the space they need, and large, dated homes owned by Baby Boomers and the Silent Generation demand maintenance and improvements.”

Filed under: Economy, Homebuilding, Morning Report | 27 Comments »

Morning Report: Inflation returns 10/18/16

Posted on October 18, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2137.5 15.0
Eurostoxx Index 342.3 5.0
Oil (WTI) 50.4 0.4
US dollar index 88.1 -0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

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

It looks like the Fed has made some progress in getting inflation up to its goal of 2%. The Consumer Price Index came in at 0.3% MOM. Ex-food and energy it is up 2.2% on a YOY basis. The Fed doesn’t really look at CPI all that much – it prefers the Personal Consumption Expenditure Index – but it looks like we are moving further away from the deflation ledge that central bankers fear.

What drove the increase in the core index? Owner-equivalent rent, which is a proxy for real estate prices. It rose 0.4%, which is the highest reading since 2006.

What does increasing inflation mean for the mortgage business? Assuming higher inflation translates into wage inflation, you should see a pick-up in the purchase business as Millennials get jobs / raises. On the other hand, the refi business is going to take a hit.

One Texas builder is focusing on the entry-level homebuyer and using USDA loans to help make the sale. LGI Homes, based in Houston, is marketing to people in apartment complexes with flyers discussing the monthly payment they could have if they bought. These are largely properties in the exurbs around Dallas and Houston, where lower land acquisition costs translate into lower average selling prices. ASPs for LGI are below 200k, while ASPs for new homes in general is over $350k. LGI reports seeing the steadiest demand in entry-level.

Sentiment for the builders is high in general. The NAHB Housing Market Index fell 2 points in October, from its record in September.

High property taxes got you down? Here is something you can do about it.

Filed under: Economy, Morning Report | 17 Comments »

Morning Report: Manufacturing disappoints 10/17/16

Posted on October 17, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2126.5 -0.5
Eurostoxx Index 338.0 -2.0
Oil (WTI) 40.4 0.0
US dollar index 88.3 -0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.58

Stocks are lower this morning on overseas weakness. Bonds and MBS are down.

Manufacturing in the US rose slightly in September, but came in lower than expected. August’s numbers were revised downward. Industrial Production rose 0.1%, while manufacturing production rose 0.2%. Capacity Utilization rose to 75.4%. The strength in the dollar is probably driving the weakness.

Manufacturing dropped in New York last month, according to the Empire State Manufacturing Index. The index fell for the third month in a row.

The black swan event for the financial markets? A democratic party sweep in November. If so, buy infrastructure stocks, sell pharma and financials.

Meanwhile, turnout is looking to be low this year as voters dislike both candidates and are tuning out all the rhetoric.

Elizabeth Warren fired a shot across the bow of the SS Hillary, directing her to demote SEC Chair Mary Jo White. Her sin? Not going along with the left who wants more disclosure of political activities and donations for corporations. Of course this has absolutely nothing to do with investor protection: it is more about using the regulatory power of the SEC to silence opinions that she doesn’t approve of (mainly businesses that donate to the Chamber of Commerce or other groups that argue for lighter regulation or lower taxes).

Filed under: Economy, Morning Report | 32 Comments »

Morning Report: bank earnings 10/14/16

Posted on October 14, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2137.5 11.0
Eurostoxx Index 340.8 5.0
Oil (WTI) 50.7 0.3
US dollar index 88.3 0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.58

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

Inflation at the producer level is picking up, according to the Producer Price Index, which rose 0.3%, higher than expected. The core index is up 1.5% YOY. Inflation remains under the Fed’s target, but we are seeing it creep up towards their preferred 2% range.

Retail sales increased 0.6% last month, in line with expectations. Retail Sales ex autos and gasoline rose 0.3%. Housing-related sales did particularly well, with furniture up 1% and building materials up 1.4%. I wouldn’t be surprised to see some strategists take up their Q3 GDP estimates on this number.

Consumer sentiment unexpectedly fell in early October, according to Reuters and the University of Michigan.

Business inventories rose 0.2%, a little higher than expected. This will have the effect of goosing Q3 GDP growth at the expense of Q4.

Wells Fargo reported earnings this morning. Origination was up 11% QOQ to $70 billion. Purchase activity accounted for 58% of originations. The stock is unchanged in early trading.

JP Morgan reported earnings this morning as well. Mortgage origination was up 8.4% QOQ to $27.1 billion. On an annualized basis, it is down 9.4%.

The typical homeowner’s perception of the value of their home is about 1.25% lower than where the appraised value has been coming in. Appraised values are up almost 8% YOY, which is a faster rate of appreciation than we have been seeing in the real estate indices like FHFA or Case-Shiller.

Filed under: Economy, Morning Report | 34 Comments »

Morning Report: PIMCO is buying mortgages 11/13/16

Posted on October 13, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2116.0 -15.0
Eurostoxx Index 334.4 -4.0
Oil (WTI) 50.0 -0.1
US dollar index 88.4 0.1
10 Year Govt Bond Yield 1.75%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

Stocks are lower this morning after weak Chinese data. Bonds and MBS are up.

The FOMC minutes showed that September was a close call with respect to raising rates, and definitely set up the markets for a December rate hike. The Fed noted that third quarter GDP was stronger than the first half of the year, and the labor market is strengthening. The consensus for a December tightening doesn’t necessarily indicate that there is the same consensus for further rate hikes. Interestingly, the Fed views consumer spending as”growing strongly” when the actual data does not suggest much strength at all. Bottom line, it looks like we are getting a rate hike in December, and the November meeting will be a non-event. The Fed Funds futures are assigning a 68% probability of a December hike of 25 basis points.

Initial Jobless Claims fell to 245k last week, which is the lowest since the early 70s.  Consumer comfort increased last week as well.

Import prices rose 0.1% MOM and are down 1.1% YOY. Export prices rose 0.3% MOM and are down 1.5% YOY. Strategists are warning that the rise in the dollar is going to hit corporate profits.

PIMCO is getting into a defensive posture, buying mortgage backed securities and inflation-linked securities. Mortgage backed securities now account for 55% of the Total Return portfolio from 49% in August. Why mortgages? Think about what will happen to long term bonds as the Fed hikes rates. If long term bonds don’t really move all that much (in other words, the yield curve flattens) the yield on mortgage backed securities will be much better than the yield on Treasuries. If the long end of the curve increases in line with the increase in the Fed funds rate, PIMCO is betting that the decrease in prepayment speeds will offset (at least partially) the interest rate effect. You can see over the past 5 tightening cycles, the yield curve has flattened.

John Stumpf is out at Wells. COO Tim Sloan, will take over. While the scandal was in the retail banking are and not the mortgage division, there probably will be fallout there too.

Filed under: Economy, Morning Report | 20 Comments »

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