Morning Report: Bond yields flirting with 2016 lows

Vital Statistics:


Last Change
S&P futures 3251 -88.25
Oil (WTI) 51.16 -2.19
10 year government bond yield 1.38%
30 year fixed rate mortgage 3.63%


Stocks are lower this morning on overseas weakness, as investors continue to fret about Coronavirus, which is spreading beyond Asia. Bonds and MBS are up (yields down) on the flight to safety trade.


The 10-year Treasury is trading just off the lows of 2016, where it hit 1.36%. FWIW, that is a modern historical low – long term rates never fell below 2% even in the Great Depression. How low can rates go? The thing about bubbles is that they on longer and further than anyone expects. How many people are talking about a sovereign debt bubble? It hasn’t even registered yet.


Existing Home Sales fell 1.3% MOM in January to an annualized rate of 5.46 million. Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.” The median existing home price was $266,300 up 6.8% from a year ago. The first time homebuyer accounted for 32% of sales.


Fannie and Freddie will be freed with “limited and tailored” government backstops, according to US Treasury Secretary Steve Mnuchin. SIFMA has warned that removing the explicit government guarantee from Fannie and Freddie’s MBS would have a devastating impact on the market. Remember during the crisis, a trial balloon was floated about removing the government guarantee, and Bill Gross shot it down with a howitzer. No mention was made of what will happen to current stockholders.


Wells agreed to pay $3 billion to settle DOJ and SEC cases over the fake accounts scandal. Whether this will permit the company to begin growing again remains to be seen. The Fed has restricted growth in Well’s balance sheet since 2017.

Morning Report: Housing starts jump

Vital Statistics:


Last Change
S&P futures 3376 6.25
Oil (WTI) 52.86 0.95
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.69%


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


Mortgage applications fell 6.4% last week as purchases fell 3% and refinances fell 8%.


Housing starts rose 21% on a YOY basis to 1.57 million, according to the Census Bureau. Building Permits were up 18% YOY to 1.55 million. Housing may turn out to be the economic surprise of 2020, and if that is the case, GDP estimates are way too low. Check out the chart below, and note the highlighted jump in starts over the past two months. Remember we are just going to back to historical averages, which doesn’t take into account population growth.


housing starts


Speaking of homebuilding, the NAHB Housing Market Index slipped from record levels but is still historically very strong. Separately, Tri Pointe reported that orders grew 52%. Interestingly, they hiked their stock buyback. If the housing market is really that strong, why not invest in the business as opposed to buying back stock?


Producer prices rebounded in January after a soft December. The headline number rose 0.5% MOM versus expectations of 0.1%. On a YOY basis, inflation remains close to the Fed’s target rate.


The minutes from the January FOMC meeting will be released at 2:00 pm EST. They shouldn’t be market-moving, and the interest seems to be on the balance sheet side of things.


Lots of merger activity in the financial space. Asset manager Franklin Resources is buying Baltimore stalwart Legg Mason.


Lending Club, a fintech that makes personal loans, just bought a bank in order to gain access to a cheaper source of funds. “What a bank charter does for LendingClub is it allows us to take what is the leading digital loan provider online and combine it with a leading digital deposit gatherer,” Scott Sanborn, CEO of LendingClub, said Tuesday on CNBC. “It totally changes the earnings profile of this business.”


Speaking of mergers, Ally is buying CardWorks in a $2.65 billion deal. The street doesn’t like it as the stock is down 10% pre-open.

Morning Report: Goldman sees the unemployment rate falling to 3.25% this year

Vital Statistics:


Last Change
S&P futures 3362 9.25
Oil (WTI) 50.51 0.72
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.66%


Stocks are higher this morning as China begins to restart industrial production. Bonds and MBS are down.


Jerome Powell goes to the Hill today for his semi-annual Humphrey Hawkins testimony. The Fed is closely monitoring the Coronavirus issue with respect to global growth. With this being an election year, the questioning will probably be more focused on political posturing (what would you do about income inequality? what would you do about affordable housing?) than anything else. I doubt there will be anything market-moving in the testimony, but you never know.


