Morning Report – Chinese growth continues to slow 5/5/14

Posted on May 5, 2014 by Brent Nyitray

Vital Statistics:

 

  Last Change Percent
S&P Futures  1867.0 -7.4 -0.39%
Eurostoxx Index 3136.3 -41.6 -1.31%
Oil (WTI) 100.1 0.4 0.38%
LIBOR 0.223 0.000 0.00%
US Dollar Index (DXY) 79.49 -0.022 -0.03%
10 Year Govt Bond Yield 2.58% -0.01%  
Current Coupon Ginnie Mae TBA 106.2 0.0  
Current Coupon Fannie Mae TBA 105.2 0.0  
BankRate 30 Year Fixed Rate Mortgage 4.4    

 

Stocks are down after Chinese PMI came in light and showed contraction in the manufacturing sector for the fourth month in a row. Bonds and MBS are rallying.
 
What is going on in the bond market? Bonds seem to be factoring in a global slowdown as China decelerates and the US slows. This has pushed yields to the lowest level since early February and puts it at the bottom of the tight 2.56% – 2.8% trading range we have experienced since then. I wouldn’t bet on this continuing, so if you had any borrowers who were waiting for lower rates, wake them up.
 
Chart: 10 year yield:
 

 

This week promises to be dull on the economic front, as the week following the jobs report usually is. Don’t expect any market-moving releases this week. Earnings season continues, and we will hear from mortgage REIT giant Annaly Capital. During their fourth quarter earnings conference call, Annaly said they intended to build up their balance sheet and increase their portfolio of agency MBS. Based on the chart above, that was a good call. 

 

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Weekend Open Thread

Posted on May 3, 2014 by Let the mutherfuker burn!

Put all new comments here or face Lms’s wrath!

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Morning Report – good payroll numbers but labor force participation rate disappoints 05/02/14

Posted on May 2, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1881.2 3.5 0.19%
Eurostoxx Index 3188.2 -10.5 -0.33%
Oil (WTI) 99.85 0.4 0.43%
LIBOR 0.223 0.000 0.00%
US Dollar Index (DXY) 79.8 0.269 0.34%
10 Year Govt Bond Yield 2.68% 0.07%
Current Coupon Ginnie Mae TBA 105.8 -0.3
Current Coupon Fannie Mae TBA 104.6 -0.3
BankRate 30 Year Fixed Rate Mortgage 4.24

 

Markets are higher this morning after a strong jobs report. Bonds and MBS down
Nonfarm payrolls increased 288k in April and the prior two month net revision was 36k. The unemployment rate fell to 6.3% as the labor force participation rate fell to 62.8%. Average hourly earnings and average weekly hours were flat. So, all in all a set of good numbers, though it is disappointing to see the labor force participation rate still stuck at multi-decade lows – Q178 to be exact.
Pfizer sweetened its bid for UK-based AstraZeneca. The reason why Pfizer wants AstraZeneca is not so much the pipeline, but the tax rate. The combined company would be a corporate resident of the UK and pay lower taxes there.
Yesterday’s weak construction spending data caused some revisions in Q1 GDP. Barclay’s took their estimate down to -.2%. IMO, a negative Q1 GDP estimate seems at odds with the other data out there.
The government is bent on putting payday lenders out of business. Not by regulating them, or passing a law abolishing them, but by leaning on the banks and forcing them to stop doing business with them. The government is also going after other unsavory, but completely legal, businesses like porn, internet gambling, and drug paraphernalia  in the same way. obama has a pen and a phone and isn’t afraid to use it.

