The president will sign the bill to fund the government, as was expected. According to the news this morning he will also invoke an emergency security measure to get funding to complete the wall. He will be speaking at 10:00 am ET this morning. Just a fight brewing with Democrats saying it is unconstitutional to attempt to fund his proposed border wall without approval from Congress. One hurdle overcome, but looks like the beginning of another battle between President Trump and Democrats as well as some Republicans. “No crisis justifies violating the Constitution,” Republican Senator Marco Rubio said on Twitter on Thursday.
On trade; negotiators say it was a good week in negotiations and will resume talks next week in Washington. Trump is leaning toward extending his increased tariffs that presently are set to engage March 1st for an additional 60 to 90 days if discussions continue to be productive. “Next week, both sides will meet again in Washington. I hope you will continue efforts to advance reaching a mutually beneficial, win-win agreement,” Xi said. “We feel that we have made headway on very, very important, and very difficult issues. We have additional work to do but we are hopeful,” US key negotiator Lighthizer said.
January import and export prices this morning are another data point that continues to support the no-inflation view. Import prices were thought to be flat, as reported prices declined 0.5%. Export prices were expected +0.1%, as reported -0.6%. Yr/yr import prices -1.7%, export prices -0.2%.
At 9:15 am January industrial production, expected to be up +0.1%, declined 0.6%; manufacturing dropped -0.9% against estimates of +0.1%. And January factory use at 78.2% is weaker than 78.8% forecasts.
At 9:30 am the DJIA opened up +215, the NASDAQ added +44, and the S&P was up +20. The 10-yr was at 2.68%, +2 bps from yesterday.
At 10:00 am the mid-month University of Michigan consumer sentiment index was expected at 93.0 from 91.2 on the final January index. As reported, the index increased to 95.5.
Treasuries and mortgage markets are holding well although fractionally weaker. The data this morning is adding some support. This week the 10-yr increased from 2.63% last Friday; MBS prices at this point are down 30 bps.
PRICES @ 10:00 AM
10 yr note: -4/32 (12 bp) 2.67% +1 bp
5 yr note: -2/32 (6 bp) 2.49% +1.5 bp
2 Yr note: unch 250% unch
30 yr bond: -4/32 (12 bp) 3.00% unch
Libor Rates: 1 mo 2.481%; 3 mo 2.693%; 6 mo 2.744%; 1 yr 2.916% (2/14/19)
30 yr FNMA 4.0: @9:30 101.98 -5 bp (-12 bps frm 9:30 yesterday)
15 yr FNMA 3.5: @9:30 101.65 -10 bp (-12 bp frm 9:30 yesterday)
30 yr GNMA 4.0: @9:30 101.75 -6 bp (-4 bp frm 9:30 yesterday)
Dollar/Yuan: $6.7717 -$0.0005
Dollar/Yen: 110.47 -0.01 yen
Dollar/Euro: $1.1275 -$0.0023
Dollar Index: 97.06 +0.04
Gold: $1320.20 +$6.30
Crude Oil: $55.93 +$1.14
DJIA: 25,729.57 +290.18
NASDAQ: 7455.42 +28.47
S&P 500: 2766.39 +20.66
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.
Prior to 8:30 am ET this morning the 10 yr note yield traded down 1 bp to 2.69% overnight after increasing 2 bps yesterday to 2.70%. At 8:30 key data sent the 10 yr yield down to 2.65% and initial MBS prices up 17 bps from yesterday.
Weekly jobless claims expected to decline 9K to 225K, claims increased 4K to 239K.
No inflation and very surprising weak Dec retail sales sent rates lower and stock indexes in futures markets down, DJIA -100 bps.
Yesterday Jan CPI data confirmed no inflation increase at the retail level. This morning Jan PPI added more confirmation that inflation isn’t an immediate concern. Overall PPI expected +0.2% declined 0.1%; core PPI also expected +0.2% was reported +0.2%, core PPI and trade services +0.2% as expected.
The surprise came with Dec retail sales; it's one of the reports that had been delayed because of the shutdown. Sales were widely believed that holiday shopping was strong even without the actual data, as released this morning sales in Dec expected +0.1% declined 1.2%, sales less autos expected 0.0% dropped 1.8%, the control group thought to be +0.4% declined 1.7%. The soft sales data is going to lean against forecasts for Q4 GDP that will be reported on 2/28. Retail sales, the sharpest monthly decline of the expansion since September 2009 and the last recession. The twist in the data is that vehicle sales, not really part of the holiday season, contributed strongly to December's results and excluding which sales fell 1.8%. A major 3.9 percent drop for non-store retailers headlines the details and points to a disappointing holiday for e-commerce. Sales at apparel stores fell 0.7 percent in December with department stores down 3.3 percent. Restaurant sales lost 0.7 percent for a second month in a row. Exaggerating December's downside was a 5.1 percent drop in gasoline sales that reflected price effects. Confidence and consumer spending have moved to 2-year lows.
