Morning Report: China cuts rates 10/23/15

Posted on October 23, 2015 by Brent Nyitray

Stocks are higher this morning after China cut interest rates. Bonds and MBS are down.

Definitely a risk-on feel to the markets after yesterday’s torrid rally. China’s easing and yesterday’s comments from the ECB regarding further QE are putting green on the screen. All of this stimulus is going to make it harder for the Fed to raise rates.  Economists are beginning to warn of a global recession.

China’s official growth rate is just shy of the government’s 7% goal. Nobody actually believes that number however – estimates by foreign economists are closer to 3%.

The Markit US Manufacturing PMI rose in October.

The House Financial Services Committee spent some time yesterday looking at the future of HUD. The hearing looked at how HUD could help people escape poverty instead of simply pushing people to build more affordable housing. HUD has been very aggressive in suing local communities to change their zoning laws.

Filed under: Morning Report | 19 Comments »

Morning Report: Existing Home Sales rebound in September 10/22/15

Posted on October 22, 2015 by Brent Nyitray

Stocks are higher this morning after ECB President Mario Draghi signaled that the central bank may use more stimulus to counteract a weakening Eurozone. Bonds and MBS are down small.

Existing Home Sales rose 4.7% in September to 5.55 million. This is up 4.7% month-over-month. The median existing home price was $219k, up 6.1% from a year ago. Housing inventory dipped again to 2.21 million homes, which represents a 4.8 month supply, down from 5.1 months in August. Tight inventory remains an issue – 6.5 months is considered a balanced market. First-time buyers continue to sit on the sidelines, as their percentage fell to 29%. This is flat with a year ago. 40% is more or less the historical average.

The Chicago Fed National Activity Index was more or less flat at -.37 in September. The 3 month moving average was zero, which means the economy is growing pretty much on trend. The index can be volatile, but the trend in the last few months is distinctly downward.

Confirming the CFNAI trend, the Index of Leading Economic Indicators fell by 0.2% in September. The Conference Board is forecasting GDP growth of around 2.5% over the next couple of quarters.

Initial Jobless Claims rose to 259k last week. We are still bouncing around 40 year lows in this number.

The Bloomberg Consumer Comfort index fell last week to 43.5 from 45.2.

The FHFA House Price Index rose 0.3% in August. We are now within 1% of the peak level set in March of 2007. This index only looks at houses with conforming mortgages, so it will be a little different than Case-Shiller or CoreLogic.

The number of underwater homeowners is still elevated at 14 million, but that number is falling.There are 6.9 million homeowners who are “seriously underwater” or are down by over 25%, but that number has been cut almost in half from the worst point of the crisis. Equity rich homeowners are declining as well, as many use a cash out refi to pay off credit card debt.

FICO scores ticked down a touch to 723 in September, according to Ellie Mae’s Origination Insight Report. Time to close ticked down as well, but we should start seeing that increase due to TRID.

CFPB director Richard Cordray told the MBA conference that the rollout of TRID has not been smooth. Closings are being delayed and consumers end up paying for an extra two weeks of lock protection. Cordray’s reply: “These claims reflect a failure or perhaps a refusal to understand what the rule actually says.” Cordray didn’t lay it all on lenders – vendors also shoulder some of the blame.

Filed under: Morning Report | 2 Comments »

Morning Report: Homeownership rate lowest in almost 50 years 10/21/15

Posted on October 21, 2015 by Brent Nyitray

Stocks are higher this morning as a couple big mergers are announced. Bonds and MBS are up.

Mortgage Applications rose 11.8% last week, as purchases rose 16.4% and refis rose 8.8%.

Education opportunity: It is better for Millennials to buy than to rent. The catch: Millennials like the urban environment and in the hot markets like San Francisco and New York, they are priced out of the market. Not all urban areas are bad however: Here are the affordable places:

UBS is closing down its Manged High Yield Plus Fund. Is that a harbinger of bad things to come? The closing of a BNP Paribas fund in 2007 is credited with starting the financial crisis, though I remember the first tell being the inability of banks to sell the debt associated with the Alliance / Boots merger. High yield has been struggling lately as over-extended energy exploration companies are getting hammered by low oil prices. While we don’t have a residential real estate bubble anymore, it could still cause some ripples in the bond markets.

Freddie Mac is looking to expand its offering of low downpayment loans. The government is worried about people being shut out of the mortgage market, particularly low income borrowers and those with difficult to document income. Fannie Mae is looking to make income documentation easier.  Note that the homeownership rate in the US has fallen to 63.4%, about where it was before the US began the Great Experiment In Expanding Home Ownership, which began with Bill Clinton’s HUD around 1994. The last time the homeownership rate was this low? 1967. This represents a lot of pent-up demand for purchase business and is an opportunity.

Filed under: Morning Report | 47 Comments »

Morning Report: Housing starts rebound to 1.2 million. 10/20/15

Posted on October 20, 2015 by Brent Nyitray

Stocks are lower this morning after IBM missed earnings. Bonds and MBS are down.

