Morning Report: Strong Chicago PMI 12/28/17

Vital Statistics:

Last Change
S&P Futures 2687.5 2.0
Eurostoxx Index 390.3 -0.2
Oil (WTI) 59.7 0.0
US dollar index 86.3 -0.3
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.375
Current Coupon Ginnie Mae TBA 103.25
30 Year Fixed Rate Mortgage 3.97

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

Very slow news day.

The Chicago PMI came in at a very strong 67.6 as production and new orders hit multi-year highs. Employment was disappointing however as businesses struggle to find qualified employees.

Initial Jobless Claims came in at 245k last week ahead of the Christmas holiday. Surprised it is that high.

Some the biggest fixed income managers lay out their trades for 2018. Blackrock says to move up in credit quality. Note that they are neutral on everything. U.S. municipal bonds, U.S. credit, emerging markets and Asian fixed income, and an underweight position on Treasuries, European sovereign debt and European corporate bonds. They don’t like anything, really. Fidelity says global growth is going to become inflationary, so buy TIPS (Treasury inflation protected securities) and emerging market debt. Goldman is betting against the crowd, favoring yield curve steepeners as opposed to the biggest trade on the Street, which is betting on a flatter yield curve. The theme seems to be inflation will return, and that means higher rates next year. The elephant in the room is the Fed, and the fear that increasing short term rates will torpedo the recovery.

Easy come, easy go. Bitcoin continues to give back gains after it hit a record last week. It is down 28% from its highs on fears that South Korea might close one of its exchanges. Here is the fundamental issue with Bitcoin: governments despise it, and while they might not be able to kill it directly, they can attack everything that supports it. While there are a few retailers that accept Bitcoin, understand that they don’t hold it. They immediately exchange it into dollars.

Tax reform has some people in high tax jurisdictions rushing to pre-pay their property taxes ahead of the change in 2018. Note the IRS will only allow this if they are assessed and paid in 2017. So if your local government can’t get the assessments out in time, it doesn’t matter if you prepay.

Morning Report: Home prices rise 12/27/17

Vital Statistics:

Last Change
S&P Futures 2689.8 2.8
Eurostoxx Index 390.1 -0.1
Oil (WTI) 59.5 -0.4
US dollar index 86.6 -0.2
10 Year Govt Bond Yield 2.46%
Current Coupon Fannie Mae TBA 102.375
Current Coupon Ginnie Mae TBA 103.25
30 Year Fixed Rate Mortgage 3.97

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

Home prices rose 0.7% MOM in October and are up 6.4% YOY, according to the Case-Shiller Home Price Index. Seattle, Las Vegas, and San Diego led the charge with 12.7%, 10.2%, and 8.1% gains respectively. Inventory fell to 3.4 month’s worth of supply, although some of that is probably seasonal. With home prices accelerating so fast out West, renting could be more attractive than buying in some MSAs.

Manufacturing continued to be strong in in December according to the Richmond and Dallas Fed.

Pending home sales rebounded in November, according to NAR.  This is the first YOY gain since June, and is being driven by a strong economy. There might have been some hurricane elements at play however.

What trade worked in 2017 (aside from Bitcoin and the stock market?) Credit risk transfer securities issued by Fannie and Fred. These are meant to offload some of the credit risk that the GSEs hold on their balance sheets. They take the first losses when borrowers default. The subordinate tranches of these securities made over 11% last year. outstripping high yield bonds and MBS by a wide margin. If there is more of an appetite for these securities, it will go a long way in helping establish the framework for competition to Fannie and Fred.

The current state of affairs over who runs the CFPB: Mick Mulvaney (appointed by Trump) or Leandra English (appointed by outgoing director Richard Cordray).

Tax reform will probably cause more migration from the high-cost states like NY, NJ, CT, IL, and CA to cheaper states like NC and TX. These states are hit with the double-whammy of high housing costs and high state taxes. The difference probably isn’t going to be enough to cause a massive migration, however it could nudge those who are on the fence.