At 9:30 the DJIA opened -130, NASDAQ -29, S&P -13. 10 yr at 9:30 2.65% -5 bps. Fannie 4.0 30 yr coupon at 9:30 +20 bps from yesterday’s close and +17 bps from 9:30 yesterday).
At 10:00 am Nov business inventories were expected +0.2%, as released -0.1%. December retail sales will not be the only input holding down fourth-quarter GDP as November inventories won't be a plus either. Business inventories edged 0.1 percent lower but do follow a strong 0.6 percent build in October.
President Trump is widely expected to sign the funding bill moving through Congress; the latest news is the bill will move through both houses by tomorrow then on the President for signature on Friday just before Friday mid-night potential shut down. Markets believe there won’t be a closure; no one wants it. He will however not go away quietly for his wall. His comments suggest he will look for other ways to get the rest of the funds to build it. As is Trump’s style, yesterday he commented on the possibility that disputes over the wall could still cause a partial government shutdown by the weekend.
Trade discussions with China according to Trump, going very well. He is considering pushing back the deadline for the imposition of higher tariffs on Chinese imports by 60 days, as the world’s two biggest economies try to negotiate a solution to their trade dispute, according to people familiar with the matter. March 1st had been the date Trump said he would increase tariffs on China from 10% to 25%.
Looking good this morning in the rate markets. Weak sales, no shutdown and increasing optimism over trade. Weak data now surfacing after the delays over the shutdown confirm the economic outlook isn’t quite as bright as the consensus has expected, but still, a general view from most stock gurus continues to reflect optimism.
10 yr. note: +17/32 (53 bp) 2.64% -6 bp
5 yr. note: +9/32 (28 bp) 2.46% -7 bp
2 Yr. note: +3/32 (9 bp) 2.49% -4 bp
30 yr. bond: +26/32 (81 bp) 2.99% -6 bp
Libor Rates: 1 mo. 2.488%; 3 mo. 2.683%; 6 mo. 2.743%; 1 yr. 2.915% (2/13/19)
30 yr. FNMA 4.0: @9:30 102.11 +20 bp (+ 17 bp from 9:30 yesterday)
15 yr. FNMA 3.5: @9:30 101.77 +8 bp (+5 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.78 +16 bp (+18 bp from 9:30 yesterday)
Dollar/Yuan: $6.7704 +$0.0101
Dollar/Yen: 110.65 -0.36 yen
Dollar/Euro: $1.1291 +$0.0028
Dollar Index: 97.05 -0.15
Gold: $1314.00 -$1.10
Crude Oil: $53.96 -$0.35
DJIA: 25,403.13 -140.14
NASDAQ: 7411.27 -9.11
S&P 500: 2741.80 -11.23
Topping the news today: Congressional leaders have hammered out a deal to avert another government shutdown set for this Friday. Congressional sources said it will include $1.37B for new fencing along 55 miles of the southern border but only with currently used designs, such as “steel bollard” fencing. It will also address immigrant detention beds. Not the $5.7B President Trump has previously insisted on accompanied by his threat to shut government once again. The negotiators are targeting tomorrow for a final agreement. The president has three choices; accept what is passed by Congress, don’t go along and shut down the government again, or invoke a “national emergency” and use the money to build it.
Trade talks with China are moving ahead, adding to the strong stock market trading this morning. Chinese Vice Premier Liu He was expected to join U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in high-level trade talks Thursday and Friday. March 1st is the deadline set down by the president to add additional tariffs on China’s US exports; increasing the tariffs from 10% currently to 25%. As with the border wall, President Trump has this option to think about; if talks are progressing, he can simply delay the tariff increases.
Early this morning the January NFIB small business optimism index declined more than expected to 101.2 from 104.4 in December and expected at 103.0. Doubts about future economic growth diminished optimism among small business owners to the lowest level in 26 months. The fall in January mainly reflects a 10-point drop to a net 6 percent in expectations that the economy will improve, a 7-point decline to a net 16 percent in expectations that real sales will be higher, and a 7-point drop to a net 1 percent in plans to increase inventories. NFIB highlighted the 35-day government shutdown and financial market instability as contributors to the increased uncertainty driving down optimism among small business owners in January.
At 9:30 am EST the DJIA opened up +190, the NASDAQ added +49, and S&P increased +17. The 10-yr note yield 2.67%, up +2 bp.
At 10:00 am December JOLTS job openings, expected at 6.900 mil from 6.888 mil, leaped to 7.335 mil.
