Morning Report: FOMC week.

Vital Statistics:

  Last Change
S&P futures 4,341 -80.2
Oil (WTI) 70.17 -1.75
10 year government bond yield   1.32%
30 year fixed rate mortgage   3.07%

Stocks are lower this morning on fears of a hard landing in China. Bonds and MBS are up.


The big event this week will be the FOMC meeting on Tuesday and Wednesday. The markets don’t see any changes in the Fed Funds rate, however we could see some further language about reducing bond purchases. Aside from the FOMC announcement, we will get housing starts and new home sales.


The NAHB Housing Market Index improved a point in September to 76. This is a sentiment indicator for homebuilders.


Fears are increasing that the Chinese government is going to let property developer Evergrande fail. Evergrande is the most indebted property developer in the world, with something like $300 billion in liabilities. “Everyone is looking at Evergrande and saying ‘has the time come for a major default in that area, and then the potential for contagion into the broader property sector?’” said Edward Park, chief investment officer at Brooks Macdonald. “It’s an imminent risk now rather than being a theoretical risk as it has been for the past few years.”

The consensus so far seems to be that Evergrande won’t be a “Lehman-type moment,” in reference to the 2008 decision to let Lehman fail, which supposedly caused the 2009 financial crisis. The hope is that a collapse in Evergrande would be limited to the real estate sector and not impact financial sector (and therefore the overall economy) too much.

I suspect this is probably not going to happen. People who insist that Lehman and “subprime” blew up the economy in 2009 have it backwards. The issue was not the financial sector – that was the symptom. The issue was a real estate bubble – which was the disease. Real estate is such a leveraged product that if real estate prices fall by a meaningful amount, equity can be wiped out in a hurry. Real estate bubbles are therefore the Hurricane Katrinas of banking and the contagion spreads fast. When real estate bubbles burst, they throw shrapnel everywhere.

Managing a burst real estate bubble can be done – Japan did it. While there were a few developer and bank failures over the course of the decades that followed, Japan managed to prevent the economy from entering a Great Depression style tailspin. What was the cost? Little-to-no GDP growth from 1989 onward, and a debt-to-GDP ratio of 2.4x.

What does this mean for the US? I suspect the punch line is that we will see a flight to the US dollar and US Treasuries, and that will prevent rates from rising too much. If the Chinese economy hits a hard landing, they will try and export their way out of it, so import prices will fall and that should keep inflation from getting out of hand.

Morning Report: Retail sales rise

Vital Statistics:

  Last Change
S&P futures 4,460 -3.2
Oil (WTI) 72.27 -0.45
10 year government bond yield   1.37%
30 year fixed rate mortgage   3.07%

Stocks are flattish this morning on no real news. Bonds and MBS are down.


Initial Jobless Claims came in at 332k last week, which was above expectations. It is still a mystery why we are seeing such elevated numbers in the tightest job market I can remember.


Retail sales rose 0.7% in August, when the Street was looking for a 0.8% decline. Ex-vehicles and gasoline, they rose 2%, which was well above expectations. August and September are the back-to-school shopping months and this bodes well for the holiday shopping season at the end of the year.

The retail sales number is great news for those who were looking for an acceleration into the end of the year. Consumption is 70% of the US economy. Still, the labor market remains a headwind, especially if it lasts longer. Consumers may be willing to spend, but if the goods aren’t there to begin with then the sales won’t happen.

Consumer sentiment fell slightly in the preliminary reading from the University of Michigan.


Home sales fell in August, according to Redfin. Prices still increased 16%, however. “When it comes to home prices in this market, what goes up stays up,” said Redfin Chief Economist Daryl Fairweather. “That’s especially true in the Sun Belt; home prices are up more than 20% from last year in Austin and Phoenix. Even with these steep increases, homes in these areas are still relatively affordable, so these and other hot migration destinations are going to continue to attract homebuyers from the coasts. As workers change jobs en masse and enhanced unemployment benefits come to an end, we could see even more households relocate for affordability in the coming months.”