Housing starts rose 1.2 million in September, beating the 1.1 million estimate. These are up 4.7% from a year ago. Building Permits disappointed however, coming in at 1.1 million vs. the 1.2 million estimate. Starts saw an increase in single fam and multi-fam, however permits saw a drop in multi-fam.

Goldman is calling the rally in Treasuries overdone. Their argument is that investors are underestimating the potential for inflation. Not seeing where inflationary pressures are going to come from, with a strong dollar, very little wage growth, and capacity utilization at 77%. The current probability of a Dec rate hike is 33%.

Speaking of wage growth, Wal Mart was hammered last week after announcing that wage increases would cause earnings to drop next year. This will be interesting to watch – do other retailers follow suit or do they maintain lower wages? Some early hints that it will be the former. Turnover for retailers has increased to 65% from 50% and open retail positions are up 31% this year.

The Obama administration rejected calls to re-privatize Fannie and Fred, leaving GSE reform for the next president. The government is making a lot of cash from F&F. Both private investors (especially activist funds who hold Fannie prefs and common) and affordable housing advocates are pushing the government to clarify where F&F stand.

Apparently Joe Biden’s decision of a presidential run will be released any day now.

Filed under: Morning Report | 20 Comments »

Morning Report: No the Fed is not sandbagging for Obama and Hillary 10/19/15

Posted on October 19, 2015 by Brent Nyitray

Markets are lower this morning on some disappointing economic data out of China. Bonds and MBS are up small.

Not a lot of big data this week, but we do have some stuff related to real estate. Tomorrow, we will get housing starts and building permits. On Thursday, we will get existing home sales and the FHFA House Price Index. We will also hear from homebuilder Pulte on Thursday.

The NAHB Housing Market Index rose to 64 in October from a downward-revised 61 in September. This is the highest reading since October 2005. Tight supply means that builders can increase average selling prices pretty easily. Unfortunately, since wage inflation remains muted, the median house price to median income ratio has become stretched again.

Everyone knows China has been dumping Treasuries, yet rates aren’t increasing. The reason why is that US firms are buying them. This means that (a) US investors are more making bearish bets on the US economy (b) the Fed will probably be watching this closely as a “tell” whether they need to raise rates, and (c) even if rates go up, you might not see any effect out on the curve, which means that mortgage rates might simply brush off any tightening for a while.

Deutsche Bank is beginning to discuss scenarios where the next move could be something like a re-introduction of Operation Twist, which is where the Fed sells short term T-bills to fund purchases of long term Treasuries.

Speaking of the Fed, Republican presidential candidate Donald Trump accused the Fed of keeping rates low for political reasons – to help Barack Obama and Hillary Clinton. Cleveland Fed President Loretta Mester fired back saying that politics is never a factor in their decisions. The political independence of the Fed is extremely important – no politician would ever argue that the Fed should hike rates. One thing to keep in mind however is that as we approach the election in 2016, the Fed will probably hold off on making any rate hikes late in the year to prevent the appearance of being political.

Filed under: Morning Report | 2 Comments »

Morning Report: Exporters are cutting jobs 10/16/15

Posted on October 16, 2015 by Brent Nyitray

Markets are flattish this morning as earnings come in. Bonds and MBS are flat.

Consumer sentiment increased in October, according to the University of Michigan.

Job openings fell in August to 5.37 million from 5.67 million the month before.

Industrial production fell by 0.2% in September, and manufacturing production fell by 0.1%. The strong dollar and overseas weakness is obviously having an impact on exporters. Capacity Utilization fell to 77.5%. Capacity utilization hit a post-crisis high about a hear ago at 79% but has been falling ever since. This is going to concern the Fed, but keep in mind that manufacturing isn’t the dominant economic force that it was 20 or 30 years ago.

Needless to say, when exporters are facing headwinds like a strong dollar and weak overseas economies, they start cutting jobs. The biggest industries affected: transportation equipment, machinery, computer and electronic products, and primary metals. You can see below the trend in export employment versus employment overall.

Inflation remains tough to find. Social Security recipients will get no cost of living adjustment this year. Yet another excuse for the Fed to stand pat in December.

The Federal government now backs 50% of all mortgage loans made in the US. To put that number in perspective, in 1981, the Federal government backed about 7% of mortgages in 1981. Banks are reluctant to portfolio as many mortgages as they used to, which makes sense – anyone with grey hair knows how the banks got absolutely annihilated by their mortgage portfolios in the 1970s when rates went up dramatically to combat inflation.

Filed under: Morning Report | 48 Comments »

Morning report: Earnings season off to a rough start 10/15/15

Posted on October 15, 2015 by Brent Nyitray

Stocks are higher this morning after some strong economic data. Bonds and MBS are down.

Initial Jobless Claims fell to 255k last week matching the low set in July. That 255k print is the lowest since 1973. Pretty amazing number given how much the population has increased.

However that is translating into weak real wage growth. Last week real average weekly earnings increased 2.2%, We definitely have a tight labor market in some areas but wage growth has been hard to come by.

Inflation at the consumer level fell 0.2% in September on a month-over-month basis and is flat year-over-year. Ex-food and energy, consumer prices rose 0.2% on a MOM basis and are up 1.9% YOY.