Technically our work remains positive for the 10-yr note and MBSs, however over the last two weeks there has been little momentum in either direction for interest rates. We have strong support for the 10-yr at 2.70% and 101.91 for Fannie 4.0 coupon (currently 102.08). Border wall and China trade dominate through the rest of the week. The president holds the cards.
10 yr. note: -8/32 (25 bp) 2.68% +3 bp
5 yr. note: -3/32 (9 bp) 2.49% +2 bp
2 Yr. note: -1/32 (3 bp) 2.51% +1.5 bp
30 yr. bond: -19/32 (59 bp) 3.02% +2.5 bp
Libor Rates: 1 mo. 2.497%; 3 mo. 2.688%; 6 mo. 2.733%; 1 yr. 2.924% (2/11/19)
30 yr. FNMA 4.0: @9:30 102.08 -3 bp (-8 bp from 9:30 yesterday)
15 yr. FNMA 3.5: @9:30 101.74 +3 bp (+3 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.72 -2 bp (+1 bp from 9:30 yesterday)
Dollar/Yuan: $6.7715 -$0.0209
Dollar/Yen: 110.49 +0.11 yen
Dollar/Euro: $1.1296 +$0.0018
Dollar Index: 96.93 -0.14
Gold: $1313.90 +$2.00
Crude Oil: $53.68 +$1.27
DJIA: 25,313.02 +259.91
NASDAQ: 7386.00 +78.09
S&P 500: 2735.23 +25.43
The last three sessions in the bond and mortgage markets haven’t seen any movement from the early morning prices and rates through the entire day; today is the same. MBS prices traded in a three basis point range and are ending the session where it started this morning.
This week Washington is facing another potential shutdown if by Friday there is no deal acceptable to President Trump and Republicans. Given all of the barbs and Democrats’ resolve to stop the Wall and Trump’s rock hard stance for it, it isn’t likely there will be a wall. As you know, he can try to use the emergency national security act to get funding from other sources and build it. Problem with that is there will be immediate lawsuits to stop it, likely leading to a temporary restraining order that when played out will potentially keep the Wall from being built.
Trade issues with China still working with negotiators in China now after two days in the US last week. There may be some progress with tariffs, but the main event is the intellectual property that China stalls and/or forces American companies to give up. China will probably be willing to import more US goods but getting any agreement over property rights is going to be difficult. On March 1st US tariffs on $200B of goods imported from China is set to increases from 10% to 25% unless Trump relents.
Another sour forecast for the equity markets this year; we've had downward revisions for growth the Fed, IMF, World Bank, the ECB, Bank of England and about anyone stepping up to offer their outlook. Today Vanguard Mutual funds with $5.3 trillion in US and global assets, saying the annual returns for investors in equities is about 5% return if you're lucky. As for the economy, which is coming off what's expected to be about a 3% growth rate for 2018, Vanguard sees U.S. gross domestic product rising around 2% this year. More sour news from Goldman Sachs, they're forecasting slower growth and profits for the rest of the year — which could be bad news for investors who missed January’s rally. “The rally we expected has happened swiftly, and given this we see relatively modest returns on equities from here," Goldman Sachs analyst Sharon Bell commented on CNBC this morning.
There were no data points today, tomorrow not much; the Jan NFIB small business optimism index expected at 103 from 104.4 in Dec. Dec JOLTS job openings, 6.900 mil from 6.888 mil in Nov. Jerome Powell will speak at 12:45 pm ET the subject, on economic development in high poverty rural communities at the Hope Enterprise Corporation Rural Policy Forum; but there will be Q&A that will likely lead to more questioning on the Fed’s outlook. Beginning Wednesday some of the delayed economic reports will begin trickling; CPI, Treasury Budget. Thursday retail sales, PPI. More will ooze out next week.
Our tech models are still positive although there has been minimal movement in either direction. Fundamentally there is reason to move money to safety.
