Morning Report: The CFPB is going to define the term “abusive.”

Vital Statistics:

 

Last Change
S&P futures 2810 2.75
Eurostoxx index 364.61 -0.6
Oil (WTI) 71.52 -0.5
10 year government bond yield 3.18%
30 year fixed rate mortgage 4.95%

 

Stocks are flattish this morning after yesterday’s huge rally. Bonds and MBS are down.

 

We will get the minutes of the September FOMC meeting today at 2:00 pm. Be careful locking around that period. They usually aren’t market-moving, but you never know.

 

Lots of people are returning from the MBA conference in Washington, DC, so let’s catch up on the economic data from the past couple of days.

 

Job openings hit a record (going back to 2000) last month as 7.1 million positions went unfilled. The quits rate was unchanged at 2.4%. The quits rate has been steadily inching upward and we are back to early 2001 levels. The quits rate is generally considered to be a predictor of wage inflation.

 

quits rate

 

Retail sales for September disappointed at the headline level, rising only 0.1%. The control group, which strips out autos, gas stations, and building materials rose 0.5%, which was towards the higher end of expectations. Department Stores were especially weak, which isn’t surprising given that Sears just filed for bankruptcy. Overall, consumption for the third quarter looks to have been strong, which will support a good GDP number.

 

Industrial production rose 0.3% last month, and manufacturing production rose 0.2%. Capacity Utilization was steady at 78.1%. Manufacturing was up about 3.5% YOY, which is an inflation-adjusted number. If you add back 2.5% inflation, we are looking at 6% nominal growth, which is a very respectable number. Suffice it to say that whatever trade wars seem to be occurring have yet to show up in the numbers. Also, with capacity utilization stuck below 80%, we don’t have inflationary pressure from more marginal (and costly) production being used.

 

Mortgage applications fell 7% last week as purchases fell 6% and refis fell 9%. Seasonal adjustments are primarily responsible; unadjusted applications were more or less flat, which is kind of impressive given that rates rose about 16 basis points in the previous two weeks.

 

CFPB Chairman Mick Mulvaney told the MBA conference that regulation by enforcement is dead. Regulation by enforcement was a prime tactic of the Cordray regime, which was characterized by intentionally vague rules. Dodd-Frank inserted the term “abusive” into the vernacular, and while words like “fair” and “unfair” have been litigated over the past century such that we all have a pretty good legal idea of what they mean, “abusive” is still pretty much a blank canvas. The CFPB is working on a definition of what the term actually means.

 

“We know what ‘unfair’ is,” Mulvaney said. “We know what ‘deceptive is; I’m not sure we know how to define ‘abusive.’ This is an example of how we are looking at issues….”We are still Elizabeth Warren’s child, for better or worse. We’re not the FDIC; we’re not the SEC…I want the Bureau to get there, to where we are associated with other regulators and not controversial because of its partisan circumstances, which colors what half of Americans think of it.”

 

“Partisan” is a good description of how the agency was initially staffed. Here is one lawyer’s description of how things went. The agency ensured that only Democrats who were inherently hostile to the financial industry were hired to staff out the agency. Mulvaney may have different goals than Richard Cordray, but the rank-and-file of the agency do not.

 

Trulia noted that price reductions at the high end of the market accelerated in July and August. Over 17% of US listings had a price cut during August. Between tax reform, higher rates, and higher prices it was only a matter of time before we started seeing an impact at the higher price points. Don’t forget that in the aftermath of the crisis, luxury real estate was about the only sector that was working for homebuilders. While the West Coast has been able to absorb that inventory, the East Coast definitely has not. Indeed, tony NYC suburbs are swollen with $1 million + properties for sale, and some have gone as far as to ban “for sale” signs.

 

Trump continued to jawbone the Fed, calling it his “biggest threat.” FWIW, there isn’t a politician on the planet that actually likes tightening cycles, but most have the common sense not to say anything about.

Morning Report: Global sell-off continues

Vital Statistics:

Last Change
S&P futures 2758.75 -22
Eurostoxx index 359.68 -7.24
Oil (WTI) 71.9 -1.3
10 year government bond yield 3.18%
30 year fixed rate mortgage 4.95%

 

Stocks are heavy yet again as the global sell-off continues. Bonds and MBS are up.

 

The stock market sold off heavily yesterday on no real news. There wasn’t any one particular catalyst – some in the business press are blaming Powell’s comments last week, others are pointing to a lack of stock buybacks ahead of earnings, and others are talking about the FAANG stocks giving up their leadership position. Whatever the reason, it is important to keep in mind that the stock market is less than 5% from its all time high, and the VIX is hanging around in the low 20s. Stocks don’t go up in a straight line, and they don’t go down in one either.

 

The global sell-off is creating a flight to quality.  The 10 year bond yield is back below 3.2%. Mortgage backed securities will lag that move, generally wanting to make sure that it is “real.”

 

Notwithstanding the recent moves, investors have generally been pulling money out of bond ETFs. Note that shorter-duration funds did receive inflows, more evidence that money market instruments are beginning to attract assets after a long slumber.

 

The Producer Price Index rose 0.2% last month, in line with expectations. Transportation services (i.e trucking, rail and air freight charges) were the source of inflationary pressure. Energy prices are probably driving that, although labor shortages are an issue as well, especially in trucking. The PPI was the first of 3 inflation readings this week. We will get CPI today and Import / Export prices on Friday.

 

Wholesale inventories rose by 1% in September, which follows a strong increase in July. This should provide a boost for third quarter GDP numbers.

 

Hurricane Michael made landfall last night as a Category 4 storm. Initial damage estimates from Wells Fargo top $10 billion. Expect to see an uptick in delinquencies towards the end of the year. Gulf Oil production will be affected as well, although oil prices are generally correlating with every other asset as the global sell-off gathers momentum.

 

Morning Report: More cuts in banking

Vital Statistics:

 

Last Change
S&P futures 2887.25 -1
Eurostoxx index 372.16 -0.77
Oil (WTI) 74.82 -0.14
10 year government bond yield 3.23%
30 year fixed rate mortgage 4.95%

 

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

 

Mortgage Applications fell 1.7% last week as purchases fell 1% and refis fell 3%. The average contract interest rate for conforming loans increased to 5.05% from 4.96% last week. This is the first print over 5% since 2011.

 

Donald Trump jawboned the Fed a little yesterday, saying “I think we don’t have to go as fast” referring to the Fed’s pace of tightening. Politicians universally love loose central banks and loathe hawkish ones. Ronald Reagan tolerated Paul Volcker’s tightening campaign, which caused the worst recession since the Great Depression only because the inflation of the 1970s was so bad that a recession was preferable. Inflation isn’t bad right now, and if we weren’t retreating from the zero bound, the Fed probably wouldn’t need to be as aggressive as it is being. Jerome Powell said we were “a long way from neutral” last week, but what “long way” means is anyone’s guess. The market thinks another 75 bps in the Fed Funds rate and then a pause.

 

Fannie Mae reported that serious delinquencies (90+) fell to 0.82% in August, down .06% from July and down from 0.99% a year ago. DQs are back to 2007 levels, and more or less are sitting at historical pre-crisis averages. DQs will probably increase due to Hurricane Florence (those loans won’t go down 90 days until the holiday period), but for now the strong labor market has DQs back to normal.

 

seriously delinquent rates

 

Venerable retailer Sears is expected to file for bankruptcy this week. Fun fact: in the late 1960s, the 5 biggest retailers in the US were the 5 geographic divisions of Sears. The company has been kept on life support by hedge fund manager Eddie Lampert, but he wants to see a bigger reorganization of the company.

 

Earnings season starts in a couple of weeks, and the banks are the first to report. Generally speaking, analysts expect the third quarter to be the strongest for the sector since the crisis, largely driven by volatility and tax effects. The bigger question is what will drive growth going forward, especially if rising rates lowers borrowing demand. We certainly see it in mortgage banking, but it could be an issue for corporate borrowers as well. Corporate borrowers took advantage of the ZIRP years to refinance existing high coupon debt and borrow at cheap rates for general corporate purposes. That may crimp borrower demand going forward. Note that the banking sector has been underperforming the market over the past 6 months or so:

 

xlf vs spy

 

Speaking of banks, HSBC reached a settlement with the Justice Department for $756 million relating to MBS issued during the bubble years. HSBC (a UK bank) bought Household Financial in the early 00s to enter the US residential real estate lending market.

 

The mortgage industry is a boom and bust business, and we are seeing layoffs at places like Movement, Wells, and JP Morgan. Fannie Mae’s Chief Economist thinks this is still in the early innings. “I do believe you will see more layoffs…We are at the beginning of that I would say,” he said. “It is a cyclical business and it is driven by the cyclical behavior of interest rates. So, none of that should be a surprise to anyone. The only thing different in this cycle was that it was policy that drove rates, so they were so low for so long.” We are headed into the lean Q4 and Q1 time of year – I wouldn’t be surprised to see more announcements, especially at the banks during earnings calls.

Morning Report: Business sentiment strong

Vital Statistics:

 

Last Change
S&P futures 2881 -13
Eurostoxx index 370.66 -1.75
Oil (WTI) 74.94 ..67
10 year government bond yield 3.25%
30 year fixed rate mortgage 4.97%

 

 

Stocks are down this morning as the global sell-off continues. Bonds and MBS are down after taking yesterday off.

 

Small business optimism hit its third highest reading in September. This survey goes back 45 years, so that is an impressive data point. “This is the longest streak of small business optimism in history, evidence that tax cuts and regulatory rollbacks are paying off for the economy as a whole,” said NFIB President and CEO Juanita D. Duggan. “Our members say that business is booming and prospects continue to look bright.” We are also seeing plans translate into actual spending, especially in capital expenditures. For a long time, businesses were saying they planned to increase investment in their businesses, but they weren’t actually doing it at the moment. That has changed.

 

NFIB

 

While the sell-off in US stocks is gaining some attention, Asian markets are at 17 month lows, driven by emerging markets and trade fears. The IMF just downgraded global growth for the first time in two years, based on the same issues. Chinese market weakness is encouraging more selling. This weakness is putting additional pressure on the Chinese currency, which only adds to the trade tensions between the US and China.

 

The higher interest rate bet (short Treasuries) is the biggest trade on the Street right now, and many hedge funds rang the register last week when rates spiked. The net speculative short position fell to 740k from 756k the week before. Implied volatility in bond options also increased, which means the market is expecting further big moves. Volatility tends to beget volatility, so we could have a bumpy road ahead. Be careful floating.

 

Fun fact: There have only been 4 years where bonds had a negative yearly return in the past 50 years: 1994, 1999, 2009 and 2013. This year is looking like it could be another. That said, the bond bear market was already well underway in the late 60s, having begun about 10 years earlier, when the ultra – low interest rate environment from the Great Depression and WWII ended. In other words, the most relevant comparison to the current economic climate is the the 1950s and 1960, which this data range ignored.

 

The Conference Board’s Employment Trends Index declined in September. “The US economy is very strong now. Demand for workers is likely to continue growing rapidly in the coming quarters, but with the unemployment rate now at 3.7 percent, recruiters have their work cut out for them. They will have to bring more people off the sidelines faster. In the meantime, businesses will have to squeeze more out of their current workers, either by increasing working hours or raising labor productivity. Labor market tightness varies across occupations and geographies. However, for the nation we expect the unemployment rate to go down to 3.5 percent or even lower in 2019. We also expect labor force participation and productivity to gradually increase, and wages to further accelerate” said Gad Levanon, Chief Economist, North America, at The Conference Board.

 

Hurricane Michael is threatening the Florida Panhandle and Georgia, and will probably dump a lot of rain on the Eastern Seaboard this week.

 

hurricane track

Morning Report: Surprising drop in payrolls

Vital Statistics:

 

Last Change
S&P futures 2908.5 0
Eurostoxx index 377.44 -2.24
Oil (WTI) 74.56 0.25
10 year government bond yield 3.23%
30 year fixed rate mortgage 4.93%

 

Stocks are flat after the jobs report. Bonds and MBS are down

 

Jobs report data dump:

  • Payrolls up 134,000 (way below expectations)
  • Unemployment rate 3.7%
  • Labor force participation rate 62.7%
  • Average hourly earnings up 0.3% MOM / 2.8% YOY

Definitely a bond-bullish jobs report, with payrolls and average hourly earnings below expectations. The global sell-off in bonds continues, which appears to be dominating. Yet another jobs report where ADP and the BLS get completely different readings. The unemployment rate is the lowest since 1969.

 

While the business press is focusing on the unemployment rate, which is hitting the lowest since the late 60s,  the labor force participation rate seems to be stuck at just under 63%. That ratio (and the employment-population ratio) should be moving higher. Yes demographics (the retiring baby boom) explain some of it, but as people live longer, people should be working longer as well. It probably should go higher, but in the meantime highly paid baby boomers are being replaced by lower earning Millennials, which helps explain why average hourly earnings are moving up at an unsatisfying pace.

 

labor force participation rate

 

Beware of narrative changes. Good news is now bad news. Good economic news now is a negative for stocks because it means rates are going higher. FWIW, higher rates will be negative for some sectors and benign for others. But yes, REITs and utilities which were prized for their dividend yields during the ZIRP years are now going to be under pressure. The homebuilders will be sensitive to this as well, however they shouldn’t be. There is enough pent-up demand for housing that they should be able to pump out volume for years to come. As long as rate are rising for the right reasons (stronger growth encourages investors to take more risk) and not the wrong reasons (inflation on the horizon) then it should be a non-event for stocks. That said, money market instruments, which were eschewed by investors during the ZIRP years, are going to re-take their share of the investment dollar.

 

 

Morning Report: Global bond market rout on 10/4/18

Vital Statistics:

 

Last Change
S&P futures 2919.25 -12.25
Eurostoxx index 381.23 -2.61
Oil (WTI) 76.03 -0.38
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.87%

 

Stocks are lower this morning in the face of a global government bond rout. Bonds and MBS are down.

 

Global bond yields are sharply higher this morning. There doesn’t appear to be any particular catalyst, but it is affecting Japanese and German bonds as well as the US. The 10 year yields 3.2% this morning after starting yesterday at 3.08%. Interestingly, the Fed Funds futures haven’t changed at all, so this doesn’t seem to be driven by a re-assessment of Fed policy. If you look at the TIPS market (Treasuries that forecast the change in CPI), there is no change in the market’s assessment of inflation. So this has been largely confined to the long end. The short Treasury trade is one of the biggest trades on the Street, and maybe some big funds put more money to work shorting / underweighting global bonds going into the 4th quarter. 2s-10s are trading at 31 bps.

 

Jerome Powell was interviewed on CNBC yesterday, and signaled that more hikes are on the horizon.  “Interest rates are still acommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.” Interesting to see him characterizing current policy as “accomodative” when the word was taken out of the September FOMC statement. The “may go past neutral” comment has been cited by some in the press as the catalyst for yesterday sell-off, but the Fed Funds futures don’t reflect that.

 

Job cuts rose to 55,000 in September, according to outplacement firm Challenger, Gray and Christmas. This was driven primarily by announced layoffs at Wells Fargo. “As the job market remains near full employment and companies struggle to find workers, large-scale job cut announcements like the one from Wells Fargo will actually provide the workers necessary for companies to gain momentum and sustain growth,” said John Challenger, Chief Executive Officer of Challenger, Gray & Christmas, Inc.

 

Hurricane Florence appears to have had little impact on initial Jobless Claims which fell to 207,000 last week. As companies ramp up for the fourth quarter, qualified workers are hard to find. That might have been part of the reason for Amazon’s announcement on wages – they have to compete with everyone else for seasonal workers. Note that Fed-Ex is paying pilots bonuses of $40-$110k to keep them from retiring.

 

Lennar reported 3rd quarter earnings yesterday, which were decent, but forward guidance (partially driven by Hurricane Florence) was disappointing, and the stock sold off 2%. Orders increased, but its Q4 forecast was below estimates. The whole sector was hit yesterday as well, as a combination of higher mortgage rates and input costs are creating affordability problems. Most of the metrics were hard to compare YOY because of the CalAtlantic transaction.

 

Factory orders increased 2.3% in August driven by transportation orders. This is the fastest pace since September last year.

 

Investors are bailing on high-yield debt, as spreads to Treasuries are at post-crisis lows and rates are going up. With bond-like upside and stock-like downside, the risk-reward for the asset class is deteriorating. IMO, some of the action we are seeing in the stock and bond markets may simply be a re-emergence of money market investment vehicles which paid so little during the ZIRP years that investors didn’t bother with them. With short term rates pushing 3%, the asset class is making sense again.

 

high yield bond spreads

 

Of course the other asset class that has been moribund since the crisis has been the private label MBS market. While there are governance issues left be sorted out, higher absolute rates will go a long way towards bringing back that sector (and the type of lending that accompanies it). Mortgage REITs who have feasted on MBS thrown overboard in 2009 and 2010 will have to replace that paper with new issuance.

Morning Report: Strong jobs numbers, Tesla and Amazon

Vital Statistics:

 

Last Change
S&P futures 2939 10.25
Eurostoxx index 384.7 2.78
Oil (WTI) 75.25 0.07
10 year government bond yield 3.08%
30 year fixed rate mortgage 4.78%

 

Stocks are higher after the ADP jobs report came in gangbusters. Bonds and MBS are flat as we head into a day with 5 Fed speakers.

 

The ADP jobs report came in stronger than expected, with 230,000 private sector jobs added in September. This is well higher than the 180,000 estimate the Street has penciled in for Friday’s report.  The market will be focusing on the wage data more than the payroll data with the employment situation report, however.

 

ADP jobs report

 

Mortgage applications were flat last week as we head into the seasonally slow Q4 and Q1 time of the year. “Rates were little changed last week, following the most recent [Federal Open Market Committee] meeting where the Fed announced another rate hike based on the health of the economy and job market as expected, “said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Short-term rates have been increasing but long-term rates have held steady, which should not pose too much of a headwind to home purchase activity, especially given the potential demand from demographic factors.”

 

The ISM Non-Manufacturing Index hit a record high last month(albeit only going back to 2008). We saw a huge jump in the employment index of almost 6 percentage points, and continued strength in new orders. Tariff worries have taken a step back, and prices are rising, but not uncontrollably. Labor shortages were mentioned as an issue.

 

Mortgage fraud risk is increasing, as higher home prices encourages buyers to pad their financial situation to qualify for a loan. There are online services which will produce fake pay stubs and answer VOE calls, (for “novelty” purposes of course). This is in addition to the other more typical ploys, which include holding out a rental as owner-occupied. Most of the risk in in the wholesale, not retail channel, and we are nowhere near the liar loans of the bubble days. Worst places for fraud risk: NY and NJ, where glacial foreclosure timelines add insult to injury.

 

They’re still worried about deflation. Charles Evans said that inflation hasn’t gone up as much as the Fed would like. Fiscal policy is very pro-cyclical at the moment, and the expansion is long in the tooth.

 

The Tesla saga has taken another interesting turn. The SEC thought they had a settlement with Musk over the infamous 420 tweet (where he tweeted that he was planning to take Tesla private at $420 a share price, and that he had financing lined up).  The SEC sued him for making false statements that impacted the share price, and he got off relatively light, with a fine to be shared with the company, and a requirement that he step down from the Board for 2 years. Now, Musk is telling the Board that he will quit the company if they don’t fight for him. One thing is for sure: getting into public spats with the SEC is generally not good for your stock price.

 

I am surprised Amazon stock is holding up given the announcement yesterday. Although the company declined to provide any financial guidance, it is hard to see how the company escapes without a significant bite in its earnings. To make matters worse for the company, cash flow will be impacted as employee bonuses for many workers will now be paid in cash versus stock. AMZN earnings last year: $3 billion. AMZN stock compensation last year $4 billion. I guess bulls on AMZN are betting that this holiday shopping season is going to be so great that the increased costs don’t matter. But a company trading at 78x expected earnings doesn’t have a lot of margin for error, especially if its cost structure is going to more closely mirror that of its bricks-and-mortar competitors. I am sure the politics behind the announcement will be a fascinating tale.

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