Morning Report – Another Elmendorf special 2/5/14

Posted on February 5, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1742.0 -1.7 -0.10%
Eurostoxx Index 2968.5 6.1 0.20%
Oil (WTI) 97.58 0.4 0.40%
LIBOR 0.236 0.000 -0.04%
US Dollar Index (DXY) 81.15 0.024 0.03%
10 Year Govt Bond Yield 2.64% 0.01%
Current Coupon Ginnie Mae TBA 106.1 0.0
Current Coupon Fannie Mae TBA 104.8 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.24
Markets are flattish this morning after the ADP Employment Report forecast that 175,000 jobs were created in January. Bonds and MBS are flat. Markets might be a little thin today as the Northeast is snowed in once again.
The ADP report suggests a “meh” number for this Friday’s jobs report, although the ADP report has been a lousy predictor of the BLS numbers lately – last month, ADP forecast 238k jobs and the BLS number came in at 87K. So take this number with a grain of salt. Given what we know about the Fed’s intentions regarding tapering, it would take an extraordinary number on either side to change the Fed’s glidepath.
Mortgage Applications rose .4% last week, which is actually a pretty dismal number when you think about it – mortgage rates fell 7 basis points last week and we had an easy comparison given the MLK holiday the week before. Purchase apps were down 3.8%, while refis were up 2.8%. That said, this is a seasonally weak time, so it is hard to read too much into it, but there it is. FWIW, the homebuilders that have reported fourth quarter earnings so far noted strong traffic in January, which is an encouraging sign.
In the partisan spin wars about obamacare, the CBO launched a new toy to tussle over, with a study showing that obamacare would cost the economy about 2 million jobs. Republicans cited the study, saying that it confirmed what we knew all along, that obamacare would be a job killer. When you look at what CBO actually said, however, it they concluded that the job losses would comhe from people voluntarily leaving the work force, not employers cutting hours / jobs. In fact, CBO said the job losses attributable to employers cutting jobs was so small they didn’t bother to measure it. Obviously Elmendorf (head of the CBO) hasn’t been checking out the reports put out by the regional Federal Reserve banks, or the NFIB small business surveys, which document actual hiring plans from actual businesses and instead is relying on some sort of model to predict what will happen.
Regardless of how their model is specified, the CBO is in effect arguing that the laws of supply and demand are different in the labor market (which is an underlying assumption of most other left-wing labor policy). The normal supply / demand curve looks like this:  As prices increase, more supply comes out (which means if compensation increases, more people want to work) and demand decreases ( which means businesses will want to cut costs / substitute labor for technology, etc) All pretty common-sense stuff. Anyone who has taken Econ 101 will recognize this chart:

However, CBO is making a different argument: Because of obamacare (which raises the price of labor through employer mandates, etc) people will drop out of the labor force more than they would otherwise.  In other words, as price increases, supply will decrease. If people are starting to make more, does anyone really think that would encourage people to quit working? And their second argument makes even less sense – that employers will ignore increased compensation costs and continue to hire as before. Anyone who has used a self-checkout at the supermarket knows that argument is bunk. The CBO is arguing that employer demand for labor is inelastic – meaning that no matter what the price of labor is, they will pay it. In other words, if prices increase, demand stays the same. That may be true of certain items (think life-saving drugs like insulin), but certainly not 99.9% of the goods out there, and certainly not labor. Heck, if that was the case, raise the minimum wage to a million dollars and we’ll all be rich! Essentially, CBO is arguing that the labor market looks like this:

I’ll leave it to the reader to figure out whether this makes sense or not.

This study, along with another Elmendorf special – that mass principal mods would save the government money – makes me wonder how partisan the supposedly non-partisan Elmendorf CBO is.