This Week’s Calendar:
6:00 am NFIB small business optimism index (103.0 from 104.4)
10:00 am December JOLTS job openings (6.950 mil from 6.888 mil)
7:00 am weekly MBA mortgage applications
8:30 am Jan CPI (+0.1%; yr./yr. +1.5%; core CPI +0.2%; yr./yr. +2.1% down from +2.2% in December)
2:00 pm Dec Treasury Budget (-$12.0B)
8:30 am weekly jobless claims (225K -9K)
10:00 am November business inventories (+0.2%)
8:30 am February Empire State manufacturing index (7.0 from 3.9)
9:15 am January industrial production and factory use (production +0.2%; factory use 78.8% from 78.7%)
10:00 am University of Michigan mid-month consumer sentiment index (92.5 from 91.2 in Jan)
PRICES @ 4:00 PM
10 yr. note: -7/32 (22 bp) 2.65% +2 bp
5 yr. note: -4/32 (12 bp) 2.47% +3 bp
2 Yr. note: -2/32 (6 bp) 2.49% +3 bp
30 yr. bond: -14/32 (44 bp) 3.00% +3 bp
Libor Rates: 1 mo. 2.504%; 3 mo. 2.697%; 6 mo. 2.741%; 1 yr. 2.935% (2/8/19)
30 yr. FNMA 4.0: 102.19 -11 bp (+3 bp from 9:30)
15 yr. FNMA 3.5: 101.71 -5 bp (unch from 9:30)
30 yr. GNMA 4.0: 102.69 -9 bp) -1 bp from 9:30)
Dollar/Yuan: $6.7924 +$0.0476
Dollar/Yen: 110.40 +0.66 yen
Dollar/Euro: $1.1278 -$0.0048
Dollar Index: 97.07 +0.42
Gold: $1312.20 -$6.30 (strong dollar; gold trades in dollars)
Crude Oil: $52.39 -$0.32 (strong dollar; crude settles in dollars)
DJIA: 25,053.11 -53.22
NASDAQ: 7307.90 +9.71
S&P 500: 2709.80 +1.92
'Aging in Place' helps to fuel housing shortage
As the baby boomer generation has aged, it has also stayed put. And for all the innovations builders and product manufacturers have come up with to help seniors “age in place.” they may have also made it difficult for would-be homebuyers, causing a lack of housing inventory.
According to a new report from Freddie Mac, 2019 will see a significant shortage of available homes here in the U.S., failing to meet needs by 2.5 million units. It doesn’t help that at the same time millennials are buying fewer homes at this point in their lives compared with previous generations at similar periods.
As seniors continue to prefer to stay where they are as the optimal way to live out their remaining years, housing inventory has tightened nationally. According to the report, for people between the ages of 67 and 87, homeownership rates dropped by 11.6 percent for previous generations but only 3.6 percent for the current (leading edge) generation of seniors, identified as having been born between 1931 and 1941.
New advances in information technology may be the culprit, as well as accessibility to better healthcare and education, with the report crediting those advancements as “boosting and extending” housing demand among seniors. The result? The current senior generation has become much slower in transitioning out of homeownership than prior generations.
The U.S. Census Bureau says lost units will need to be replenished at a rate of 350,000 homes per year in order to bring the market to a “well-functioning” status. “Vacant homes increase liquidity in the market, enable prospective buyers to find a match, and give prospective sellers confidence to list their home for sale,” the Freddie Mac report states. “Vacancy rates are an important indicator of housing market vitality. Too high a vacancy rate reflects a moribund market, while too low of a rate reduces the efficiency of the marketplace.”
While this does not bode well for home shoppers, it will boost spending on renovations, according to Chief Economist Sam Kater. “We believe the additional demand for homeownership from seniors aging in place will increase the relative price of owning versus renting, making renting more attractive to younger generations.” If that is true, however, those in a position to purchase the limited number of homes available may well see their property values increase more quickly than anticipated.
Source: Realtor, Reversemortgagedaily, FreddieMacTBWS
How Rates Move:
Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending slightly sideways so far today. Last week the MBS market improved by +13bps. This may've been enough to slightly improve mortgage rates or fees. Rates experienced low volatility throughout most of the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week. 1) China Trade, 2) Government Shutdown and 3) Inflation.
1) China Trade: This week, trade talks accelerate with China. U.S. and Chinese officials will continue trade talks this week with a focus on intellectual property which has been the major hurdle so far. Meetings will be held each day this week with higher level discussions happening on Thursday and Friday. There will continue to be a swirl of news reports on the progress on these talks. The more positive these talks appear to be, the worse it will be for your rates as a new deal will remove a considerable global economic uncertainty as well as kick start trade and growth.
2) Government Shutdown 2.0: Congressional lawmakers continue to struggle to find common ground to avoid another government shutdown. They have until Friday to get a deal done, but it appears that the markets are pricing in that we won't get a deal done by then and it could go on a little longer.
3) Inflation: We get both PPI and CPI this week. The focus will be on Wednesday Consumer Price Index YOY number which came in at 2.2% last time and is expected to remain above 2.0% with a 2.1% reading. Any reading above 2.3% will be negative for rates, any reading in the 1.9% range or below will be very good for rates. We also get some important economic readings with retail sales being the second most significant release of the week.
Fed: We will hear from a few members of the Federal Reserve this week.