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Morning Report – Lots of economic data 5/1/14

Posted on May 1, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1876.9 -1.0 -0.05%
Eurostoxx Index 3198.5 0.1 0.00%
Oil (WTI) 99.17 -0.6 -0.57%
LIBOR 0.223 -0.001 -0.22%
US Dollar Index (DXY) 79.5 0.027 0.03%
10 Year Govt Bond Yield 2.65% 0.01%
Current Coupon Ginnie Mae TBA 105.9 0.0
Current Coupon Fannie Mae TBA 104.7 0.0
BankRate 30 Year Fixed Rate Mortgage 4.26

 

Markets are flattish after some decent economic data. Bonds and MBS are flattish. Markets should be somewhat less liquid today as much of the world celebrates Labor Day.

April Auto sales continue to stream in – GM reported a better than expected increase, while Ford reported a drop. Nissan literally blew the doors off with an increase of 18.3%. Public construction was down .6% month-over-month and is down .8% year over year. Of course after this past winter, the Northeast is going to see a lot of construction on the roads, fixing all the potholes.

The ISM Manufacturing Index came in better than expected, at 54.9. Employment is accelerating, and customers’ inventories are very low, which portends future production (and economic growth). If you annualize out the ISM April reading, it would correspond to a real GDP growth rate of nearly 4%. Of course manufacturing isn’t the percent of the economy it used to be, but still…

Construction spending rose .2% in March, after February was revised downward to a .2% decline. On a year-over-year basis, it is up 8.4%. Residential construction rose .7% month-over-month and is up 15.2% year over year. Of course with low double digit increases in average selling prices, that doesn’t necessarily correspond to big unit volume, which is why employment lags.

Personal Incomes rose .5% in March and Personal Spending rose .9%. Part of the increase in spending is obamacare-related so it isn’t really an apples-to-apples comparison. Still, it was a good number, but probably represents some pent-up demand from the bad winter.

Challenger and Gray announced job cuts rose 5.7%, but are still pretty low, running at a 40k pace. Telecom and Automotive sectors led way. Note these are announced job cuts (a press release). Often these cuts never materialize, or are over a long period of time.

Initial Jobless Claims rose to 344k – small increase from last week, but still a pretty good number.

The FOMC met yesterday and maintained interest rates while cutting another $10 billion a month out of asset purchases. Stocks and bonds rallied on the statement. They committed to maintaining interest rates below long-term levels even after unemployment and inflation reach the Fed’s target rates. The Fed noted that economic activity has picked up recently, which means the early Q1 slowdown was probably indeed weather-related and not indicative of an overall economic slowdown.

Credit standards are easing again, as Wells cut its minimum credit score for conforming loans to 620 from 660. TD has lowered down payments to 3% without requiring mortgage insurance. When there is not much business to go around, people start reaching for yield. Interesting stat: almost 16% of the mortgages for home purchases went to homebuyers with DTIs > 43. This is up from 2012. I suspect much of these are low LTV, asset-rich jumbo borrowers, where the ability to repay is pretty strong in spite of the high DTIs.

In a story that seems to be getting a lot of press, The Chinese economy is set to become bigger than the US this year. This sort of analysis is difficult to begin with, because China manipulates its exchange rate so economists use Purchasing Power Parity (aka the Big Mac Index) to back out what China’s GDP is. The Chinese real estate bubble is bursting as we speak, so this may be short-lived as their GDP will fall in real terms and growth will be slow as they dig out in the aftermath. Rapidly growing countries seem to have these bubble episodes – we did in the 20s, Japan did in the 80s, and China has over the past couple decades. Booms create mal-investments which sow the seeds for the boom’s destruction.

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Morning Report – Q1 GDP surprises 4/30/14

Posted on April 30, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1870.8 -1.0 -0.05%
Eurostoxx Index 3196.3 -12.4 -0.39%
Oil (WTI) 100.3 -1.0 -1.01%
LIBOR 0.223 -0.002 -0.89%
US Dollar Index (DXY) 79.59 -0.221 -0.28%
10 Year Govt Bond Yield 2.69% 0.00%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 104.5 0.0
BankRate 30 Year Fixed Rate Mortgage 4.3

 

