Morning Report: New Lows on rates

Vital Statistics:

 

Last Change
S&P futures 2926 -29.25
Oil (WTI) 45.47 -1.79
10 year government bond yield 1.18%
30 year fixed rate mortgage 3.51%

 

Another day in paradise, with the stock market indices down a percent and bond yields at new lows. Stocks are on pace to have the worst week since 2008 as coronavirus fears infect the global markets. Oil is getting slammed as well.

 

Mortgage backed securities have lagged this move in a big way, so don’t be disappointed when you run a scenario. Rate sheets are not driven by the 10 year.

 

St. Louis Fed Governor James Bullard cautioned the market to not get ahead of itself regarding coronavirus. “Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time.” That said, ever since 2008, the markets have been the dog and the Fed has been the tail.

 

Personal incomes rose 0.6% in January, which was way more than expected. Personal spending rose 0.2%, which was below expectation, and inflation remained well below the Fed’s 2% target rate.

 

Pending Home Sales rose 5.2% in January according to NAR. “This month’s solid activity – the second-highest monthly figure in over two years – is due to the good economic backdrop and exceptionally low mortgage rates,” said Lawrence Yun, NAR’s chief economist. We are still lacking in inventory.” Supply is the lowest since 1999.

 

Where is iBuying (selling your home directly to Zillow or Opendoor) most popular? Turns out Phoenix and Raleigh. “It’s no surprise Raleigh and Phoenix led the nation in iBuyer share because those housing markets are iBuyer sweet spots and are poised for price growth in 2020,” said Redfin Chief Economist Daryl Fairweather. “These markets work well for iBuyers which tend to purchase homes that are relatively affordable, were built within the last few decades and are easy to price accurately because they are located in tract neighborhoods with largely homogenous housing stock.” Selling your home directly to Zillow (for example) isn’t necessarily cheap. Zillow charges anywhere from 7% to 9.7% to buy your home, so it isn’t like you are escaping the realtor commissions. This process probably appeals most in a competitive housing market, where a non-contingent offer can carry the day if everyone is close.

 

 

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: Big jump in jobs

Vital Statistics:

 

Last Change
S&P futures 3327 23.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Another “risk-on” day as stock markets rally overnight and bonds get sold. MBS are performing a touch better than the 10 year.

 

Mortgage applications hit a six year high last week, which included an adjustment for the MLK holiday. The index rose 5% while refis increased 15%. The refi index is up 183% from the same week a year ago. Purchases fell 10%. “The 10-year Treasury yield fell around 20 basis points over the course of last week, driven mainly by growing concerns over a likely slowdown in Chinese economic growth from the spread of the coronavirus. This drove mortgage rates lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates.”

 

ADP reported that payrolls increased by 291,000 last month, a huge jump from December, which was revised upward from 139,000 to 202,000. The Street is looking for an increase of 158,000 nonfarm payrolls in Friday’s jobs report, so that number appears to be too low. There was a pretty big increase in construction workers as it looks like homebuilders are eager to finally fulfill the pent-up demand for housing out there. It looks like the ADP number was the strongest in at least a year

 

ADP report

 

Home prices rose 0.3% MOM in December, and are up 4% on an annual basis according to CoreLogic.

Morning Report: The Fed maintains current interest rate policy

Vital Statistics:

 

Last Change
S&P futures 3140 -3.25
Oil (WTI) 58.90 -0.14
10 year government bond yield 1.79%
30 year fixed rate mortgage 3.97%

 

Stocks are flattish after the Fed maintained interest rates yesterday. Bonds and MBS are up.

 

The Fed maintained the Fed Funds rate at current levels and gave a generally upbeat assessment on the economy. The FOMC took down their future unemployment estimates by .2% and left all other projections unchanged. The biggest revelation was the dot plot, which was a bit more dovish than the September plot, but is still forecasting the possibility of a hike in 2020, along with no forecasts for a rate cut.

 

Dec dot plot

 

The Fed Funds futures, which have been (a) more dovish than the Fed’s dot plots and (b) more correct, went from forecasting a 50% chance of a cut in 2020 to a 70% chance of a cut. The bond market adjusted as well, with the 10 year bond yield falling about 4 basis points in the afternoon.

 

The Producer Price Index (PPI) was unchanged in November, and up 1.1% on a year-over-year basis. The PPI measures inflation at the wholesale level, and is a companion inflation index to the Consumer price index. Ex-food and energy, the index fell in November and was up 1.3% YOY.

 

Initial Jobless Claims jumped to 252,000 last week. This is a huge jump, and I am not sure what drove it. We have been hanging around in the low $200,000s for quite some time. FWIW, this jump in new jobless doesn’t necessarily comport with the other labor market indicators out there, but it is less of a lagging indicator than the others.

Morning Report: Negative yielding corporate debt

Vital Statistics:

 

Last Change
S&P futures 3020 5.35
Oil (WTI) 60.39 0.19
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

Stocks are higher as we kick off earnings season. Bonds and MBS are up.

 

The upcoming week will be dominated by bank earnings. The economic data is unlikely to be market-moving, however we will get some real-estate related data with housing starts and homebuilder sentiment. We will also get retail sales, industrial production and capacity utilization.

 

Citigroup reported earnings this morning that beat Street estimates. Mortgage banking revenues were down 2% QOQ and down 9% YOY.

 

Manufacturing activity in New York State rebounded last month, climbing out of negative territory. New Orders were flat, shipments improved, while employment hit the lowest level in 3 years.

 

Europe is used to negative yields on sovereign debt, with the German Bund yielding -29 basis points. In other words, you are paying 105.25 to get back 100 in 10 years, along with some interest. That is strange enough, in of itself, but how about this? Corporate bonds trading with negative yields. Don’t believe it? US jar maker Ball Corp, maker of the mason jar, trades at a yield of -20 basis points and matures in 18 months. Why would any investor buy that? Because the principal hit will be less than deposit rates of -40 basis points or 18 month German paper yielding -70 basis points. It is a fascinating study of the law of unintended consequences. The whole point of negative interest rates is to push investors to get out of safe haven sovereign debt and take some risk – specifically lending money to businesses that need it. The whole point of this exercise is to increase the amount of credit in the system in order to fuel economic growth. However, instead of providing financing to nascent businesses who could be the growth drivers of tomorrow, they are lending money to a company that makes jars (hardly emerging technology) instead.

 

A portfolio manager at Janus Capital explained it as follows: “A bond like Ball Corp’s is “a safe place to hang out,” [Janus Capital Portfolio Manager Tim] Winstone said. “And just because something is negative yielding, that doesn’t mean it can’t get more negative yielding.” In other words, we are in greater fool territory. Fun fact: around 2% of the European junk bond market trades at negative yields. In fact, Winstone says that about 24% of the European investment grade market trades at negative yields. It isn’t entirely irrational – money managers are making a bet on further central bank stimulus and are positioning themselves to reap capital gains on negative yielding paper, which means they could end up making a positive return despite a negative yield headwind.

 

euro corporates

 

John Maynard Keynes once advocated inflation as the “euthanasia of the rentier class.” In reality it may turn out that negative interest rates will do the job. Fascinating times we live in.

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