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Friday, January 27, 2017

Morning Report: GDP disappoints

Vital Statistics:

Last Change
S&P Futures  2294.3 0.3
Eurostoxx Index 366.1 -1.4
Oil (WTI) 53.5 -0.3
US dollar index 91.5 0.1
10 Year Govt Bond Yield 2.51%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Stocks are flattish after GDP comes in weaker than expected. Bonds and MBS are down small. 

Fourth quarter GDP growth came in at 1.9%, lower than the 2.2% Street estimate. For the year, GDP came in at 1.6%. Trade was the big drag, along with Federal government spending. This is the advance estimate and will be subject to two more revisions. Disposable personal income rose 3,7% and the PCE deflator (the Fed's preferred measure of inflation) increased 2%, right in line with the Fed's inflation target. Ex-food and energy it increased only 1.3%. The savings rate also fell. 

The Fed has been consistently high with its estimates for GDP growth. Check out the chart below. It shows the Fed's forecast for 2016 GDP starting with the June 2014 FOMC meeting. They started out forecasting 2.75% growth, and it actually came in at 1.6%. 

Durable Goods orders disappointed in December, falling 0.4% versus expectations of a 2.6% increase. Capital Goods orders (a proxy for business capital expenditures) increased .8%, which was below expectations again. 

Consumer sentiment improved in January, according to the University of Michigan survey. 

I crunched some numbers looking at the last few tightening cycles, and compared the move in the 10 year bond yield to the move in the Fed Funds rate. During the last 3 tightening cycles (1994, 1999, and 2004) the yield curve flattened, meaning that long term rates went up less than short term rates. In fact, for every percentage point increase in the Fed Funds rate, the 10 year increased by about 34 basis points. The 10 year was at 2.2% when the Fed began its latest hike. With the Fed expecting an increase of 50-75 basis points in the Fed Funds rate this year, we should see an end of 2017 Fed Funds rate of about 2.6% or so. With the 10 year already at 2.5% plus, the market is treating these increases as if they have already been made. The 10 year has gotten ahead of itself a little bit, which means we could see the yield stay at these levels during the year while the Fed Funds rate catches up. 

I talked about this and other stuff during the HousingWire 2017 Housing Outlook webinar: Trump's Mortgage Nation. There is a link in the article for a playback if you missed it. We discussed interest rates, regulation and mortgage interest. 

Mortgage backed securities got beat up a little yesterday after Brookings released an article by former Fed Chairman Ben Bernanke that discussed ending the practice of re-investing the cash from maturing bonds and MBS back into the market. The Fed's balance sheet has been stuck at $4.5 trillion since QE ended, and they purchased about 360 billion worth of MBS last year to maintain their exposure. Given that total originations were probably around $2 trillion, that number is not insignificant. Does that mean spreads will widen once the Fed ends this practice of re-investing maturing proceeds? The short answer is "probably not" The spread between the 10 year and the mortgage rate is about 165 basis points or so. Prior to QE, it was around 166, and you didn't really see any decrease in that spread when QE was active. The end of reinvestment should be a nonevent for the mortgage market. 

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