Markets are slightly lower this morning after GDP came in much, much lower than expected. Bonds and MBS are up small. The market almost does not believe the number.
The advance estimate for first quarter GDP came in at +.1%. The Street was looking for +1.2%, so this is a big surprise. Remember, this is the advance estimate for first quarter GDP and will be subject to two revisions. Given the fact that the SPUS aren’t down 20 handles and the 10 year isn’t yielding 2.6%, the Street clearly thinks this will be revised substantially upward the next time around. Going from 2.6% growth in Q4 to nearly flat GDP growth simply doesn’t comport with all the other numbers we have been getting.
Mortgage Applications fell 5.9% last week. The index is challenging the lows we set in the last week of 2013. The refi index has already broken through that low and is now around the lows set in mid 2008. Purchases fell 4.4%, even though rates were flat. Average loan sizes fell to 239.7k and the refis account for just over half of all applications right now.
The ADP Employment report is forecasting 220k private payrolls for Friday’s jobs report. Last month, the ADP number pretty much nailed it. The Street is forecasting 215k this Friday.
We had some other minor data this morning, with the ISM Milwaukee missing estimates and the Chicago Purchasing Manger’s index beating.
We will hear from the FOMC later today. Given there will be no press conference, I think we should expect nothing major, just another $10 billion in tapering and a commitment to lower rates until the labor market improves. I will be interested to see if the statement references the slowdown in Q1.
The Senate Banking Committee has enough votes to get Johnson Crapo out of Committee, but not enough to bring it to the floor. Six Democrats and six Republicans out of 22 support the measure. The liberals want more effort spent on forcing banks to lend to “underserved” areas.

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Morning Report – Case-Shiller up / 13 out of 20 markets down 4/29/14

Posted on April 29, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1870.3 4.3 0.23%
Eurostoxx Index 3197.9 32.1 1.01%
Oil (WTI) 101.2 0.4 0.40%
LIBOR 0.225 0.001 0.22%
US Dollar Index (DXY) 79.79 0.103 0.13%
10 Year Govt Bond Yield 2.72% 0.02%
Current Coupon Ginnie Mae TBA 105.4 -0.2
Current Coupon Fannie Mae TBA 104.3 -0.1
BankRate 30 Year Fixed Rate Mortgage 4.26
Markets are up small this morning on no real news. Bonds and MBS are down small.
Home prices rose.76% month-over-month and 12.9% year over year, according to the Case-Shiller real estate index. The strength in home prices is largely due to reduced inventory and does not necessarily represent a robust housing market. In fact, 13 out of the 20 cities in the index declined in February on a month-over-month basis. The strength was in the West Coast, Dallas, and DC. Everyone else was down.
Why does a company with $123 billion in net cash on the balance sheet need to tap the bond market? In a move guaranteed to infuriate many, Apple is looking to do a $17 billion bond issue to repurchase stock. Why not use the their cash to do it? Because it is overseas and subject to repatriation taxes.
The markup of the Crapo-Johnson bill begins mark-up in the Senate. The two big expected changes are 1) Guarantors of MBS cannot also be originators, and 2) The bill will not supersede the bailout agreement, which means all of Fan and Fred’s profits have to go straight to the government. My personal opinion is that not much is going to be done on housing reform this year. With Republican control of the Senate a distinct possibility, they are going to want to wait and see if they can drive a better deal when control changes.
There was nothing earth-shattering in American Capital Agency’s first quarter earnings release. AGNC is the second-biggest mortgage REIT in the US and is a big buyer of mortgage backed securities. They continue to shrink their balance sheet and buy back stock. They have shortened the maturity of their portfolio and now half of it is in 15 year fixed rate MBS. The dwarfs are interesting – you do get a meaningful drop in rate on the conforming side, but not on the government side. In fact, there is no rate advantage in going from 30 to 15 in govvies at all. Why? Govvie dwarfs are highly illiquid.