Chinese developer Evergrande is on the brink of default, with something like $300 billion in debt. We have known forever that China has a real estate bubble, similar to what the US went through in the 1920s and Japan went through in the 1980s. If this is indeed the end of the Great Chinese Real Estate Bull Market then the country is probably due for a Great Depression style event. IMO, this is a byproduct of decades of rapid growth. Eventually, more and more marginal projects get built and the debt crisis creates a collapse.

As far as the banking system goes, I don’t think that the US banking system has much exposure here. We can pretty much guarantee that any bailout for Chinese banks won’t extend to foreign banks, but I suspect this might be an overseas hedge fund event. I don’t see any sort of reverberation into the US markets, however I do think that this event will be bullish for US bonds. When financial markets hit credit-related stress, the first asset everyone wants is US Treasuries. We saw good demand in the 30 year auction earlier this month, and that could portend strong demand going forward.


Morning Report: Inflation moderates

Vital Statistics:

  Last Change
S&P futures 4,475 13.2
Oil (WTI) 71.09 0.65
10 year government bond yield   1.33%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning after inflation data came in lower than expected. Bonds and MBS are flat.


Prices at the consumer level rose 0.3% MOM and 5.3% on a YOY basis. This monthly increase was the lowest since January. Ex-food and energy, they rose 0.1% MOM and 4% YOY. Higher energy prices have been the big driver for the index, however food has also been a big factor as well. Interestingly, owners equivalent rent (which is a function of housing prices) rose only 0.3% MOM and 2.6% YOY. While this number is an artificial construct, it should generally correlate with housing prices. According to just about every real estate index, prices are rising in the high teens percent.


Small business sentiment increased 0.4% in August, according to the NFIB Small Business Sentiment Index. “As the economy moves into the fourth quarter, small business owners are losing confidence in the strength of future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions.”


Biden is expected to nominate Mike Calhoun to run FHFA. It sounds like the left is not happy with him due to his Wall Street contacts. Supposedly he is in support of he utility model for Fannie Mae and Freddie Mac.


The share of mortgages in forbearance fell 15 basis points to 3.08% last week. “The share of loans in forbearance decreased by 15 basis points last week, as forbearance exits jumped to their fastest pace since March. The fast pace of exits outweighed the slight increase in new forbearance requests and re-entries,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Servicer call volume jumped last week as summer came to an end and many borrowers reached the end of their forbearance terms. We anticipate a similarly fast pace of exits in the weeks ahead, which should lead to increased call volume and a further decline in the forbearance share.”


The housing market is beginning to cool off, according to Redfin. Redfin agents reported that 59% of all sales involved bidding wars last month. “Sellers are still pricing their homes very high, but a lot of buyers have had enough and are no longer willing to pay the huge premiums they were six months ago. Instead of 25 to 30 offers on turnkey homes, we’re now seeing five to seven,” said Nicole Dege, a Redfin real estate agent in Orlando, FL, where the bidding-war rate dropped to 57.5% in August from 78.9% in July. “Buyers are getting a bit more selective. I have one seller who recently put his four-bedroom single-family pool house on the market, but the roof was shot. He had to lower his asking price to $423,000 from $427,000 and agree to spend around $7,000 to replace the roof in order to attract bidders. Six months ago, he would have easily been able to sell that home as-is without dropping the price.”

Morning Report: GDP growth estimates falling

Vital Statistics:

  Last Change
S&P futures 4,481 28.2
Oil (WTI) 70.59 0.95
10 year government bond yield   1.33%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning as commodities continue to rally. Bonds and MBS are flat.


The upcoming week will contain some important economic data with the consumer price index, industrial production, retail sales, and consumer sentiment. We won’t have any Fed-speak this week as we are in the quiet period ahead of next week’s FOMC meeting.


