Morning Report: The Fed meets

Vital Statistics:

 

Last Change
S&P futures 322 -10.6
Oil (WTI) 41.45 -0.12
10 year government bond yield 0.6%
30 year fixed rate mortgage 2.98%

 

Stocks are lower this morning as the FOMC meeting begins. Bonds and MBS are flat.

 

The FOMC meeting begins today, and we will get the announcement tomorrow. The Fed is considering the idea of basically controlling the entire yield curve, which means it essentially sets interest rates by diktat. The Fed is reaching into its historical toolbox and returning to the Truman Administration, where the Fed pushed down rates to limit the government’s borrowing costs. Japan has experimented with the same policy. Note that the rest of the world more or less relies on the 10 year US bond yield to determine the correct price of risk, and taking that number out of the hands of the market is playing with fire. IMO, we have a sovereign debt bubble of epic proportions, with negative yields all over the globe. Like all bubbles, this one will probably blow up too, once inflation returns. I have no idea what it will look like, but I can almost assure you that politicians, the media, and academia will blame the free market and not a bunch of academics sitting in a room trying to manipulate the price of money the way the Soviets manipulated the price of corn, tractors or gasoline.

 

Durable Goods orders rose 7.3% last month, which was higher than expectations. Core Capital Goods orders (kind of a proxy for business capital expenditures) rose 3.3%.

 

The MBA reported that the share of loans in forbearance fell for the 6th straight week. Reported loans in forbearance decreased by 6 basis points to 7.74%, or about 3.9 million homeowners. Ginnie loans ticked up, while Fannie / Freddie loans fell.

 

The Senate GOP has released their $1 trillion coronavirus relief proposal, which will include another $1,200 payment to individuals, more payroll protection money, but a reduction in the additional unemployment benefits from $600 a week to $200 a week. Democrats are complaining about the drop in unemployment benefits. The increased benefits will probably get get reinstated to get enough support to get it through the House. Both parties realize that as we approach the election, it will get harder to pass anything.

 

New COVID cases are slowing in Arizona, Texas and Florida.

 

Homebuilder D.R. Horton reported a 10% increase in revenues for the quarter ended June 30. Net orders were up 38% in units. Orders were up 50% year-over-year in May and June. Note D.R. Horton has a lot of Texas exposure, which is seeing an increase in COVID cases.

The Company believes the increase in demand since May has been fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of the Company’s markets, and to some extent the lower levels of home sales from mid-March through early April which caused some pent-up demand.

D.R. Horton stock is up 4% pre-open

 

We saw similar order growth for MDC Holdings as well. Orders increased 5% in the June quarter and were up 53% in the month of June.

Our results this quarter reflect the favorable industry dynamics in place today, including a low interest rate environment, a lack of available supply and a highly motivated buyer. They also reflect our continued shift in focus to the more affordable segments of the market and the benefits of our build-to-order strategy, which caters to the wants and needs of a large segment of the buying population. We believe that providing homebuyers with flexibility and choice at an affordable price is a winning strategy for our company. Given the favorable market conditions we are experiencing, we now believe that we may achieve as many as 8,000 home deliveries for the 2020 full year, which would be a 15% increase from the prior year.

MDC stock is trading up 6% pre-open.

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