June 16th, 2017 11:09 AM by Richard Sardella MLO.100007700
May housing starts and permits didn’t meet expectations, and April data was revised lower than what was originally reported. Starts were expected at 1221K +4.0%, as reported 1092K -5.5%. April starts originally reported at 1172K, revised to 1156K. May building permits were thought to be up 2.6% at 1249K; permits were 1168K down 4.9%. All components show declines with single-family starts down 3.9 percent to a 794,000 rate and permits down 1.9 percent to 779,000. Multifamily starts fell 9.7 percent to 298,000 with permits down 10.4 percent to 389,000. Total completions did rise 5.6 percent to a 1164K rate, which adds supply to a thin market, but homes under construction slipped 0.7 percent to 1067K. Quarter-to-quarter comparison, starts have averaged 1124K so far in the second quarter, down a very sizable 9.2% from 1238K in the second quarter. Permits, at an average of 1198K, are down 4.9 percent. No matter how we look at it, this is disappointing and will be a drag on Q2 GDP. It is yet another weaker than expected measurement. May retail sales, reported on Wednesday, also well below economist’s estimates.
The initial reaction was rather subdued but did improve levels before the 8:30 AM EDT report. The 10 before housing +1 bp to 2.17%, MBS prices down 2 bps from yesterday’s close. By 9:00 the 10-yr. unchanged at 2.16% and MBS prices up 3bps. Not much of a reaction given the weakness, and adding to the reality that regardless of the reasons, are not meeting expectations for growth. No inflation fears and weak data should support the long end of the yield curve.
The dollar strength or weakness has influence over the US markets, especially bonds. Yesterday, the dollar had a nice improvement (the index +0.51). This morning, the index a little weaker. As long as the dollar is thought to decline more it is a plus for lower interest rate expectations.
Markets still absorbing the FOMC and Yellen last Wednesday. The Fed isn’t likely to increase the Federal Funds rate at the September meeting based on the soft economy, but it does appear based on the Fed’s update of its ‘normalization’ plans announced on Wednesday that in September the Fed will begin cutting back support. Presently, the Fed is set to begin unwinding its balance sheet by not reinvesting principal payments, and the plan calls for $4B a month reduction in MBS purchases and $6B cut in Treasury purchases. It is another way the Fed can tighten without increasing the Federal Funds rate. The reduction of MBS purchases will cause MBS markets to adjust the relationships between MBSs and Treasuries; the MBS market is very thin; the Fed has been buying about 30% of MBSs for the last eight years. Although it remains a moving target, and as the Fed says, it’s data dependent, presently markets are leaning to another federal funds increase at the December meeting. Unless there is an increase in growth and inflation that view will change.
At 10:00 AM the preliminary June U. of Michigan consumer sentiment index was expected unchanged from May at 97.1; as reported the index declined to 94.5 the lowest since November.
Not in our wheelhouse, but the big news this morning is that Amazon will buy Whole Foods for $13.9B in cash. Stocks of grocers are under pressure, and Jim Cramer on CNBC has been almost apoplectic over it; thought he might have an aneurysm. Kroger stock over this week down 31%.
The only event left today: Dallas Fed’s Kaplan at 12:45. There will be Q&A after his speech to Park Cities Rotary Club in Dallas. Our technicals still hold bullish biases.
PRICES @ 10:00 AM
10 yr note: +3/32 (9 bp) 215% -1 bp
5 yr note: +2/32 (6 bp) 1.75% -1 bp
2 Yr note: +2/32 (6 bp) 1.33% -2 bp
30 yr bond: +4/32 (12 bp) 2.78% -1 bp
Libor Rates: 1 mo 1.209%; 3 mo 1.267%; 6 mo 1.427%; 1 yr 1.729%
30 yr FNMA 3.5 July: @9:30 103.16 +9 bp (+3 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.94 +3 bp (-10 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.13 -31 bp (-4 bp from 9:30 yesterday)
Dollar/Yen: 110.90 -0.03 yen
Dollar/Euro: $1.1173 +$0.0028
Dollar Index: 97.31 -0.15
Gold: $1257.20 +$2.60
Crude Oil: $44.74 +$0.28
DJIA: 21,336.89 -23.01
NASDAQ: 6157.31 -8.19
S&P 500: 2427.94 -4.52
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.