02/12 Esther George, Loretta Mester
02/13 Raphael Bostic, Atlanta Fed Business Inflation Expectations
This Week's Potential Volatility: Average
Mortgage rates continue to trade at lower levels due to all of the uncertainty in the markets. Look for the same this week. However, if we avoid a shutdown or make significant progress on China trade talks, rates could push higher.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Stocks weaker earlier this morning, the 10 yr at 8:30am ET 2.64% -2 bps after declining 4 bps yesterday. No movement though in the MBS markets.
There are no economic releases today.
This week there have been many reports and comments about the rapidly slowing global economies and the lack of progress with US/China trade talks. On trade, this week Sec of Commerce said a trade deal is “miles” away, and Larry Kudlow chimed in with more comments that there is no deal within sight. Meanwhile, President Trump was still talking positively; early this week he was espousing a meeting between him and China’s President Xi, yesterday a different tone and Trump admitting a meeting is unlikely in March. On March 1st the deadline Trump initiated to delay more tariffs; will he actually increase Chinese tariffs as he has said? Tariffs now at 10% would increase to 25% according to prior statements from the White House.
Global growth, the trade issues increasing movement to safety in US treasuries. The Wall Street Journal says the two sides have not even drafted an accord specifying the matters they agree and disagree on. The report comes just a day after White House economic advisor Larry Kudlow said there is a "pretty sizable distance to go" before China and the U.S. reach a deal. President Donald Trump also says that a meeting with Chinese President Xi Jinping will not take place before the crucial March deadline. U.S. stocks fell sharply yesterday as it became clear the meeting will not take place before the deadline. The Dow Jones Industrial Average lost 220 points, while the S&P 500 dropped 0.9%.
Equity markets have had a great run since the beginning of the year, now central banks and governments cast doubt on the health of the global economy. The European Commission slashed forecasts for the euro region yesterday, while the Bank of England said the U.K. may grow at its slowest pace in a decade. US growth still looking good according to economists and analysts but we too are going to see slower growth this year. This morning The U.K.’s FTSE 100 Index fell less than 0.05 percent. Germany’s DAX Index sank 0.5 percent to the lowest in more than three weeks. The MSCI Emerging Market Index dipped 0.4 percent to the lowest in more than a week. The MSCI Asia Pacific Index decreased 1 percent to the lowest in more than a week on the biggest dip in more than six weeks.
At 9:30 the DJIA opened -125, NASDAQ -49, S&P -12. After 7 weeks of gains, the NASDAQ will end this week with losses. At 9:30 the 10 yr note 2.64% -2 bps frm yesterday. Fannie 4.0 30 yr coupon at 9:30 +5 bps from yesterday’s close and +5 bps from 9:30 yesterday.
The March 1st tariff deadline, the border wall, the potential of another government shutdown; all loom over markets.
Treasuries are improving technically and fundamentally; our models and other momentum oscillators are bullish. Sluggish but working lower. MBS rates though have seen very little improvements. Earlier this week there was a lot of volatility in MBS prices but yesterday and today so far not any appreciable change.
10 yr note: +7/32 (22 bp) 2.63% -3 bp
5 yr note: +5/32 (15 bp) 2.43% -3 bp
2 Yr note: +2/32 (6 bp) 2.46% -2 bp
30 yr bond: +15/32 (47 bp) 2.98% -2 bp
Libor Rates: 1 mo 2.516%; 3 mo 2.697%; 6 mo 2.765%; 1 yr 2.948%
30 yr FNMA 4.0: @9:30 102.22 +5 bp (+5 bps frm 9:30 yesterday)
15 yr FNMA 3.5: @9:30 101.75 +8 bp (+4 bps frm 9:30 yesterday)
30 yr GNMA 4.0: @9:30 102.77 +8 bp (+7 bps frm 9:30 yesterday)
Dollar/Yuan: $6.7448 unch (China celebrating the Lunar New Year this week)
Dollar/Yen: 109.75 -0.06 yen
Dollar/Euro: $1.1349 +$0.0009
Dollar Index: 96.53 -0.04
Gold: $1316.30 +$2.10
Crude Oil: $52.58 -$0.06
DJIA: 24,983.00 -186.53
NASDAQ: 7236.76 -51.59
S&P 500: 2689.77 -16.28
The State of the Union has come and gone. The markets didn't get anything unexpected.
Interest rates are slightly improving this morning following the modest improvements yesterday.
At 7:00 am EST MBA weekly mortgage applications were weaker once again; the composite -2.5%, purchase apps -5.0% while re-finance apps were +0.3%.
The November US trade deficit was less than forecasts. Dropping -$49.3B with estimates of -$54.0B, there was a pullback in imports but not in exports. Imports, reflecting price declines for petroleum as well as a $4.3B drop in consumer goods especially cell phones, fell $7.7B in the month while exports also fell, down $1.3B and largely reflecting oil-related declines for supplies and materials. Looking at the goods to services split, the goods deficit fell $6.7B to $71.6B while the services surplus slipped $0.3B to $22.3B.