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Morning Report – Big week ahead 4/28/14

Posted on April 28, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1863.2 3.1 0.17%
Eurostoxx Index 3161.8 14.4 0.46%
Oil (WTI) 101.1 0.5 0.47%
LIBOR 0.225 -0.002 -0.77%
US Dollar Index (DXY) 79.58 -0.174 -0.22%
10 Year Govt Bond Yield 2.67% 0.01%
Current Coupon Ginnie Mae TBA 105.6 0.0
Current Coupon Fannie Mae TBA 104.6 0.0
BankRate 30 Year Fixed Rate Mortgage 4.25

 

Markets are up small this morning after Pfizer released a $100 billion bear hug for AstraZeneca Plc. Bonds and MBS are flat.
Big week coming up. The action begins Wednesday, with the FOMC decision and the advance estimate of Q1 GDP. On Thursday, we have a couple of big reports with the ISM Manufacturing report as well as personal income / consumption. Finally, on Friday we get the jobs report. So, there is a lot of stuff this week that could move bonds around. Float at your own risk.
The Street estimate for Q1 GDP is +1.2%, a significant slow down from the +2.6% pace for the fourth quarter. Clearly the Street is baking in some caution given the lousy weather in January and February. Housing continues to punch below its weight, so that is another issue.
The FOMC meeting will not have a press conference or any revisions to the economic forecast, so it should be a non-event. Expect to see another $10 billion reduction in asset purchases.
Pending Home Sales rose 3.2% month over month but fell 7.4% on a year-over-year basis. The jump was mainly a catch-up after a rough start to the year. The NAR is expecting existing home sales to hit 4.9 million in 2014, less than the 5.1 million pace in 2013. Given the inventory shortage, they expect median prices to increase 6% – 7% this year.

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Saturday Open Thread

Posted on April 26, 2014 by Michigoose

Since McWing hasn’t put up a weekend thread yet I’ll pick up his slack.

Thought for the day:

With foxes we must play the fox.

Thomas Fuller

Which of course, in today’s day and age, led me immediately to this:

Birthdays today:

William Shakespeare, Ludwig Wittgenstein, Kevin James, John James Audubon, Jet Li

Filed under: Open Thread, Saturday | Tagged: | 5 Comments »

Morning Report – Mixed signals on the economy 4/25/14

Posted on April 25, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1867.6 -5.5 -0.29%
Eurostoxx Index 3164.6 -25.2 -0.79%
Oil (WTI) 101.1 -0.8 -0.83%
LIBOR 0.227 -0.001 -0.55%
US Dollar Index (DXY) 79.68 -0.120 -0.15%
10 Year Govt Bond Yield 2.68% -0.01%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 104.5 0.0
BankRate 30 Year Fixed Rate Mortgage 4.24

 

Stocks are lower this morning on no real news. Emerging markets continue to sell off. Bonds and MBS are up small.
University of Michigan Consumer Confidence picked up in April, from 82.6 to 84.1.
The Markit Purchasing Managers Index fell slightly to 54.9 from 55.7. The Markit Services PMI fell as well. These readings are still well above neutrality, but it looks like things cooled a bit in April. The employment numbers were not great – the expansion in service sector payroll was the weakest in almost 2 years. Input prices (primarily food and energy) increased.
Rep. Elijah Cummings (D-MD) wants to exhume the robo-signing scandal and hold hearings on it. There was an ongoing investigation of servicing misdeeds during the foreclosure process that was eventually shut down when the government realized the only people making any money on it were the consultants, not aggrieved homeowners. Apparently the consultants walked away with $1.9 billion and homeowners got nothing. Seems to me to be a lot of money to pay consultants to review foreclosure files. But that probably explains why 6 of the 10 richest counties in the US surround DC.
Speaking of regulators going after the banks, the government is looking for more that $13 billion from Bank of America over RMBS deals. If B of A wasn’t asked to buy Countrywide from the government, that deal will go down in history as one of the worst mergers ever. If the government asked B of A to buy Countrywide, then the government is exhibiting absolutely reprehensible behavior.
The Wall Street Journal has a good article on how demand for home loans has fallen off as buyers experience sticker shock. Last year at this time, mortgage rates were 75 basis points lower, and home prices were 13% lower. This has caused affordability to take a hit, although real estate is still highly affordable compared to historical numbers. As a result, housing continues to punch below its weight in terms of contributing to economic growth. That said, the thing that jumped out in reviewing the homebuilder earnings is that the growth is pretty much coming from increases in average selling prices. For example, Pulte had flat year-over-year revenues which consisted of a 10% increase in ASPs and a 10% drop in deliveries. The builders have probably increased prices as far as they can, and will now have to push out volume to keep increasing the top line. In my opinion, that is what is going to break the logjam in the economy. The builders are coming up against some tough comparisons, and are not going to want to report revenue declines. Which means more building, which puts more people to work, which gets the virtuous cycle going again. At some point, the job market will improve enough to bring the first time homebuyer back, which is the key to a meaningful recovery in housing and is the difference between housing starts of 900k and 1.5 million.

