Top of the Street: Rates up, Fed portfolio down, housing and muni markets bullish

The ECB rather than the Fed has pushed US rates up lately. The Fed takes a step closer to reversing QE. Housing looks bullish. The muni market likes Illinois. Contributions from Barclays, CoreLogic, NY Fed, MS and Milepost.

Markets: Rates rise on growth in Europe
Growth in the EU and signals from the European Central Bank of an end to QE have kept US rates rising, too. US 10-year rates have jumped 35 bp since June 26. France, Spain and Germany all have shown signs of accelerating growth lately, and the June ECB minutes signaled interest in slowly reducing stimulus. That lifted rates and steepened the yield curve. The Street now expects the Fed to start trimming its portfolio in September and to hike in December. The hike may require some sign that inflation can rebound toward 2.0%. The June employment report showed no signs of wage inflation, however. Chair Yellen testifies before Congress this week. Look for clues to policy. See Barclays, Global Economics Weekly: When central banks listen to growth, 7 Jul 2017. (Barclays, Milepost).

Markets: The Fed forecasts a smaller portfolio
The NY Fed today released its own forecast of balances for its $4.2 trillion portfolio as the Fed gets a step closer to reversing QE. Using scenarios built from surveys of primary dealer interest rate expectations and other assumptions, the NY Fed projects a $174 billion drop in Treasury holdings next year and a $117 billion drop in MBS. A drop in interest rates and a rise in prepayments could drive the run-off in MBS higher. The new forecasts also indicate that the Fed portfolio could stabilize sometime between 2020 and 2023 with a balance between $2.4 trillion and $3.5 trillion. Today’s NY Fed forecast is here. A NY Fed post on the mechanics of trimming its balance sheet is here. (NY Fed, Milepost).

Markets/economy: Tight supply helps push up home prices
Low supply is helping keep US home prices on the rise – the latest data through April showing 5.5% YoY. The supply of existing homes for sale stands at the lowest level since 2000, new homes at levels last seen in the 1970s and the supply of homes sold out of delinquency or foreclosure continues to fall. Although permits for new construction keep rising, the pace remains well below 2000-2007 levels. Homebuilders like their prospects. Expectations for buyer traffic and present and future sales are back to levels last seen in the boom years of 2005-2006. CoreLogic expects US home prices to rise 5.3% over the next year, with home in the lowest price tier rising the most. The CoreLogic forecast is here. See also Morgan Stanley, US Housing Tracker, 7 Jul 2017. (MS, Milepost).

Markets: The muni market likes Illinois
Illinois general obligation bonds tightened nearly 80 bp last week after the legislature overrode the governor’s veto and finally passed a budget for the first time in three years. The budget raised the corporate and personal income taxes, cut spending and authorized borrowing to pay overdue bills. The budget also shifted some state employees from defined benefit to defined contribution pensions. See Barclays, Municipal Weekly: Budget Override Puts Bonds into Overdrive, 7 Jul 2017. (Barclays, Milepost).