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Morning Report – VIX is spiking again 2/4/14

Posted on February 4, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1744.7 11.9 0.69%
Eurostoxx Index 2964.2 0.3 0.01%
Oil (WTI) 97.18 0.8 0.78%
LIBOR 0.236 0.001 0.36%
US Dollar Index (DXY) 81.11 0.103 0.13%
10 Year Govt Bond Yield 2.61% 0.04%
Current Coupon Ginnie Mae TBA 106.1 -0.3
Current Coupon Fannie Mae TBA 105 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.25
They take ’em away, they give ’em back. Volatility is back. Markets are higher this morning after yesterday’s bloodbath that sent the S&P 500 down 40 points. Overseas markets got slammed, particularly Japan, which is down 14.5% for the year already. Bonds and MBS are lower.
The VIX went out at 21.4. This is an indicator of financial pain and fear – as it rises, it should correlate positively with bonds – meaning if the VIX increases, rates will be falling. We are still nowhere near the spikes we saw in 2011 and 2010, let alone the late 2008 panic, but it is something to watch. The main thing to understand is that there are two forces acting on interest rates right now – 1) the Fed’s ending of QE, which is pushing rates higher, and 2) the sell-off in worldwide markets, which is causing the flight to safety trade which pushes rates lower. I would stress to your borrowers that all bets are off right now with interest rates. You could float and you might get lucky if someone blows up, or this could all blow over and we could be looking at 4.75% mortgage rates before you know it.

Speaking of interest rate bets, the largest mortgage REIT – American Capital Agency reported earnings yesterday. They had been deleveraging since last Spring, when they took their leverage ratio from 10x down to 7.2x. Last quarter they increased their exposure to the MBS market a tad, taking their leverage ratio up to 7.6x. The company had been seeing value in the MBS space. REITs are major players in the space and their activity influences mortgage rates, so their activity is something to watch. Given how much rates have fallen, this looks like a winning trade for them. That said, the sector is very much out of favor as the secular headwinds are going to be tough to manage.
Part of the reason for yesterday’s sell-off was an absolutely dismal ISM report. The ISM manufacturing report came in at 51.3, vs street expectations of 56. This shows a major deceleration in manufacturing in the month of January. Many reports – durable goods, for instance – showed a slowdown in December, which seems to have continued into the new year. Some of this could be weather-related, but investors are bracing for a lousy jobs report this Friday. Separately, construction spending rose .1% in January, which was better than expected.
The fireworks should start tomorrow with the ADP employment report, which is all honesty has been a terrible predictor of the employment report lately. We have another potential winter storm affecting the area as well, so tomorrow could be sloppy in more ways than one.

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Morning Report – spring selling season begins early 02/03/14

Posted on February 3, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1776.5 -0.1 -0.01%
Eurostoxx Index 3003.0 -11.0 -0.36%
Oil (WTI) 97.79 0.3 0.31%
LIBOR 0.236 -0.001 -0.42%
US Dollar Index (DXY) 81.22 -0.088 -0.11%
10 Year Govt Bond Yield 2.67% 0.03%
Current Coupon Ginnie Mae TBA 106 -0.1
Current Coupon Fannie Mae TBA 104.7 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.26
Markets are flat this morning on no real news. Bonds and MBS are down.
In spite of all the snow falling in the Northeast, the spring selling season more or less begins now. Last week, we heard from PulteGroup and D.R. Horton who both observed that traffic patterns were unusually strong in January, indicating the spring selling season has begun early. Regarding interest rates, both companies said the shock from higher rates appears to have worn off and buyers realize the low rates of a year ago aren’t coming back. Both companies target the first time homebuyer who still remains absent from the market, although the move-up buyer appears to be doing well.
Why is the first time homebuyer struggling? Student loan debt and a lousy job market are considerations. Also they are competing with professional investors for starter homes who are buying them to rent.
The Census Bureau reported that the homeownership rate fell to 65.2% at the end of the fourth quarter. The big excesses of the bubble years have been worked off.

Nonvoting San Francisco Fed Head John Williams said that the issues in the emerging markets aren’t changing the Fed’s forecast for the U.S. economy and that the FOMC doesn’t “focus too much on the short-term developments in the markets.” Take that to mean that emerging markets sell-offs aren’t going to affect Fed tapering, at least as long as credit availability remains unaffected.

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