Bond funds have been seeing outflows since tax reform has passed and investors are making changes to their asset allocations. Bond funds saw a withdrawal of $3.3 billion in the week ending Dec 20, which may account for the big increase in the 10 year’s yield that week. It isn’t just US Treasuries – the German Bund yield is up big this year as well. As investors become more constructive on the economy, they are shifting to emerging market sovereign bonds, which pay more and are more levered to global economic growth and out of Treasuries and Bunds, which are largely looked at as safe haven assets. Developed market stock funds also saw outflows as investors rang the register after a great year.

Merry Christmas everyone

Morning Report: Incomes and spending rise 12/22/17

Vital Statistics:

Last Change
S&P Futures 2689.8 2.0
Eurostoxx Index 390.0 -0.7
Oil (WTI) 58.0 -0.4
US dollar index 86.8 0.0
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.531
Current Coupon Ginnie Mae TBA 103.375
30 Year Fixed Rate Mortgage 3.88

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

This should be a relatively quiet day as bonds close early heading into the long holiday weekend.

Durable Goods orders increase 1.3% MOM / 8.2% YOY in November, coming in below analyst estimates. A surge in aircraft orders drove the increase. Core capital goods orders (a good proxy for business capital expenditures) rose 8.1% YOY.

Personal incomes rose 0.3% in October, slightly below the Street estimate of 0.4%. Consumer spending was better than expected, rising smartly at 0.6%. Inflation remains nowhere to be found, with the core PCE up 0.1% MOM and 1.5% YOY. The low inflation numbers certainly give the Fed some breathing room, although tax reform will probably push them to be more aggressive. Especially since 9 companies so far have announced wage increases based on tax reform.

The Fed Funds futures are currently handicapping a 5% probability of no hikes in 2018, a 21% probability of a single 25 basis point hike, a 35% chance of 50, a 27% chance of 75, and a 10% chance of 100.

Bitcoin is crashing right now, down 25% from yesterdayI was asked how Bitcoin would affect the real estate market.  My view was that Bitcoin is simply so volatile that I cannot imagine both a buyer and seller being comfortable quoting a house in bitcoin. I just don’t see someone trying to sell their house for 25 bitcoin. Second, the financing has to be in dollars as no banks lend in bitcoin yet, and I cannot imagine what the interest rate for a bitcoin loan would be. So no, it may be accepted by your local store, however it is more of a novelty at this point. Will that change? Who knows? Will Bitcoin be dominant cryptocurrency or will it be like Classmates.com or MySpace – early adopters that got crushed later on by Facebook?

Bloomberg takes a look at the state of housing entering 2018. Tight inventory, builder confidence, and a growing economy point to a strong housing market next year. On the other side of the coin, the drop in the mortgage interest deduction could hurt homes at the top end, while the larger standard deduction may lower the incentive to buy versus rent for many at the lower end of the income scale. IMO, the negatives are marginal compared to the positives.

Don’t forget, housing’s contribution to GDP is way, way below historical levels. If 2018 is the year homebuilding finally breaks out, it will have an ousized effect on GDP growth. Labor shortages might be the bottleneck, but as wages rise, they attract new workers so that state of affairs doesn’t last long. Swinging a hammer pays a lot more than slinging burgers.

housing contribution to GDP

90 day delinquencies spiked in November, according to Black Knight Financial Services. 85% of the spike is attributed to the hurricanes, so it doesn’t really tell us anything about the state of the economy.

Finally, happy holidays to all!

Morning Report: Home Prices rise 6.6% YOY 12/21/17

Vital Statistics:

Last Change
S&P Futures 2687.0 5.5
Eurostoxx Index 388.8 0.4
Oil (WTI) 57.5 0.3
US dollar index 86.8 0.0
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.531
Current Coupon Ginnie Mae TBA 103.375
30 Year Fixed Rate Mortgage 3.88

Stocks are up this morning after tax reform is passed. Bonds and MBS are flat.