More partial data to report; preliminary Q4 productivity and unit labor costs; the manufacturing sector, because of the government shutdown, is the only data available for the fourth quarter. Non-farm productivity was expected +1.6%, unit labor costs expected +1.7%. The third quarter with non-farm productivity shaved 1 tenth to plus 2.2% while unit labor costs remained unrevised at plus 0.9%. Led by strength in durables, manufacturing productivity rose a quarter-to-quarter 1.3% in the fourth quarter which is in line with 1.1 and 1.2 percent gains in the prior two quarters. The fourth-quarter gain reflects a 2.3% rise in output against only a 1.0% increase in hours worked.
At 9:30 am the DJIA opened down -27, the NASDAQ added +6, and the S&P dropped -3. The 10-yr stood at 2.68%, down -2 bps.
At 1:00 pm the Treasury will auction $27B of new 10-yr notes; if it is well bid, expect the rate on the 10 to improve.
We are still tilting toward more rate declines; as noted yesterday and Monday our technical analysis work has been neutral, and yesterday’s and today’s minor improvement is encouraging. Having the 10 under 2.70% is friendly.
10 yr. note: +4/32 (12 bp) 2.69% -1 bp (2.68% earlier)
5 yr. note: +3/32 (9 bp) 2.49% -2 bp
2 Yr. note: +2/32 (6 bp) 2.50% -2 bp
30 yr. bond: +8/32 (25 bp) 3.02% -1 bp
Libor Rates: 1 mo. 2.512%; 3 mo. 2.738%; 6 mo. 2.777%; 1 yr. 2.985% (2/5/19)
30 yr. FNMA 4.0: @9:30 102.17 +9 bp (+14 p from 9:30 yesterday)
15 yr. FNMA 3.5: @9:30 101.68 +6 bp (+7 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.70 +16 bp (+15 bp from 9:30 yesterday)
Dollar/Yuan: $6.7448 unch (Asian markets closed)
Dollar/Yen: 109.75 -0.21 yen
Dollar/Euro: $1.1386 -$0.0019
Dollar Index: 96.20 +0.13
Gold: $1317.40 -$1.80
Crude Oil: $53.28 -$0.38
DJIA: 25,352.79 -58.73
NASDAQ: 7391.98 -10.10
S&P 500: 2732.65 -5.05
Renters are paying more than ever, hitting record levels in 2018
Perhaps it’s because millennials are still trying to handle their student loan debt that they’re not moving out of their apartments, but just about any way you look at it, 2018 was the best year for multifamily real estate this century. According to a recent report in HousingWire, renters paid more for housing than they ever have before.
To top that off, Freddie Mac and Fannie Mae both had banner years and commercial and multifamily debt hit an all-time high, all while delinquencies remained at historic lows. This is pointing to clear evidence that last year was the market’s best year since 2000.
The new report from CBRE shows the following: net absorption hit 286,600 in 2018, the highest level since 2000, topping 2017’s 277,000 total, and marking the highest total this century.
Multi-family construction activity was also high last year, with 267,900 units completed in 2018, slightly lower than the previous year when completions came in at approximately 274,000. That figure notwithstanding, 2017 was a record year itself, with the highest number of completions since the 1980s.
Absorption rates provide information on the leasing rates of a rental market or an individual property over a time period known as the absorption period. They are most telling when compared to the rates from other time periods or other properties. The report for 2018 shows multi-family absorptions were higher than completions for the second year in a row.
Beyond that, multifamily acquisitions were at their highest level in 19 years, up 12.1% from 2017, CBRE’s report stated. Also according to the report, multifamily investment totaled $50.9 billion in the fourth quarter, the highest in any quarter since the fourth quarter of 2015.
As CBRE notes, all this demonstrates a “strong appetite for multifamily assets by investors of all types outweighed concerns over rising interest rates, possible late-cycle exposure and relatively low returns.”
As for vacancy rates, the report shows it at 4.5% in the fourth quarter, down 20 basis points from the same time in 2017. The 2018 fourth quarter vacancy rate was also the lowest, leading to strong investments in 2019.
Source: HousingWire, CBRE, TBWS
Rates Currently Trending: Higher
Mortgage rates are trending higher this morning. Last week the MBS market improved by +47bps. This was enough to improve mortgage rates or fees. There was moderate volatility throughout most of the week.
