All Things in Moderation

Vital Statistics:

Stocks are lower this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

The Fed made no changes to interest rate policy  yesterday. The part that got everyone’s attention:

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Fed will also maintain its purchases of Treasuries and MBS at the current pace. The economic projections include a 6.5% expected drop in GDP this year, an unemployment rate of 9.3%, and sub-1% inflation. The dot plot shows the Fed expects to keep rates at zero throughout 2020 and 2021.

The gloomy outlook and the continued asset purchases are what seems to be driving the drop in stocks this morning and the strength in the bond markets. I guess we should expect mortgage rates to continue to ratchet lower as financial conditions thaw and more aggregators begin to get aggressive in pricing.

It seems like yesterday that the mortgage REITs were being thrown overboard. Bellwether Annaly just cut its dividend, which was to be expected, but it wasn’t that bad. In addition, it bought back $100 million worth of stock. With everyone out there deleveraging, I found it interesting that they chose to buy back stock as opposed to buying assets.

Meanwhile, initial jobless claims fell to 1.5 million and the producer price index fell 0.8% on a YOY basis.

The Trump Administration is considering another stimulus bill that would include more direct payments and further aid for small businesses. “We will have a significant amount of unemployment and we’re going to need to look at doing something there,” Mnuchin said. “I think we’re going to seriously look at whether we want to do more direct money to stimulate the economy, but I think this is all going to be about getting people back to work.”

Home Equity rose 6.5% in the first quarter, according to CoreLogic. The number of homes with negative equity fell by 16% to 1.8 million homes.

Filed under: Economy, Morning Report | 12 Comments »

Vital Statistics:

Stocks are flattish as we await the FOMC decision. Bonds and MBS are up small.

The FOMC decision is set for 2:00 pm EST. No changes in policy are expected, and the main item will be the economic forecasts.

Small business optimism improved in May, according to the NFIB. “As states begin to reopen, small businesses continue to navigate the economic landscape rocked by COVID-19 and new government policies,” said NFIB’s Chief Economist Bill Dunkelberg. “It’s still uncertain when consumers will feel comfortable returning to small businesses and begin spending again, but owners are taking the necessary precautions to reopen safely.” Needless to say, profits and employment were depressed in May, and few businesses are looking at expansion right now.

Job openings fell to 5 million at the end of April according to the JOLTs jobs report. The quits rate fell to 1.4%.

Inflation decreased slightly in May, with the headline and core CPI indices down 0.1%. Ex-food and energy the CPI is up about 1.1% YOY. This is below the Fed’s target rate, so they will be in no hurry to raise rates.

Mortgage Applications increased 9.3% last week as purchases rose 5% and refis rose 11%. “Fueled again by low mortgage rates, pent-up demand from earlier this spring and states reopening across the country, purchase mortgage applications and refinances both increased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The recovery in the purchase market continues to gain steam, with the seasonally adjusted index rising to its highest level since January. Purchase activity increased for the eighth straight week and was a notable 13 percent higher than a year ago. Refinances moved higher for the first time in nearly two months, with both conventional and government applications rising and the overall index coming in 80 percent above year-ago levels.”

Filed under: Economy, Morning Report | 23 Comments »

Vital Statistics:

Stocks are lower this morning as we head into the Fed meeting. Bonds and MBS are flat.

The MBA reported that mortgage credit availability fell to a 6 year low. “Mortgage lenders in May responded accordingly to the increased risk and uncertainty in the economy,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Credit availability continued to decline, with MBA’s overall index now at its lowest level since June 2014. There was a reduction in supply across all loan types, driven by further pullback in investors’ appetites for loan programs with low credit scores and high LTVs. Credit tightening was observed at both ends of the market, with less availability of low down-payment programs designed for first-time homebuyers, as well as for conforming and non-conforming jumbo loans.” So basically low FICO FHA and jumbo, which means forbearance and securitization issues are driving the decrease.

The MBA also reported that the number of mortgages in forbearance increased slightly to 8.53%. “The overall share of loans in forbearance increased by only 7 basis points compared to the prior week,” said MBA Chief Economist Mike Fratantoni. “With the job market beginning to gradually improve, more homeowners are exiting forbearance, and we are seeing declines in forbearance volume among some servicers.”

FWIW, the Fed Funds futures are predicting a 15% chance of a 25 basis point rate hike at the June meeting. That seems to be the consensus going all the way out to March 2021. If the economy rebounds quickly the Fed will probably choose to unwind asset purchases first, so it could be a while before we see rate hikes.

