November 27th, 2017
Late Morning Review:
The national homeownership rate in the U.S. as of September 30, 2017 was 63.9%, down from a peak of 69.2% at the end of 2004. Every 1 percentage point reduction in the homeownership rate represents 1.2 million households that have changed from homeowner to renter status.
Freddie Mac reports that the average 30-year fixed rate mortgage over the last 45 years is 8.26%. The average 30-year fixed rate mortgage as of 1130/17 was 3.90%. Mortgage rates continue to run just above all-time lows. The all-time low was 3.35% hit back in November and December of 2012.
An estimated 10,100 Americans will turn 65 years old each day next year (2018). This group represents the 8th year of 19 years of "Baby Boomers" turning age 65. An estimated 11,500 Americans will turn 65 years old each day in the year 2029. Baby boomers are those born between 1946 and 1964 when the U.S. saw a big spike in its birth rate.
Mortgage Bonds opened near unchanged, and actually traded positive, but sellers infiltrated the market after news that the Sentate tax bill was progressing. The Fannie Mae 30-yr 3.5% coupon closed at 102.53, -16bp though off its session low of 102.38 and off the high of 102.75. Stocks balsted off on the tax bill news. The Dow closed up 331.67 points to 24,272.35 while the S&P jumped 21.51 points to close at 2,647.58, both fresh record highs as the Dow traded and closed above 24K for the first time ever. The NASDAQ gained 49.63 points to end at 6,873.97, just below its record high. WTI oil closed at $57.33/barrel, near unchanged. The yield on the 10-yr T Note hit 2.43% before settling at 2.41%. Tomorrow's data is limited to the ISM Index.
Late mornnig review:
Inflation remained tame in October. The Fed's favorite inflation gauge, the annualized Core PCE, rose 1.4% from October 2016, well below the Fed's 2% target range. Despite low inflation, the Fed is on target to raise rates at next month's FOMC meeting. Don't expect many more hikes if inflation doesn't move higher. Within the report it showed that Personal Spending rose 0.3% in October, below the 0.9% in September.
Yesterday's Fed Beige Book showed that economic activity continued to increase at a modest to moderate pace in October and mid-November, with a slight improvement in the outlook among contacts in reporting districts. In addition, reports of tightness in the labor market were widespread. The Beige Book precedes the Federal Open Market Committee meeting which will begin on December 12 and end on December 13.
Mortgage rates edged lower this week and remain just above all-time lows. Freddie Mac reports that the 30-year fixed-rate mortgage fell 2bp this week to 3.90% with an average 0.5 in points and fees. Freddie Mac says average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage
Market Wrap: After this morning's decline, MBS traded in a tight range for most of the session ending lower, weighed down by strong GDP data along with unfriendly Bond talk from Fed Chair Yellen. The Fannie Mae 30-yr 3.5% coupon closed at 102.66, -19bp and below both resistance levels supplied by the 25- and 200-day Moving Averages. Stocks ended mixed as investors sold tech shares and moved into financials with the talk of raising interest on Capitol Hill from Fed Chair Yellen. The Dow closed at a fresh record high of 23,940.68, the S&P ended near unchanged at 2,626.07, while the tech heavy NASDAQ fell by 87.96 points to 6,824.38. WTI oil closed at $57.40, -$0.59. 10-yr yield 2.38%. Tomorrow's economic data includes Personal Income & Spending, Core PCE, Weekly Initial Jobless Claims and the Chicago PMI.
After this morning's decline, MBS traded in a tight range for most of the session ending lower, weighed down by strong GDP data along with unfriendly Bond talk from Fed Chair Yellen. The Fannie Mae 30-yr 3.5% coupon closed at 102.66, -19bp and below both resistance levels supplied by the 25- and 200-day Moving Averages. Stocks ended mixed as investors sold tech shares and moved into financials with the talk of raising interest on Capitol Hill from Fed Chair Yellen. The Dow closed at a fresh record high of 23,940.68, the S&P ended near unchanged at 2,626.07, while the tech heavy NASDAQ fell by 87.96 points to 6,824.38. WTI oil closed at $57.40, -$0.59. 10-yr yield 2.38%. Tomorrow's economic data includes Personal Income & Spending, Core PCE, Weekly Initial Jobless Claims and the Chicago PMI.
Late Morning Review:
Solid economic growth was seen from the second reading on third quarter Gross Domestic Product (GDP) where strong business inventory and equipment investment offset an ease in consumer spending. The second read on Q3 GDP rose 3.3%, up from 3.0% in the first reading. This was the best number since Q3 2014. GDP registered 1.2% in the first quarter of 2017 and 3.1% in the second quarter. Consumer spending fell to 2.3% in the third quarter after hitting 3.3% in the second quarter. GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. It is considered the broadest measure of economic activity.
After a weak reading in September due to hurricanes Harvey and Irma, signed contracts to purchase existing homes surged in October. The National Association of REALTORS® reports that Pending Homes Sales increased 3.5% in October from September, the highest level since June. However, sales were down 0.6% from a year earlier. The South saw the biggest gain of 7.4%, which was most likely due to pent-up demand after the storms subsided.