The Bloomberg Consumer Comfort Index edged up last week to 45.2 from 44.8.

The Philly Fed manufacturing index improved to -4.5 in October.

The Fed Beige Book survey reported that the US continued to experience modest economic expansion during the August – October period. Pretty much all districts reported growth except for Kansas City. Labor markets tightened in most districts and some are reporting shortages of skilled labor and are seeing upward wage pressure.

Earnings season is off to a rough start as Alcoa, JP Morgan, Goldman, and Netflix all missed and Wal Mart guided lower. Wal Mart was down 10% yesterday after they announced profit will fall as they retool their stores and face higher labor costs. The strong dollar is weighing on manufacturing and the volatility in the markets over the summer is hurting the banks.

Americans are more sanguine about the real estate market, according to the National Association of Realtors. House prices are up, less and less people are underwater and the economy has improved.

Corporate balance sheets are deteriorating, as many took advantage of the record low interest rates to lever up and fund buybacks. Interest coverage ratios are at the lowest since 2009, and companies are returning 35% of EBITDA back to shareholders via dividends and buybacks. Interestingly, the markets are beginning to punish companies with big buyback programs. One thing to keep in mind: when companies spend money on buybacks, they are making a statement about the opportunity set they see for expansion. The other place corporate funds are going: mergers. AB Inbev plans to issue $55 billion of debt to fund its purchase of SABMiller. Dell will issue something like $40 billion in debt to purchase EMC.

  • No further market volatility
  • Two good jobs reports
  • Solid consumer spending and further improvement in housing
  • No further deterioration in exports
  • No protracted government shutdown

Filed under: Morning Report | 27 Comments »

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

Posted on October 14, 2015 by Brent Nyitray

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.

Filed under: Morning Report | 26 Comments »

Morning Report: Main Street is hiring 10/13/15

Posted on October 13, 2015 by Brent Nyitray

Markets are lower this morning after weak economic data out of China. Bonds and MBS are up.

The NFIB Small Business Optimism index rose to 96.1 from 95.9 the prior week. Good news on the labor front – small businesses are hiring or trying to hire despite the volatility in the markets. This actually points to a bit of dichotomy we have seen since the financial crisis – a bifurcation of the “S&P 500 economy” and the “main street economy.” The S&P 500 economy has a lot of international exposure and this acted as a tailwind for the stock markets as the US economy began recovering. Many people were perplexed that the economy could feel so tepid yet the stock market was hitting new highs. Now the phenomenon seems to be reversing. Companies with big international exposure are feeling the effects of the commodity sell-off and emerging markets pain, while the small manufacturer who serves the local area is thinking about expanding and hiring.

Low oil prices are here to stay, at least through 2016, according to the IEA. You have a combination of decreasing demand as China slows combined with an additional million barrels of oil a day coming out of Iran. Rig count has already fallen and is at 5 year lows.

There were 36,000 completed foreclosures in August, according to CoreLogic. This is up 0.8% versus July, but down 20% year-over-year. The foreclosure rate of 1.2% is back to January 2008 levels. The non-judicial states have largely worked through their inventory, however the judicial states (especially in the Northeast) still have some wood to chop.

UBS has a piece out on hybrid funds – funds that hold stocks and high yield debt. If we continue to see a sell-off in junk bonds, these funds will face redemptions, and that meant that the stocks will get sold as well. This is an issue in particular for the energy patch.

Filed under: Morning Report | 26 Comments »

Morning Report: Slow news day 10/12/15

Posted on October 12, 2015 by Brent Nyitray

Markets are flattish on no real news. Bonds and MBS are closed for the Columbus Day holiday.

No economic data this morning, but we will get a slew of data this week. We will get retail sales on Wednesday, which promises to be a big number as well as inflation data. On Friday we get some big manufacturing data.

Earnings season kicks off in earnest this week with many of the big banks reporting. We will hear from JP Morgan after the close.

The CFPB is going after mandatory arbitration clauses in banking and credit cards. This will make it easier for consumers to sue. Separately, the SEC is reducing its use of in-house administrative law judges, which critics have said gives it a “home court” advantage.

The rental market has been on fire, and has been doing much better than the single family construction market. Is that about to change? As the Millennials age, they will become house buyers. The demographics are changing, and 2015 may be the known as “peak rentals” The one thing our economy needs more than anything right now is more housing construction. We have a shortage, and housing construction employs a lot of people with jobs that pay good wages. The difference between 1.2 million housing starts and 2 million in terms of growth is very meaningful.

Last week the House passed a bill that would extend a hold-harmless period for TRID until February. Its fate in the Senate is unclear. The CFPB has said it will take into account whether a company is making a good faith effort to comply but does not support a hold harmless period.

Shortest honeymoon ever. After agreeing to a deal to stop developing nuclear weapons in exchange for the lifting of sanctions, Iran tested a long range ballistic missile with a range of around 800 miles, potentially violating the agreement signed in July.

Filed under: Morning Report | 5 Comments »

« Previous Page — Next Page »