This Week's Rate Forecast: Higher
Three Things: These are the three areas that have the greatest ability to move the needle on mortgage rates this week: 1) Political, 2) Domestic and 3) Geopolitical
1) Political: We will hear from the two most important figures when it comes to the economy. President Trump will have his State of the Union speech on Tuesday at 9 pm ET and Fed Chair Jerome Powell will speak Wednesday night at 7 pm at a town hall-style meeting in D.C.
2) Domestic: We have a very light week for economic data, but we do get one key report. ISM Services will get a lot of attention. Last Friday's stronger than expected ISM Manufacturing report definitely pushed MBS pricing lower. But that report ONLY covers 1/3 of our economy. The other 2/3 is covered in this Tuesday's ISM Services report.
3) Geopolitical: China markets are shutdown due to the Chinese New Year, so there won't be any economic releases from them (weaker PMI data out of China helped your rates last week). Also, that means that we will not see much movement on the trade negotiations. The markets will continue to be very reactive to Brexit news as well as any progress in the next round of government shutdowns.
Treasury Auctions this Week:
This week we get the ISM Services report. This report has the ability to move rates and increase volatility. The other factor we'll be keeping an eye on are movements in trade talks and other geopolitical events.
Early today the 10-yr note yield increased to 2.74%, up +2 bps from yesterday. By 8:30 am ET the note inched back to unchanged and in early activity in the MBS prices were unchanged as well. The pre-open trading in the equity markets had the DJIA +100 at 8:30.
This evening it’s the State of the Union address. We doubt if, whatever is said or how it is swallowed, there will be much reaction in the financial markets. The two parties are so divided now that it’s difficult to see any improvements. The president will push for the Wall while Democrats are nowhere near giving it any funding. Yesterday there was a lot of talk that he may declare a national emergency to move around Congress to build it; we doubt he will make that threat in the speech this evening. Feb 15th is fast approaching; the date Trump said he would shut the government down again if the Wall money isn’t achieved ($5.7B). We also doubt he will shut down the government again; even he has seen the mess and turmoil. Senate Majority Leader Mitch McConnell commented yesterday; “I’m for whatever works that prevents the level of dysfunction we’ve seen on full display here the last month, and also doesn’t bring about a view on the president’s part that he needs to declare a national emergency.” The speech is scheduled to begin at 9:00 pm.
Federal Reserve Chairman Jerome Powell met Donald Trump at the White House for dinner Monday to discuss the economy’s performance and outlook, but the central bank said Powell did not share the president’s expectations for monetary policy. According to a Fed statement Powell “did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.” Fed Vice Chairman Richard Clarida and Treasury Secretary Steven Mnuchin were also at the dinner.
At 9:30 am the-yr note, after trading weaker earlier, is getting traction as stocks increase, and was at 2.71%, down 1 bps from yesterday and down 3 bps from earlier today.
At 10:00 am the Jan ISM non-manufacturing index was thought to be 57.1 from 57.6. As reported the index declined to 56.7, but December, originally reported at 57.6, was revised to 58.0. No market reactions.
At 1:00 pm this afternoon the Treasury will auction $38B of 3-yr notes. Last week the Treasury sold 2s, 5s, and 7s; for the most part, all three auctions were well bid compared to auctions earlier this year. Tomorrow and Thursday it will be 10s and 30s, both new issues; how demand and bidding go will have an impact on MBS prices.
The State of the Union address tonight will likely keep US financial markets generally quiet. Our models and other technical indicators for the 10-yr note remain neutral. With heavy supply tomorrow and Thursday rate markets should remain orderly; the caveat though is if the equity markets rally strongly it will help the bond market; that is what we are seeing recently. Historically when equity markets improve it puts pressure on rates with money moving into stocks and out of fixed income. These days when stocks improve treasury rates have found support; both markets are still working on the current belief that the Fed will not increase rates this year and inflation won’t escalate.
10 yr. note: +5/32 (15 bp) 2.705% -1.5 bp
5 yr. note: +3/32 (9 bp) 2.51% -2 bp
2 Yr. note: +2/32 (6 bp) 2.51% -2 bp
30 yr. bond: +11/32 (34 bp) 3.04% -2 bp
Libor Rates: 1 mo. 2.513%; 3 mo. 2.734%; 6 mo. 2.795%; 1 yr. 2.980% (2/4/19)
30 yr. FNMA 4.0: @9:30 102.03 +3 bp (+11 bp from 9:30 yesterday)
15 yr. FNMA 3.5: @9:30 101.61 +9 bp (+11 bp from 9:30 yesterday)
30 yr. GNMA 4.0: @9:30 102.56 +5 bp (+13 bp from 9:30 yesterday)
Dollar/Yuan: $6.7448 unch (Asian markets closed for Lunar New Year)
Dollar/Yen: 109.95 +0.06 yen
Dollar/Euro: $1.1417 -$0.0020
Dollar Index: 95.95 +0.12
Gold: $1318.90 -$0.40
Crude Oil: $53.97 -$0.59
DJIA: 25,363.93 +124.56
NASDAQ: 7387.56 +40.02
S&P 500: 2731.93 +7.06
Markets began today with no real changes in the stock indexes, but the rate markets are under a little pressure after the price declines on Friday; at 8:00 am ET the 10-yr was at 2.70%, up +1 bp, and MBS prices dropped -5 bps from Friday.