Foreclosure activity picked up after the Federal Government’s foreclosure moratorium expired at the end of August. “As expected, foreclosure activity increased as the government’s foreclosure moratorium expired, but this doesn’t mean we should expect to see a flood of distressed properties coming to market,” said Rick Sharga, Executive Vice President at RealtyTrac, an ATTOM company. “We’ll continue to see foreclosure activity increase over the next three months as loans that were in default prior to the moratorium re-enter the foreclosure pipeline, and states begin to catch up on months of foreclosure filings that simply haven’t been processed during the pandemic. But it’s likely that foreclosures will remain below normal levels at least through the end of the year.”

Professional investors hoping for a 2008-style foreclosure deluge of distressed merchandise will be disappointed. Unlike 2008, hope prices are appreciating at close to a 20% clip. Very few (if any) of these properties will be underwater, and therefore will be “money good” for the lender. Given the housing shortage, there will be plenty of buyers and any foreclosure discount will be minimal.


Mortgage bankers expect profit margins to decline according to Fannie Mae’s third quarter Lender Sentiment Survey.

“Mortgage lenders appear to have adopted a more neutral posture, reporting to us via the MLSS mixed expectations for purchase and refinance mortgage demand over the next three months,” said Fannie Mae Vice President and Deputy Chief Economist Mark Palim. “In the third quarter, more lenders than not reported expectations that purchase mortgage demand will continue to grow, though the total share expecting such growth fell substantially compared to the previous quarter. Meanwhile, a plurality of mortgage lenders expects refinance activity to continue to wane from the highs of the past year and a half – even so, their outlook on likely refi volumes was improved compared to the prior quarter. Of the lenders who expect purchase mortgage demand to decrease in the coming months, high home prices and a limited supply of homes for sale were the primary reasons given – these were also among the top reasons provided by the 63% of consumers who believe it’s a ‘bad time to buy a home’, according to our latest Home Purchase Sentiment Index® result.”

“On net, mortgage lenders’ profitability outlook improved slightly from last quarter, although more lenders than not continue to expect profit margins to decline in the months ahead,” Palim continued. “The primary-secondary spread, an indicator of potential profitability, remains wider than the previous decade’s average – a positive sign for lenders – though in August it was at its narrowest since February and 53 basis points below the peak seen in August 2020. While lenders continue to overwhelmingly cite increased competition as their primary concern regarding future profitability, the share citing personnel costs for their diminished profit margin outlook increased significantly, suggesting that mortgage lenders’ ability to efficiently manage their workforces will be critical to their bottom lines as competitive pressures remain intense.”


The meta-story for 2021 was that a rapidly accelerating economy into the end of the year was going to force interest rates higher. Instead, it seems like the big second-half rebound is not materializing. According to the Atlanta Fed’s GDP Now index, growth is expected to come in at 3.7% for the quarter ending September 30. As recently as three weeks ago, the index was predicting 6% growth.

What Vaccine Mandate Advocates Don’t Talk About

It is interesting to me that vaccine mandate proponents never talk about or account for the more than 60 million people in the US who have natural immunity from having already contracted and recovered from covid. (60 million is the low end of estimates…the CDC, which I no longer trust due to its politicization, puts the number well over 100 million) Even if we accept the pretzel logic used to rationalize mandate advocacy, that logic does not hold for the huge number of people who already have what the vaccine will ostensibly give them. Even if nothing else does, I think this not insignificant demographic poses an insurmountable obstacle to justifying these authoritarian desires, which I presume is why it is usually just ignored by mandate advocates

The other notable thing about the mandate crowd is the complete lack of any acknowledgement of just how extraordinary the thing they want to do really is. It would be one thing if they argued that draconian government measures were justified on the basis that they are needed to combat an extreme situation. “Hey, we understand why this is objectionable, and it is very unfortunate that we have to take these steps, but we are in an existential crisis and only extreme measures can turn it around.” It wouldn’t make their position any more sensible or any less troubling, but at least it would indicate some shared understanding and embrace of what constitutes governmental norms in a civilized, free society. The argument, then, would simply revolve around a prudential judgment about just how “extreme” the current situation with covid actually is, and just how necessary the draconian steps actually are.