Small Business started the year off strong, according to the NFIB Small Business Optimism Index. “2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” Labor continues to be an issue: “Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”


Speaking of the labor market, Goldman Sachs Chief Economist Jan Hatzius sees the unemployment rate falling to 3.25% this year. That would be the lowest since 1953. But first, the Boeing and Coronavirus issues need to recede into the rear-view mirror.


The Trump Administration released its 2021 budget, which cut social programs and increased defense spending. Some housing related programs were hit, such as the Housing Trust Fund and the Capital Magnet Fund, which are funded by a 4 basis point charge on Fannie and Freddie origination. The Community Development Block Grants would be eliminated. As a general rule, these proposed budgets are not meant to become law (one of Obama’s budgets received exactly zero votes) – but are more statements of priorities. It also cuts Medicare and Medicaid, which means it would get no support from Democrats.


Morning Report: A historical examination of the last 3 tightening cycles 10/14/15

Markets are flattish as earnings season begins in earnest. Bonds and MBS are up.

Last night JP Morgan reported weaker than expected earnings. Mortgage originations are up 41% year-over-year and up 2% on a quarter-on-quarter basis. Charge-offs fell dramaticallyl.

Bank of America reported better than expected earnings. Originations for them were up 17%.

Mortgage Applications fell 27.6% last week as the “beat the TRID deadline” effect was unwound. Purchases were down 34% and refis were down 22.5%.

Retail Sales rose 0.1% in September, while the control group, which ignores gasoline, autos, and building supplies, fell 0.1%. Where are consumers spending their money? Cars, furniture, apparel, and entertainment.

The Producer Price Index fell 0.5% in September as the strong dollar depressed commodity prices. Ex- food, energy and trade the index is up 0.5% year-over-year. We have yet to see any sort of meaningful inflation at the producer level.

Business inventories were flat in August. Commodity prices could be playing a role in this number.

We know the Fed is going to start hiking rates soon. But does that necessarily mean that mortgage rates are going up? If you look at the historical record, at least over the past 3 tightening cycles. the Fed Funds rate increased, but the long term rate moved up much less, or not at all. If you look at the spread between long term and short term rates, the yield curve flattened dramatically and ended up inverting. The vertical blue lines are the 1994, 1999, and 2004 tightening cycles. The red line is the yield on the 10 year, which will most approximate mortgage rates, while the blue line is the Fed Funds rate. The green line is the difference between the two. The lower the green line, the more flatter the yield curve.

What are the takeaways from this? 1) Don’t necessarily fear a tightening in December – it might not affect mortgage rates at all, and 2) When the Fed starts tightening, that is the time to get people out of ARMS and into a 30 year fixed rate mortgage. LIBOR will increase with the Fed funds rate, resetting ARM rates, but if the 30 year fixed doesn’t move (or barely moves), then that switch is a great trade for the borrower.

Morning Report: Worrisome trends in inventories 8/11/15

Markets are lower this morning after China devalued the yuan overnight. Bonds and MBS are up.

Wholesale inventories rose 0.9% in June, while wholesale sales rose only 0.1%. The ratio of inventories to sales rose to 1.3. This is a worrisome signal. A rising inventory to sales ratio is a harbinger of a cyclical recession. While there is a possibility that the West Coast Port strike from earlier this year is messing with the data, the trend is unmistakable.

Productivity rose less than expected in the second quarter, and unit labor costs were higher than expected, which was disappointing. The first quarter numbers were revised better (productivity up and unit labor costs down), however Q1 productivity was still flat and unit labor costs were higher than inflation. These two numbers can be volatile, so it makes sense to look at a moving average. The 12 month moving average for productivity is about 0.25%. The 12 month MA for unit labor costs is about 2.1%. Anyway, flat productivity and 2% wage inflation is not symptomatic of a great labor market, despite what the numbers say.

Small business optimism rose in July, according to the NFIB. Expectations for the economy accounted for about half the rise. Employment was flat. Increasing labor costs (not only wages, but regulatory burden) are depressing the bottom line as profits fall. In fact, most are reporting that the increase in labor costs is due to mandated benefits, not wage increases. This again speaks to the bifurcated market: the big S&P 500 companies are doing well, but much of that is due to (a) rock bottom interest rates and (b) overseas exposure. Those circumstances don’t really apply to the local dry cleaner. Which is why liberals can claim: “These hugely profitable companies refuse to pay a “fair” wage” and conservatives can claim “Regulation is strangling small business and those costs are manifested in stagnant wages.” Liberals are focusing their ire at the big multinationals and conservatives focus their ire at government. There is a bit of truth in both viewpoints.