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Morning Report – Homebuilder earnings 4/24/14

Posted on April 24, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1879.7 6.8 0.36%
Eurostoxx Index 3197.1 21.1 0.66%
Oil (WTI) 101.9 0.4 0.40%
LIBOR 0.228 -0.001 -0.39%
US Dollar Index (DXY) 79.97 0.111 0.14%
10 Year Govt Bond Yield 2.72% 0.02%
Current Coupon Ginnie Mae TBA 105.2 -0.1
Current Coupon Fannie Mae TBA 104.2 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.28

 

Markets are up this morning after earnings reports and a good durable goods number. Bonds and MBS are down.
Durable goods came in at 2.6% in March, better than the 2% Street estimate. Initial Jobless Claims increased to 329k.
Pulte announced better than expected earnings, but orders are down 6% from a year ago. Net new orders are down 2%. Average selling prices increased 10% to 317,000 and gross margins increased to 23.8%. They reported that the spring selling season is off to a good start, and demand accelerated throughout the quarter. Michigan apparently did well, and demand is strong in Texas, Florida, and the Carolina. Demand is weak in Washington DC and New England. We saw confirmation of DC weakness from NVR. Perhaps prices simply rose too far too fast there. Pulte is more of an entry-level homebuilder, so that is encouraging. The first-time homebuyer has been the missing piece of the puzzle.
D.R. Horton announced even better numbers than Pulte, with new orders up 9% in units and 20% in dollar value. Gross Margins increased 210 basis points to 22.5%. Average selling prices increased 10% to 278,900. They reported that market conditions remain favorable, but the strength and improvement varies significantly over local markets. D.R. Horton in based in Texas, but operates over a big geographic area.
Finally, Ryland reported orders increased 6%, ASPs increased 18%, and gross margins increased to 21.1%. Ryland is based in Southern California and operates in 17 states.
So, for all the fears that homebuilder earnings would be terrible, so far, so good. We have heard from Lennar, KB, Pulte, DR Horton, NVR, and Ryland. Only NVR missed. That said, the weak order growth does seem to indicate that the big increases in ASPs and gross margins may be in the past. Very hard to reconcile these good earnings reports with that awful new home sales number yesterday.
Apple delighted the crowd with a better than expected earnings and a 7 for 1 stock split. I remember the ads for stock split beepers back in the late 90s in Barron’s. A company would announce a stock split, a page with the ticker is sent to your beeper, and you quickly go to your E*Trade account and buy the stock. No analysis required. Heck, you don’t even have to know what they do. Typical bubble thinking. Similarly, I remember the guy who sold me my Volvo station wagon in 2006 was speculating in condo rights. Hopefully he found a seat when the music stopped.
FWIW, it seems like the half a trillion market cap seems to be where companies stall out (both XOM and MSFT flirted with that level before petering out) and Apple is trading at $491B pre-open.

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