But this is not what they are arguing. They are suggesting that people who are reluctant to get the vaccine are the bad guys, that it is not Covid but what these people are doing (or, in fact, not doing) which is the cause of harm to other people, and that protecting the populace from the harmful (non-)acts of these people is what government exists to do as a matter of course. Biden suggests that the government has so far been compassionately indulging vaccine reluctance, but that “patience” is up and it is time for the government to do its job.

And what is that job? Put plainly and stripped of the vague generalities and benign language that is usually used, the stark reality of what they advocate is this: They want the government to forcibly impose a medical procedure on healthy people against their will, one that consists of injecting them with brand new and relatively untested medical technology. It is possible, I suppose, to imagine an extreme circumstance in which such a plain imposition on individual liberty might be arguably justifiable in a free and civilized society, at least relative to the probable alternative. But anyone who thinks such a measure is not a violation of personal liberty at all and thinks it is akin to traffic regulations or public nuisance laws does not share my notions of personal liberty, limited government, or what constitutes a free and civilized society. And to me such a mindset is immensely more dangerous to the future safety and well-being of the nation than vaccine hesitancy.

Morning Report: Big increase in wholesale prices

Vital Statistics:

  Last Change
S&P futures 4,501 18.2
Oil (WTI) 69.79 1.65
10 year government bond yield   1.32%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning on overseas strength. Bonds and MBS are up small.


Inflation at the wholesale level rose 0.7% MOM and 8.3% YOY, according to the Producer Price Index. Ex-food and energy it rose 0.6% MOM and 7.3% YOY. Foods (especially meat products) were a big contributor to the increase, as was transportation and warehousing. Building products (and lumber) pulled down the numbers. It is important to keep in mind that the annual numbers are being affected by COVID lockdowns of a year ago, so there is going to be some exaggeration in the numbers.

The 8.3% increase in prices is the highest reading going back to 2010.


The Biden Administration is going to demand that all Federal workers and contractors get vaccinated, and is going to insist that all companies with 100 or more employees require vaccination. The net result of this will probably be to exacerbate the labor shortage even more.


United Wholesale is launching an appraisal management company-free program, which will handle appraisals in-house. Not sure how their current hundred or so AMC will like this.


HUD is looking at strategies to reduce regulatory barriers to affordable housing. My guess is that their strategy will be nothing new – it will be to sue local governments to eliminate single-family zoning. “The research makes clear that there is bipartisan support for state and local reform to improve housing affordability,” said HUD Secretary Marcia Fudge. HUD and the Administration will remain hard at work to build inclusive, equitable communities through affordable housing.”



Morning Report: Record job openings

Vital Statistics:

  Last Change
S&P futures 4,511 4-2.2
Oil (WTI) 68.64 -0.65
10 year government bond yield   1.34%
30 year fixed rate mortgage   3.07%

Stocks are lower this morning after the European Central Bank said it would start reducing asset purchases. Bonds and MBS are flat.


Initial Jobless Claims came in at 310k which was a touch below expectations. Separately, the JOLTS report showed 10.9 million job openings, which is a record. Check out the chart below of the JOLTs data going back 20 years:


I suspect the market response to the huge number of unfilled jobs will be to increase investment in labor-saving technology. If the issue simply that expanded government benefits are driving the labor shortage, then it should reverse pretty rapidly once the extended benefits expire. If the government is keeping these expanded benefits in hopes of driving up wages, I suspect it will backfire, and any bump in wages will be temporary. The fatal flaw in that analysis is that workers don’t just compete with each other – they compete with technology which only gets better and cheaper.


Mortgage credit availability expanded last month, according to the MBA. “This expansion was heavily driven by the addition of refinance loan programs at a time when the 30-year fixed rate has been above 3% for the past month, and refinance activity has trended lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Of note, jumbo credit availability increased 9% to its highest level since March 2020, as more non-QM jumbo and agency-eligible high balance loan programs were offered. In the conforming space, more lenders offered GSE refinance programs catered for lower-income borrowers to help reduce their rates and payments. There was also a slight expansion in government credit, as more investors offered streamline refinance options for FHA and VA loans.”


Mortgage applications fell 1.9% last week as purchases declined 0.2% and refis fell 3%. “Mortgage application volume fell last week to its lowest level since mid-July, as mortgage rates have stayed just above 3% for several weeks. Refinance volume has been moderating, while purchase volume continues to be lower than expected given the lack of homes on the market,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Economic data has sent mixed signals, with slower job growth but a further drop in the unemployment rate in August. We expect that further improvements will lead to a tapering of Fed MBS purchases by the end of the year, which should put some upward pressure on mortgage rates.”  


Economic growth “downshifted slightly” in August according to the latest Fed Beige Book. The decline was primarily due to decreased dining and travel, however supply chain shortages also played a part. The report discusses the labor market:

All Districts continued to report rising employment overall, though the characterization of the pace of job creation ranged from slight to strong. Demand for workers continued to strengthen, but all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity. Contributing to these shortages were increased turnover, early retirements (especially in health care), childcare needs, challenges in negotiating job offers, and enhanced unemployment benefits. Some Districts noted that return-to-work schedules were pushed back due to the increase in the Delta variant. With persistent and extensive labor shortages, a number of Districts reported an acceleration in wages, and most characterized wage growth as strong—including all of the midwestern and western regions. Several Districts noted particularly brisk wage gains among lower-wage workers. Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers.

Rapid home price appreciation has led to an increase in tappable home equity to $9.1 trillion, according to Black Knight. The average mortgage holder has $173k in tappable equity, an increase of $20,000 from the first quarter. What does this mean for originators? Debt consolidation refinances are a powerful tool for people with high interest credit card debt. Loan officers should be pitching these to their borrowers.

Morning Report: Weak job growth

Vital Statistics:

  Last Change
S&P futures 4,539 4.2
Oil (WTI) 70.24 0.25
10 year government bond yield   1.33%
30 year fixed rate mortgage   3.05%

Stocks are flattish after a weak jobs report. Bonds and MBS are down.


The economy added 235,000 jobs in August, which was way below the Street expectations of 740,000. It looks like the driver for the miss was leisure and hospitality, which added zero jobs in August, after adding 400k in June and July. Retail also fell, which is surprising given that we should be seeing the boost of seasonal hiring as we head into back-to-school and the holidays. Total nonfarm employment has risen by 17 million since April of 2020, however we are still about 5 million jobs below pre-pandemic levels. The two-month revision was up 134,000 which was a small positive.

The unemployment rate fell to 5.2%. The labor force participation rate was flat at 61.7% and the employment-population ratio ticked up 0.1% to 58.5%. Average hourly earnings rose 0.6% MOM and 4.3% YOY. This was again well above Street expectations, but I suspect the surprises in leisure / hospitality and retail hiring were playing a part in the numbers.

Overall, it looks like the Delta variant is depressing leisure and hospitality hiring, which makes perfect sense. It is still hard to reconcile the lack of job growth in that sector with all the “help wanted” signs out there. The labor market of the last year has been an anomaly to say the least.

The punch line is that I think we will see the Street (and the Fed) begin to take down Q3 GDP numbers, and I wouldn’t be surprised if the Fed Funds Futures begin cutting their probability estimates for a rate hike next year.

I doubt that the jobs report will affect the tapering decision, and I think the Fed will gradually begin to cut its purchases of mortgage backed securities. While MBS spreads widened significantly during the 2013 taper tantrum, I don’t think that is in the cards this time around. I think in 2013 the market expected that the Fed might sell its holdings into the market. That isn’t going to happen this time around – heck the Fed decided that even letting the portfolio run off naturally was having too big of a negative effect on the economy. So I think they will gradually reduce purchases and will almost assuredly re-invest maturing proceeds back into the market.

Where does that leave interest rates? The Fed’s projected path of inflation and interest rates was based on an assumption that economic growth would accelerate into the end of the year and through 2022. Given the economic data we have been seeing, that doesn’t seem to be materializing. If we decelerate and begin having recession fears, I suspect the 10 year yield will fall and during the next recession we will join our brethren like German and Japan in the subzero club.


The housing market is becoming slightly more favorable to buyers, as soaring prices are decreasing demand. “The housing market has clearly become slightly more favorable to buyers,” said Redfin Chief Economist Daryl Fairweather. “Homes are taking longer to sell, which gives buyers more time to make thoughtful decisions about whether to make offers. Home prices have plateaued, so buyers shouldn’t feel rushed to buy before prices rise further. And the fact that more sellers are dropping their list price is a sign that sellers have to be realistic about their price expectations.”



Morning Report: Weak jobs report

Vital Statistics:

  Last Change
S&P futures 4,538 24.2
Oil (WTI) 70.14 1.65
10 year government bond yield   1.29%
30 year fixed rate mortgage   3.05%

Stocks are higher this morning as the Street rows to work. Bonds and MBS are flat.


Initial Jobless Claims came in at 340k last week. This is still elevated compared to historical levels and has seemed to be the new normal post-COVID. Separately, there were 15,723 announced job cuts last month according to outplacement firm Challenger, Gray and Christmas.


The economy created 374,000 jobs in August, according to the ADP Jobs Report. The Street was looking for 600,000 jobs, so this was a pretty big miss. The consensus estimate for tomorrow’s jobs report is 740,000. It does look like the big acceleration in job growth has petered out.


Manufacturing is expanding in the US, according to the ISM Manufacturing Report. New Orders and Production drove the increase, and it looks like pricing pressures are abating.  “Business Survey Committee panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential.”


Productivity in the second quarter was revised downward to 2.1%, while unit labor costs increased to 1.3%.


Mortgage Applications fell by 2.4% last week as purchases increased 1% and refis fell 4%. “Despite low rates, refinance applications declined, with some borrowers still waiting for rates to drop even lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent uncertainty around the economy and pandemic have kept rates low over the past month, which is why the refinance index has oscillated around these levels.”


New York State is going to extend the eviction moratorium until January 15.

Morning Report: Home price appreciation continues

Vital Statistics:

  Last Change
S&P futures 4,520 -4.2
Oil (WTI) 68.44 -0.85
10 year government bond yield   1.29%
30 year fixed rate mortgage   3.05%

Stocks are lower this morning on no real news. Bonds and MBS are up small.


Home prices rose 1.6% MOM and 17.4% YOY, according to the FHFA House Price Index. We saw torrid price appreciation in several MSAs including Boise, Austin, and Salt Lake City. As we saw from the latest FOMC minutes, the Fed is focusing on home price appreciation and how its MBS purchases affect it. Separately, the Case-Shiller Home Price Index rose 2.2% MOM and 18.6% YOY.


Home Price appreciation is driving up asking rents for single family homes. They are up 13% YOY for SFR, while up only 8.3% for apartments. We have seen all sorts of institutional money flood into the SFR space over the past year, as high cap rates and home price appreciation create returns that are hard to replicate elsewhere. While eviction moratoriums have been an issue, many investors are targeting higher-income renters who have been less affected by COVID job losses.


The share of loans in forbearance was unchanged last week at 3.25% or about 1.6 million homeowners. “The share of loans in forbearance changed little once again this week, as both new requests and exits remained at a slow pace,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “We expect a sharp increase in forbearance exits over the next month as many borrowers reach the 18-month mark and see their forbearance plans end. For those borrowers who have exited in August, the majority either enter deferral plans or obtain modifications.”


While the Federal Government’s eviction ban was shot down by SCOTUS, several states still have eviction moratoriums in place, including California, New Jersey, and DC.


Latest from Fannie Mae regarding homeowners affected by Hurricane Ida. “We urge everyone in the path of the storm to focus on their safety,” said Cyndi Danko, Vice President, Single-Family Risk Management, Fannie Mae. “Fannie Mae is committed to ensuring assistance is available to homeowners and renters in need and we encourage residents impacted by this storm to seek assistance as soon as possible.”  


Consumer confidence slipped in July, according to the Conference Board. While the employment situation remains strong, consumers were less optimistic about present and future business conditions.

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