A disturbing report on the state of future labor market activity was released by McKinsey research this week saying that a large portion of the global workforce could be displaced by 2030. The report estimates that between 400 million and 800 million people could be displaced by automation and need to find work. The professions that are more physical labor will be the most likely to see automation take over such machine operators and preparing fast food. Jobs that involve content providing, managing people and the like would be least impacted. In addition, jobs like gardeners, plumbers and, health care providers - will likely see less automation.
MBS traded higher early in the session but surging Stocks weighed on Bond prices for the rest of the day. In addition, a poor showing from today's 7-yr Note auction also capped any gains in Bond prices. The Fannie Mae 30-yr 3.5% coupon closed unchanged at 102.84 and just above resistance at the 200-day Moving Average. The Senate tax bill moved forward, which fueled the Stock market rally. Furthermore, strong gains in home prices and a 17-yr high in Consumer Confidence bolstered Stocks and sent the major averages to fresh record highs. The Dow gained 255.93 points to 23,836.71, the S&P 500 was up 25.62 points to 2,627.04, while the NASDAQ jumped 33.83 points to end the news filled session at 6,912.35. WTI oil closed at $57.99/barrel, -$0.12. 10-yr yield 2.32%. Tomorrow's data includes the second read on Q3 GDP and Pending Home Sales. The Fed's Beige Book will be released at 2:00 p.m. ET.
Late Morning review: Home prices continued to rise in September buoyed by low mortgage rates, an improving economy and a strong labor market. The September S&P/Case-Shiller 20-City Home Price Index rose 6.2% year over year, above the 5.8% registered in August. It was the biggest increase in more than three years. “Most economic indicators suggest that home prices can see further gains,” David Blitzer, chairman of the S&P index committee, said in a statement. “One dark cloud for housing is affordability -- rising prices mean that some people will be squeezed out of the market.”
A confirmation hearing for incoming Fed Chair nominee Jerome Powell will take place at 9:45 a.m. ET today but there should be no surprises. Mr. Powell says he expects interest rates to rise somewhat further and the size of the balance sheet to shrink gradually. Mr. Powell is expected to pursue a similar course to outgoing Fed Chair Janet Yellen. Mr. Powell will be the 16th chairman, which dates back to 1914.
Consumer optimism surged in November fueled by a strong labor market. The Conference Board reported that its Consumer Confidence Index hit 129.5 this month, a 17-year high, above the 124.0 expected and up from the 126.2 recorded in October. Those Americans stating jobs are “plentiful” increased from 36.7% to 37.1%, while those claiming jobs are “hard to get” decreased slightly from 17.1% to 16.9%. Lynn Franco, Director of Economic Indicators at The Conference Board said, "Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace into the early months of 2018.”
Market Wrap: Not much action today in the MBS markets as prices traded in a tight range for most of the session. The strong New Home Sales report weighed on Bond prices as did the added supply from the Treasury auctions. The Fannie Mae 3.5% 30-yr coupon closed at 102.84, +6bp and right at resistance at the 200-day Moving Average. Stocks closed mixed and near unchanged. The Dow gained 22.79 points to 23,580.78, the NASDAQ was down 10.63 points to 6,878.52, while the S&P 500 declined by just 1 point to end at 2,601.42. WTI oil closed at $58.11/barrel, -$0.84. 10-yr yield 2.33%. Tomorrow's data includes the S&P Case-Shiller Home Price Index and Consumer Confidence. The Treasury will sell $28B 7-yr Notes tomorrow, results at 1:00 p.m. ET and completes this week's Note and Bond offerings.
Late Morning Review: The Federal Reserve reports that home equity hit an all-time high in mid-2017 at $13.9T, up $0.5T from the 2006 peak and up $6T from the lowest point in the Great Recession. Quickly rising home prices are the main reason for the equity gains. Increasing home prices have also helped many homeowners to come out of negative equity. There were 12.2 million homeowners in negative equity at the end of 2009. That number has now decreased to just under 3 million in 2017.
The Commerce Department reported on Monday that sales of new homes rose to their highest level in 10 years due to strong sales across the country. New Home Sales rose 6.2% in October from September to an annual rate of 685,000 units, above the 629,000 expected. September was revised to 645,000 from 667,000. Strong sales were seen in the Northeast, Midwest, South and West. Year-to-date New Home Sales rose 18.7%. There is a 4.9 month supply of new homes for sale on the market, where a six-month supply is seen as a healthy balance between supply and demand.
Shoppers were out in full bloom as they shopped online on Thanksgiving and hit the malls on Black Friday. Black Friday and Thanksgiving online sales show U.S. retailers raking in a record $7.9B, up nearly 18% from a year ago. Cyber Monday is now underway and record online sales are expected to the tune of $6.6 billion. Total holiday sales are expected to come in between $678.75 billion to $682 billion, up from $655 billion last year.