Speaking of regulations, the American Enterprise Institute crunched the numbers and it turns out that Seattle lost about 1,300 jobs from Jan – June. Of course it is still early days, but it looks like the laws of supply and demand are still applicable in the labor market, regardless of what politicians think.

Completed foreclosures fell to 43k in June, according to CoreLogic. This is up 4.8% from May but down 14.8% from a year ago. The foreclosure inventory remains the highest in the Northeast, where the judicial states are still working through their backlog.

Google is now going to be known as Alphabet. They are re-organizing into a holding company structure.  The Street seems to like it.

Morning Report – Existing Home Sales rise 6/22/15

Markets are higher this morning after the Greek government offered a new proposal to end the standoff. Bonds and MBS are down

The Chicago Fed National Activity Index improved slightly in May to -.17. The 3 month moving average was also negative, which means the economy is growing a little below trend. Production and Consumption were negative, while employment was positive.

Merger mania in the health insurance space: Cigna rejected an offer from Anthem, and Aetna supposedly approached Humana. Insurers are looking to cut costs.

Existing Home Sales improved 5.1% to 5.35 million in May, according to the NAR. This is the highest since May 2009.  The first time homebuyer accounted for 32% of sales, up from 30% in April, but still below its historical average of about 40%. All cash transactions were flat at 24%, while days on market ticked up slightly to 40 days. The median price of a home rose 7.9% to $228,700. This puts the median home price to median income ratio at 4.3x, which is again stretched and well outside the historical norm of 3.2x – 3.6x.

In political news, the Supreme Court is supposed to rule on King vs Burwell, the case which decides whether states that did not set up exchanges are eligible for federal subsidies. This will dominate the news headlines in Washington if the Court decides the language in the law needs to be changed.

Morning Report – Toll Brothers reports home price appreciation is moderating 12/10/14

Markets are weaker this morning as oil (and oil stocks) continue to fall. WTI is trading at $62.20 after OPEC revised its 2015 forecast. Bonds and MBS are flat.

Mortgage Applications rose 7.3% last week. Purchases were up 1.3% while refis were up 13.2%. Don’t bust out the champagne quite yet, we are still basically bumping along the bottom.

Luxury builder Toll Brothers reported 4th quarter and full year results this morning. Deliveries rose 29% in dollars and 22% in units, but it looks like the torrid increase in average selling prices has passed and they are beginning to moderate. ASPs rose 6% YOY to $747k. Price appreciation for signed contracts was even less – around 3.6%. Backlog was up 3% in dollars and flat in units.

Robert Toll, CEO of Toll Brothers made a point I have been making for a long time – housing starts are still way below historical averages: “We believe the housing recovery has many years to run. Housing starts, through ups and downs from 1970-2007, have averaged about 1.6 million annually. According to Harvard University’s Joint Center for Housing Studies, ‘Despite the rebound in the last two years, home sales and starts are still nowhere near normal levels. This was the sixth consecutive year that starts failed to hit the one million mark, [which was] unprecedented before 2008 in records dating back to 1959.”

Obviously the recovery to normalcy depends on the first time homebuyer. Consistent rental inflation is pushing them to consider home ownership as an alternative. The NAHB is praising Fannie and Freddie for re-introducing the 3% downpayment loans.

Morning Report – Consumer Confidence at post-recession highs 8/26/14

Rallies in European stocks and bonds are dragging US stocks and bonds along for the ride. Remember the PIIGS? The US 10 year yields just a touch less than Italian sovereign debt and about 20 basis points more than Spanish sovereign debt. Let that sink in.

Durable goods orders were all over the map due to a big jump in aircraft orders. The headline number increased 22.6%, however the number most pros focus on – Capital Goods Orders Non-defense / ex-aircraft was down .5%, however June was revised up big, from 1.4% to 5.4%.

The Richmond Fed Manufacturing Index rose to 12 from 7. Consumer Confidence rose to 92.4 in August, from 90.3 the prior month. This is a post-recession high and we are approaching historical normalcy. Lets see if this translates into good personal spending numbers on Friday.