Other than the ISM non-manufacturing index, auto sales, preliminary Q4 productivity, and weekly claims there isn’t a lot of key current data this week. Treasury will sell $84B of notes and bonds issuing new 10-yr notes and 30-yr bonds.
Tomorrow night is the State of the Union address; Democratic lawmakers have invited refugees and immigrants, including two who were undocumented when they worked for Mr. Trump’s Bedminster, N.J., golf club. Republicans are offering seats to law-enforcement officers, including those who work on or near the border with Mexico. Looks like both parties will fill the gallery with people that typify their positions on border security; illegal immigrants and law enforcement agents on the border. Likely another State of the Union that will be replete with applause and boos. Doubt whether whatever his speech is will be new news.
Feb 15th is fast approaching. That is the date Trump has indicated he may shut down the government again if he doesn’t get an acceptable deal with Dems over the border Wall, or declare a national emergency to bypass Congress and tap existing sources of money to build a wall. His speech tomorrow evening may provide what he is thinking. Nancy Pelosi is saying the House-Senate conference committee need to wrap up their work by Friday to allow time to vote on any plan to resolve the stalemate.
Bill Gross, once the darling and king of the bond market at PIMCO who then moved to Janus Hendersen Group where his trading didn’t make money, is retiring. “I’ve had a wonderful ride for over 40 years in my career—trying at all times to put client interests first while inventing and reinventing active bond management along the way.” You only get to keep your job managing investor money if you make money; Bon Voyage Mr. Gross.
For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment. Confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide Inc. (Vistage polls firms with between $1 million and $20 million of revenue.) Just 14% of firms expect the economy to improve this year, while 36% expect it to get worse. Nearly one in four small firms surveyed by Vistage said the Trump administration had hurt the outlook for their business.
At 9:30 am the DJIA opened down -10, the NASDAQ was up +5, and the S&P dropped -1. The 10-yr stood at 2.72%, up +3 bp.
At 10:00 am November factory orders declined 0.6% on estimates of +0.3%.
The rate markets have had a very nice rally over the last two and a half months on the Fed changing its stance about more rate increases, no inflation and still some movement into safety investments. Those events are likely over; now markets look for the next possible movement lower for rates. We believe it best now to move to a more defensive view while the digestion continues. Like a huge Thanksgiving dinner, eat until you can’t move then let it digest before starting over.
No time (December and January auto and truck sales; Sec 17.3 mil; Jan 17.0 mil.)
November factory orders (+0.3%) (as reported -0.6%)
10:00 am ISM non-manufacturing index (57.1 from 57.6)
1:00 PM $38B 3-yr note auction
8:30 am November US trade deficit (-$54.0B)
1:00 pm $27B 10 yr note auction
7:00 pm Jerome Powell to host a town hall meeting with educators from across the country
8:30 am weekly jobless claims (220K -31K)
1:00 pm $19B 30-yr bond auction
3:00 pm December consumer credit (+$18B, down from $22.1B in November)
10 yr. note: -10/32 (31 bp) 2.72% +3 bp
5 yr. note: -6/32 (18 bp) 2.54% +3 bp
2 Yr. note: -3/32 (9 bp) 2.53% +4 bp
30 yr. bond: -20/32 (62 bp) 3.06% +3 bp
Libor Rates: 1 mo. 2.514%; 3 mo. 2.732%; 6 mo. 2.790%; 1 yr. 2.961% (2/1/19)
30 yr. FNMA 4.0: @9:30 101.92 -12 bp (-35 bp from 9:30 Friday)
15 yr. FNMA 3.5: @9:30101.53 -8 bp (-27 bp from 9:30 Friday)
30 yr. GNMA 4.0: @9:30 102.44 -14 bp (-32 bp from 9:30 Friday)
Dollar/Yuan: $6.7448 unch
Dollar/Yen: 110.10 +0.59 yen
Dollar/Euro: $1.1428 -$0.0030
Dollar Index: 95.84 +0.24
Gold: $1316.80 -$5.30
Crude Oil: $54.24 -$1.02
DJIA: 24,979.29 -84.60
NASDAQ: 7274.31 +10.44
S&P 500: 2700.06 -6.47