Hot on the heels of tax reform is legislation to keep the lights on. The House is set to vote on a stopgap measure to keep the government open for another month. This will prevent the Senate from attaching too many things to the bill. It also gives the government some breathing room after the new year to hash out a longer-term funding deal.

In response to the tax cuts, 5 big corporations (Comcast, AT&T, Boeing, Fifth Third, and Wells Fargo) all announced they were either raising pay or paying bonuses to workers. Could this be the start of broader wage growth?

House prices rose 0.5% in October, according to the FHFA House Price Index. September’s 0.3% increase was revised upward to 0.5%. On a YOY basis, prices rose 6.6% nationally. The East South Central region (TN, KY, MI, and AL) rose 8.2%, which was a particular strong showing. As usual, the West and Mountain states led the charge, while the Upper Midwest and the East Coast brought up the rear.

The final revision for third quarter GDP came in at 3.2%. The prior estimate was 3.3% as consumer spending was revised down a tenth of a percent to 2.2%. The GDP price deflator was unchanged at 2.1%.

In other economic data, Initial Jobless Claims rose to 245k last week, while the Philly Fed Manufacturing Index rose. The Chicago Fed National Activity Index gave back some of October’s hurricane-related gains. The Index of Leading Economic Indicators rose 0.3%. Overall, all of these reports were strong readings and show the economy with some momentum heading into 2018.

The chickens are coming home to roost for subprime auto lending. Some big private equity firms got into the business, hoping to generate huge returns from auto loans paying in the high single digits. Unfortunately, the default rates have soared for these loans, and auto sales have cooled off and they can’t exit the business. No, it isn’t a canary in the coal mine for the US economy as a whole.

Realtor.com weighs in on the hottest and coldest real estate markets of 2017. In the top 20, the hottest are unsurprising – the Bay Area. However there are a few surprises, like Detroit, Fort Wayne, and Stockton.

This reminds me of the late 90s, when companies discovered you could get a multiple by adding .com to your corporate moniker. Long Island Iced Tea company jumps fivefold after renaming itself Long Blockchain and committing to looking for a way to make money in blockchain and fintech. Not that they have any business in it, or expertise, but they will look into the idea.

Morning Report: Is the Trump Reflation Trade back? 12/20/17

Vital Statistics:

Last Change
S&P Futures 2693.3 -0.3
Eurostoxx Index 390.5 -0.5
Oil (WTI) 57.5 0.3
US dollar index 86.8 0.0
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.531
Current Coupon Ginnie Mae TBA 103.375
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning as tax reform looks set to pass. Bonds and MBS are down.

The Senate passed tax reform, and it looks like we’ll need a second vote in the House because of the name. Stocks like it, and bonds are selling off. That said, bonds are selling off worldwide, so it isn’t just the US.

Hot on the heels of tax reform comes funding the government, as normal funding runs out on Friday.  Mitch McConnell has vowed there will be no government shutdown, and he is probably correct, as the continuing resolution will be larded up with all sorts of unrelated measures to garner the necessary votes. The big threat is if Democrats demand some sort of immigration deal or if conservatives balk at stabilizing Obamacare or re-authorizing CHIP. Politicians talk about “Christmas Tree” bills, where everyone gets an ornament (or a priority satisfied). Given the silence in the media and the absence of leaks, it appears that is exactly what is going on. Just in time for the season, I guess.

The 10 year broke through support yesterday, which caused a sell-off driven by stop-loss selling on the part of technical traders.  Don’t forget, one of the biggest trades on the Street right now is the yield curve flattening trade, where investors are long the 10 year and short the 2 year (or some variation of that). Yesterday, people got carried out on that trade as the losses on the 10 year side of the trade were not offset by gains on the 2 year. My point on this is that the movement in the 10 year over the past couple of days has a lot of noise in it, caused by temporary technical trading. It might just be a blip.