The National Bureau of Economic Research says the US entered a recession in February, which seems strange given the COVID crisis didn’t start until late March and the economic numbers in February were decent. “In deciding whether to identify a recession, the committee weighs the depth of the contraction, its duration, and whether economic activity declined broadly across the economy. … The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions,” the committee said in a statement. So in other words, it sounds like they are using some sort of qualitative assessment of the economy to come up with the idea that we entered a recession in February.

Filed under: Economy, Morning Report | 8 Comments »

Vital Statistics:

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

The FOMC will meet this week, although no changes in interest rates are expected. They may give some sort of update on the various sundry financial assets they will buy, but that is about it.

The unemployment rate was probably understated in Friday’s jobs report. Apparently there was a misclassification error for people who were employed but absent from work. They should have been classified as “unemployed” but were not, which means the unemployment rate was higher than advertised. Note this doesn’t affect the payroll number, which comes from the establishment survey.

The Fed is launching its Main Street lending program, but it looks like the high minimum amount of $500k is putting some borrowers off.  It has generated some political heat as a bailout for oil and gas industries. “It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Fed chair Jerome Powell said last month during a Princeton University webcast in which he also said the central bank is open to adjusting the program.

The FHA gave some more guidance on forbearance. Loans in forbearance are generally ineligible for FHA insurance, but the government is permitting closed loans to be insured provided the lender agrees to indemnify FHA for 20% of the loan amount if the loan goes into foreclosure. “FHA has continually been at the forefront of providing assistance and assurance for borrowers, lenders, and the mortgage market since the coronavirus pandemic began,” said Department of Housing and Urban Development Secretary Ben Carson in a statement, adding the policy change “will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”

Filed under: Economy, Morning Report | 5 Comments »

Vital Statistics:

Stocks are higher this morning after the jobs report showed the economy added jobs in May. Bonds and MBS are down.

Jobs report numbers:

• Nonfarm payrolls rose by 2.5 million.
• Unemployment rate fell to 13.3%
• Average hourly earnings up 6.7% YOY
• Labor force participation rate 60.8%

The message from this report is that the economy turned the corner in May and the recovery has begun. Street expectations for this report were way off. The average forecast for payrolls was a loss of 7.7 million jobs, and the forecast for unemployment was 19.8%. The average hourly earnings numbers are interesting. They were down 0.1% MOM, but up 6.7% YOY. I suspect that the higher paid furloughed workers were brought back first, and now we will see the lower paid workers return as retail and restaurants re-open.

The big takeaway from the jobs report is that the recession probably ended last month. I expect to see big upward revisions in the Q2 economic forecasts.

Black Knight reported that the number of loans in forbearance fell slightly last week. “After rising sharply in April and then leveling off toward the end of May, the number of American homeowners in forbearance plans has now decreased for the first time since the crisis began,” said Jabbour. “There were a net 34,000 fewer homeowners in forbearance as of June 2. The decline was actually greater among government-backed mortgages, which saw 43,000 fewer total forbearance plans than last week, but this was partially offset by an increase of 9,000 new plans on mortgages held in bank portfolios and private-label securities.”

Invitation Homes (a single family home REIT) reported that it collected 97% of historical rent in May, so despite the scary numbers from the survey about New York City rent, the rest of the country seems to be doing much better.

The jobs report sent bonds lower, with the 10 year trading around 0.9%. After such a huge move in the long bond, a retracement was to be expected. That said, mortgage rates might not go anywhere as aggregators fight for business and mortgage backed security spreads tighten.

Filed under: Economy, Morning Report | 37 Comments »

Vital Statistics:

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

Initial jobless claims fell to 1.9 million last week. Separately, Challenger and Gray reported that 397,000 job cuts were announced last month.

Homebuilder Hovnanian reported a 22% increase in revenues for the second quarter. The cancellation rate ticked up slightly, but it looks like the homebuilders are seeing a recovery already. We should hear from Lennar and KB Home in a week or two.

Productivity was revised upward in the first quarter to -0.9% and unit labor costs were revised upward to 5.1%.

It looks like June rental payments are falling a touch, after holding up reasonably well in April and May. According to a survey, 37% of all New York City renters don’t have the money to pay June rent.

Another sign the recovery is upon us: Investors are starting to pick at bank stocks. “There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

Filed under: Economy, Morning Report | 18 Comments »

Vital Statistics:

Stocks are flattish this morning as riots continued overnight. Bonds and MBS are flat as well.

The share of loans in forbearance rose slightly to 8.46%, according to the MBA. “MBA’s survey continues to indicate that fewer homeowners are seeking forbearance as more states across the country reopen their economies and prospects begin to improve,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The share of loans in forbearance increased by only 10 basis points over the week of May 24. Policy support for households, including expanded unemployment insurance benefits and other transfers, have helped many stay on their feet during this crisis. With 11.82 percent of Ginnie Mae loans currently in forbearance, FHA and VA borrowers are struggling the most.”

For what its worth, housing seems to be picking up more or less right where it left off. Homebuilder Taylor Morrison said that home sales picked up significantly in May, and traffic was 3 times higher than it was in early April, the height of the pandemic. Note that Toll Brothers said that deposit activity (which is a leading indicator of signed contracts) was up on a YOY basis in May.

Despite COVID, construction spending did exceed last year’s numbers by 3%, which is impressive in of itself. Residential construction was up 6.3% on a YOY basis.

Home prices rose 5.4% YOY in April, according to CoreLogic. Inventory remains tight, especially for entry-level homes, which fell 25%.

The Congressional Budget Office says it will take 10 years for the economy to reach the levels it was forecasting in January. FWIW, I am skeptical that a 3 month lockdown will reverberate for a decade.

Filed under: Economy, Morning Report | 40 Comments »

Vital Statistics:

Stocks are flattish this morning despite riots in major cities across the US. Bonds and MBS are flat.

Trump will be meeting with the Attorney General this morning to figure out how to respond to the violence in many US cities.

The big economic news will be the jobs report on Friday. The Street is looking for a 7.7 million drop in jobs, an unemployment rate of 20% and a 7% increase in average hourly earnings. More and more states are re-opening so hopefully this will be the last jobs report with negative payroll growth.

Construction spending fell 2.9% in April, which was a little bit better than expected. The ISM Manufacturing Index fell to 43, which again was a little bit better than expected.

Personal Income rose 10.5% in April, largely due to the CARES Act. Personal consumption expenditures fell as people were unable to go to the stores. This caused a big jump in the savings rate, up to 33% from 10%, which ironically shows how big Keynsian spending plans often don’t have the desired effect.

The riots are certainly not going to help the jobs situation of course. Much will depend on how long they last. If they peter out over the next few days then we probably won’t see a major effect.

I can’t escape the idea that the riots and COVID have set in place the circumstances for a massive exodus from the big cities, similar to what we saw in the late 60s. During the 60s, manufacturing jobs fled the cities to the suburbs as many employees no longer wanted to work there. This time, I could see white collar jobs fleeing. When people can largely work from home, why pay top dollar for office space in the cities? And if the jobs relocate, why spend ten grand a month for a 1200 square foot apartment? I could see this turning out to be the catalyst for a massive expansion of the suburbs and exurbs,  which will be good for the homebuilders. Realtor.com noted that Connecticut has seen something like a 75% increase in people moving out of NYC.

Filed under: Economy, Morning Report | 29 Comments »

Vital Statistics:

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

Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.

Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.

First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.

Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.

Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”

Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

Filed under: Economy, Morning Report | 15 Comments »

Vital Statistics:

Stocks are higher this morning on news of further global stimulus and optimism that the COVID crisis is in the rear view mirror. Bonds and MBS are flat.

The MBA reported that 8.4% of mortgages are in some sort of forbearance plan right now.  “Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance as of May 17,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in employment and income is hitting FHA and VA borrowers harder, leading to 11.6 percent of Ginnie Mae loans currently in forbearance.”

Mortgage Applications increased 2.7% last week as purchases increased 3% and refis declined by 0.2%. “The home purchase market continued its path to recovery as various states reopen, leading to more buyers resuming their home search,” said Joel Kan MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased 9 percent last week – the sixth consecutive weekly increase and a jump of 54 percent since early April. Additionally, the purchase loan amount has increased steadily in recent weeks and is now at its highest level since mid-March.”  Home purchase applications have increased 54% since early April.

Job losses from COVID show a pretty large regional distribution, with the Northeast and the Midwest bearing the brunt of the losses versus the South and West.

Filed under: Economy, Morning Report | 4 Comments »