Consumer Confidence Bloomberg

It is official: Burger King is buying Tim Horton’s and plans to move its headquarters up north. Expect the usual kvetching about “corporate patriotism” out of the usual suspects. That said, Walgreens was jawboned into not moving their headquarters, but the stock was slammed on the decision. I am curious as to whether the left will go after the company by threatening a boycott or will go after Burger King Worldwide’s biggest shareholders – 3G and Pershing Square. That said, 3G is a Brazilian investment firm, and who knows if Ackman holds BKW in its onshore or offshore accounts. BKW could already be more or less foreign owned to begin with.

House prices are down month-over-month and year-over-year according to Case-Shiller. These are the seasonally-adjusted numbers – the non-seasonally adjusted numbers were still up .9% month over month.

Separately, home prices continue to rise, according to FHFA, with the index up .4% from May. Prices are up 5.1% year-over-year. The FHFA index is different than Case-Shiller in that it only looks at homes with a conforming mortgage, which means it excludes distressed and high end home. It is more of a central tendency index and tends to be less volatile than Case-Shiller.

Morning Report – Bonds signalling a slowdown? 8/6/14

Stocks are lower after some bearish economic news out of Europe. Bonds and MBS are rallying. The 10 year bond is right at its May highs.

Mortgage Applications increased 1.6% last week, according to the MBA. Purchases fell 1.3% while refis increased 3.8%. It looks like overall mortgage rates increased 3 basis points or so over the week, while the 10 year was flat. Refis accounted for 55% of all loans, the highest percentage since May.

Wells is getting even more aggressive in the jumbo space. Minimum FICOs for a fixed rate jumbo have been lowered to 700 from 720. They also now do cash-out refis on jumbos and are buying jumbos on second homes on a correspondent basis. This is why the jumbo space is so competitive – banks can subsidize the jumbo mortgage and use that as an opening to pitch other bank services to the customer, particularly asset management.

Walgreen’s has decided to not pursue the tax inversion trade after intense political pressure from Washington. They will still purchase the remaining part of Alliance Boots, but will keep their headquarters in Chicago. This change will cost the company about a billion in excess taxes. If I was an arb, I would be nervously looking at my Abbvie / Shire position, and my Covidien / Medtronic positions, which are blowing out this morning.

Corporate inversions are going to be a political football going into midterms. First of all, nobody likes them. Companies don’t really want to do them, but they have to honor their fiduciary responsibilities. Politicians on both sides of the aisle despise them. The tax code is going to be changed to prevent them in the future. However, Republicans don’t feel much need to negotiate now, as they are pretty much guaranteed to keep the House and may in fact take the Senate. So their negotiating power can only get bigger. The Administration is pushing the “fix the inversion part of the tax code first, and then let’s do full tax reform later” argument. Of course Obama knows that he is going to have to trade closing loopholes for lower rates, so he wants to sneak in a freebie before negotiations start. That is a nonstarter for Republicans. Which gives Obama an opportunity to demagogue the issue and paint Republicans as defenders of corporate tax dodgers as the consolation prize.

Arbs are already reeling as Rupert Murdoch withdrew his offer for Time Warner last night. Fox also announced a big buy back, so arbs are getting killed on both sides of the trade. Tough, tough day to be in the risk arbitrage business…

Watch the data. The latest ISM numbers were quite strong, and Dallas Fed President Richard Fisher is predicting that rates will have to increase sooner than it projected in the June dot plot if this economic strength continues. Remember the Fed’s “dot graph” – the dots for a tightening will move up. Fisher also said that the debate among the central bankers is “coming in my direction.” Bottom line – for the last 6 years you have been able to dismiss the hawks. The ground is shifting.

fed funds dot graph

Counter-argument: The bond market is warning about a slowdown. At least one market strategist thinks the 10 year is heading to 2.2%. True, when the stock market and the bond market disagree, you usually want to side with the bond market. However, you have to keep in mind what is happening overseas and the concept of relative value. The German 10 year Bund yield has hit fresh lows – 1.104%. When rates are falling overseas, they will inevitably drag US Treasuries with them, simply due to relative value. FWIW, I don’t think the US bond market is signalling weakness in the US economy. Nor does Goldman.

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