Does the passage of tax reform bring the Trump Reflation Trade back into play? The Trump Reflation Trade refers to the rally in stocks and the sell-off in bonds that we saw a year ago based on policy expectations in Washington. The markets were expecting a tax cut and an infrastructure spending plan which would goose the economy and drive investors out of safe assets like Treasuries into riskier assets like stocks and corporate bonds. That trade petered out, at least on the bond side of the ledger as getting anything passed in Washington looked almost impossible. We had a nice rally in bonds in Spring and have been stuck in a narrow range since. With tax reform now done, and talks of infrastructure spending next year, we could see a repeat, where bonds test the early 2017 levels around 2.6%. That said, I would be extremely surprised to see a deal on infrastructure, as 2018 will be all about midterm elections and posturing ahead of them.

The tax bill made some changes that are positive for housing and the mortgage industry. The biggest one for many smaller independent originators concerns mortgage servicing rights and the recognition of income for tax purposes. The original bill would have required originators to pay the tax up front for the MSR portion of the gain on sale. Since MSRs are not cash, it would have hurt the cash flows of many smaller originators and perhaps driven them out of servicing. The tax treatment for MSRs remains unchanged. Second, affordable housing advocates were worried about two provisions that would have possibly discouraged affordable housing construction – the removal of the Low Income Housing Tax Credit and Private Activity Bonds. Those provisions remain unchanged.

Mortgage Applications fell 4.9% last week as purchases fell 6% and refis fell 3% despite a drop in rates.

Existing Home Sales rose 5.6% to a seasonally adjusted annualized value of 5.81 million, which is the highest since 2006. The median home price rose 5.8% to $248,000. There are 1.67 million homes for sale, which represents about 3.4 month’s worth. The first time homebuyer was 29% of sales, and we saw cash-only sales (think investors) increase to 22%. The new tax bill will make it somewhat more attractive to be a landlord, so we could see some effect here, especially at the lower price points.

Morning Report: Housing starts solid 12/19/17

Vital Statistics:

Last Change
S&P Futures 2697.3 2.8
Eurostoxx Index 392.4 -0.3
Oil (WTI) 57.4 0.2
US dollar index 86.9 0.3
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.531
Current Coupon Ginnie Mae TBA 103.375
30 Year Fixed Rate Mortgage 3.88

Stocks are higher as Congress begins the voting for tax reform. Bonds and MBS are down.

The House is expected to vote on tax reform this afternoon around 1:30. Depending on the procedural machinations, the Senate will vote either tonight or tomorrow. Bob Corker and Susan Collins are supposedly on board, so this should be done.

Housing starts increased to 1.3 million in November, according to Census. This is up 3.3% MOM and 13% YOY. Building Permits came in at 1.3 million as well. The increase in starts was driven by single-family, not multi, and hit a 10 year high. Note that tax reform’s pass-through treatment will be good news for landlords and could encourage more multi-fam construction. We didn’t see any jump in multi-fam permits last month, so maybe the change is too recent to influence behavior yet.

Minneapolis Fed Head Neel Kashkari argues that we should not be raising interest rates yet. Neel was one of 2 dissenters at the last FOMC meeting, preferring to maintain the current level of rates.  His argument is that inflation remains below the Fed’s target rate of 2% and there is still slack in the labor market. He also is worried about what the flattening yield curve is saying. IMO he has a point – we want the labor market to keep bringing back the long-term unemployed, however we are hardly going to a tightening posture. On a scale of 1 – 10, where 1 is easy and 10 is tight, we are going from a 1 to a 2. Real interest rates are still negative, and the Fed is still buying Treasuries and MBS albeit at a reduced pace. What would a 10 on that scale look like? The early 1980s, when Paul Volcker tightened to quell inflation and took the Fed Funds rate from 9% to 19%. We are in a different economic scenario than the late 70s, but some historical perspective is helpful.

New mortgage loan credit risk increased in the third quarter, according to CoreLogic’s Housing Credit Index. The increase in risk was driven by an increase in the share of condo / multi-fam loans. Credit scores improved, while DTIs fell. We are back in the pre-bubble range of credit risk.

%d bloggers like this: